sbv2
As filed with the Securities and Exchange Commission on
October 27, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM SB-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
UROPLASTY, INC.
(Exact Name of Registrant as
specified in its charter)
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Minnesota
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3841
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1-1719250
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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5420 Feltl Road
Minnetonka, Minnesota
55343
Telephone:
(952) 426-6140
(Address, including zip code and
telephone number, including
area code, of Registrants
principal executive offices)
David B. Kaysen
President and Chief Executive
Officer
5420 Feltl Road
Minnetonka, Minnesota
55343
Telephone:
(952) 426-6140
(Name, address, including zip
code and telephone
number, including area code, of
agent for service)
Copies to:
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Jeffrey C. Robbins, Esq.
Messerli & Kramer P.A.
150 South Fifth Street, Suite 1800
Minneapolis, Minnesota 55402
Telephone:
(612) 672-3600
Facsimile:
(612) 672-3777
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Thomas G. Lovett, IV
Lindquist & Vennum PLLP
4200 IDS Center
Minneapolis, Minnesota 55402
Telephone: (612) 371-3270
Facsimile: (612)
371-3207
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Approximate date of commencement
of proposed sale to the public:
As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. x
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate Offering
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Securities to be Registered
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Price
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Amount of Registration Fee
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Common Stock, par value
$0.01 per share
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$12,000,000(1)
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$1,284
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Agents Warrant(2)
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$50
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Common Stock, par value
$0.01 per share, issuable upon exercise of Agents
Warrant
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$600,000(1)
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$64
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(1)
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Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(o).
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(2)
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No fee pursuant to Rule 457(g).
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The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where an offer or sale is not permitted.
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Subject to Completion Dated
October 27, 2006.
PROSPECTUS
SHARES
Common Stock
We are offering up
to shares
of common stock for $ per share.
Our common stock is traded on the American Stock Exchange under
the symbol UPI. On October 26, 2006, the
closing price of our common stock on the American Stock Exchange
was $2.99 per share.
This investment is speculative and involves a high degree of
risk. See Risk Factors on page 5 to read about
factors you should consider before buying shares of the common
stock.
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Per Share
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Total
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Public offering price
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$
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$
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Agent fees and commissions
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$
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$
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Proceeds to Uroplasty before
expenses
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$
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$
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We have retained Craig-Hallum Capital Group LLC to act as
selling agent in connection with this offering. The selling
agent is not required to sell any specific number or dollar
amount of securities in this offering but will use its best
efforts to sell the securities offered. There are no
arrangements to place any funds received in this offering in an
escrow account. The offering will continue until the earlier of
the sale of all shares offered by this prospectus or
December , 2006.
Neither the SEC nor any state securities commission has
approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
Craig-Hallum Capital Group
LLC
Prospectus
dated ,
2006
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information that is different from that contained in this
prospectus. This prospectus may be used only where it is legal
to sell these securities. The information in this prospectus is
complete and accurate only as of the date on the front cover
regardless of the time of any sale of shares.
PROSPECTUS
SUMMARY
This summary highlights the key information contained in this
prospectus. Because it is a summary, it does not contain all the
information you should consider before investing in our common
stock. You should read carefully this entire prospectus. In
particular, you should read the section entitled Risk
Factors and the consolidated financial statements and the
notes relating to those statements included elsewhere in this
prospectus. The references in this prospectus to we,
our, or us refer to Uroplasty, Inc. and
its subsidiaries, unless the context indicates otherwise.
Overview
We are a medical device company that develops, manufactures and
markets innovative, proprietary products for the treatment of
voiding dysfunctions. Our minimally invasive products treat
urinary incontinence and overactive bladder symptoms. We believe
that our company is uniquely positioned because we offer a broad
and diverse set of products to address the various preferences
of doctors and patients, as well as the quality of life issues
presented by voiding dysfunctions. We currently offer three
medical devices for the treatment of incontinence and overactive
bladder symptoms.
Market
Voiding dysfunctions affect urinary or fecal control and can
result in unwanted leakage (urinary or fecal incontinence) or
uncontrolled bladder sensations (overactive bladder). The Agency
for Health Care Policy and Research (AHCPR), a division of the
Public Health Service, U.S. Department of Health and Human
Services, estimates that urinary incontinence affects about
13 million people in the United States, of which 85%
(11 million) are women. AHCPR estimates the total cost of
treating incontinence (management and curative approaches) of
all types in the United States as $16 billion. Overactive
bladder (OAB) is a prevalent and challenging urologic problem
affecting an estimated 34 million Americans. Historically,
only a small percentage of the patients suffering from these
disorders have sought treatment. In recent years, however, the
number of people seeking treatment has grown as a result of the
publicity associated with new minimally invasive treatment
alternatives.
When patients seek treatment, physicians generally assess the
severity of the symptoms as mild, moderate or severe. Regardless
of the degree of severity, however, patients will often consider
drug therapy and minimally invasive treatment first. We believe
that our company is uniquely positioned because we provide a
broad product offering of minimally invasive solutions.
Strategy
Our goal is to gain market share in the voiding dysfunction
market by increasing sales of our existing products and
expanding our portfolio of minimally invasive products for the
treatment of voiding dysfunctions, with a particular focus on
products and applications for outpatient and office-based
procedures. We believe that, with our suite of innovative
products, we can increasingly garner the attention of key
physicians, independent sales representatives and distributors
to enhance market acceptance of our products. The key elements
of our strategy are to:
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Focus on office-based solutions for physicians.
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Grow our United States sales and international distribution.
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Educate physicians and patients about the benefits of Urgent PC.
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Provide patient-driven alternatives.
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Develop, license or acquire new products.
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1
Our
Products
Macroplastique®
is a minimally invasive, implantable soft tissue bulking agent
for the treatment of urinary incontinence. When Macroplastique
is injected into tissue around the urethra, it stabilizes and
bulks tissues close to the urethra, thereby
providing the surrounding muscles with increased capability to
control the release of urine. Macroplastique has been sold for
urological indications in over 40 countries outside the United
States since 1991. In December 2004, FDA accepted for filing our
pre-market approval submission with respect to Macroplastique
for the treatment of female stress urinary incontinence. In
September 2006, we received an approvable letter from FDA
relating to our pre-market approval application for
Macroplastique. We expect to begin marketing Macroplastique in
the United States during 2007, assuming FDA clearance of our
pre-market approval application.
I-Stoptm
is a minimally invasive biocompatible, polypropylene,
tension-free sling for the treatment of female urinary
incontinence. Our I-Stop sling can correct stress urinary
incontinence by providing tension-free hammock-type support for
the urethra to prevent its downward movement and the associated
leakage of urine. In August 2005, FDA granted 510(k) clearance
for the sale of I-Stop within the United States.
The
Urgent®
PC neuromodulation system is a minimally invasive device
designed for office-based treatment of overactive bladder
symptoms of urge incontinence, urinary urgency and urinary
frequency. This product uses percutaneous tibial nerve
stimulation to deliver an electrical pulse that travels to the
sacral nerve plexus, a control center for bladder function. We
received regulatory approvals for the sale of Urgent PC in the
United States and Canada in October 2005, and in Europe in
November 2005. Subsequently, we launched the product for sale in
those markets. We developed a second generation Urgent PC
product during 2006. Following CE mark approval and 510(k)
clearance, we launched this product for sale in Europe in
September 2006 and in the United States in October 2006.
Sales and
Marketing
We are focusing our sales and marketing efforts primarily on
office-based and outpatient surgery-based urologists,
urogynecologists and gynecologists with significant patient
volume. We believe the United States is a significant
opportunity for future sales of our products. In order to grow
our United States business, we recently established a sales
organization, consisting of a direct field sales management team
and independent sales representatives, and a marketing
organization to market our products directly to our customers.
By expanding our United States presence, we intend to develop
long-standing relationships with leading physicians treating
incontinence and overactive bladder symptoms.
Recent
Developments
In September 2006, FDA advised us that our pre-market approval
application for Macroplastique is approvable subject to FDA
audit of our manufacturing facilities, methods and controls for
compliance with applicable Quality System Requirements. FDA has
completed its inspection of our manufacturing facilities in
Minneapolis, Minnesota and Eindhoven, The Netherlands, with no
findings noted. We expect to begin marketing Macroplastique in
the Unites States during 2007, assuming FDA approves our
pre-market approval application. However, we cannot ensure when
or if FDA will ultimately approve our marketing of
Macroplastique in the Unites States or that we can market the
product profitably.
Corporate
Information
Our company was incorporated in Minnesota in 1992. Our
headquarters are located at 5420 Feltl Road, Minnetonka,
Minnesota, 55343. Our telephone number is
(952) 426-6140.
We maintain a web site at www.uroplasty.com. Information
contained on our web site is not part of this prospectus.
Macroplastique®,
Bioplastique®,
PTQtm,
VOXtm,
I-Stoptm
and
Urgent®
PC are trademarks we own or license. This prospectus also refers
to trademarks and tradenames of other organizations.
2
The
Offering
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Common stock offered: |
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Up to shares. |
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Common stock outstanding before offering: |
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8,411,188 shares as of October 9, 2006. |
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Common stock to be outstanding after offering: |
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shares, assuming all of the shares
offered are sold. |
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Use of proceeds: |
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We expect to use the net proceeds from this offering to fund
operations and for working capital purposes. Our management will
have broad discretion in determining the specific timing and
uses of the offering proceeds. |
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Risk factors: |
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Our business is subject to a number of risks which you should
consider before investing in our company. For a discussion of
the significant risks associated with our business, please read
the section entitled Risk Factors beginning on
page 5. |
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Trading symbol: |
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Our common stock is traded on the American Stock Exchange under
the symbol UPI. |
The number of shares of common stock outstanding as of
October 9, 2006 and to be outstanding after this offering
exclude:
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2,213,734 shares of common stock subject to outstanding
options, at a weighted average exercise price of $3.56 per
share;
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2,751,646 shares of common stock issuable upon the exercise
of outstanding warrants, at a weighted average exercise price of
$3.39 per share; and
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1,027,000 shares of common stock reserved for issuance
under our 2006 Stock and Incentive Plan.
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3
Summary
Financial Data
The following tables present our summary consolidated financial
data for our fiscal years ended March 31, 2006 and 2005,
which have been derived from our audited consolidated financial
statements. The financial data for our three months ended
June 30, 2006 and 2005 have been derived from our unaudited
consolidated financial statements which, in managements
opinion, have been prepared on the same basis as the audited
consolidated financial statements and include all normal and
recurring adjustments and accruals necessary for a fair
presentation of such information. You should read this
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes appearing elsewhere in this prospectus.
Consolidated
Statements of Operations Data:
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Three Months Ended June 30,
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Fiscal Year Ended March 31,
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2006
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2005
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2006
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2005
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(unaudited)
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Net sales
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$
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1,764,210
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$
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1,645,653
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$
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6,142,612
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$
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6,657,726
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Cost of goods sold
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555,516
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420,828
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1,837,716
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1,755,456
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Gross profit
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1,208,694
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1,224,825
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4,304,896
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4,902,270
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General and administrative expenses
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884,109
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690,564
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2,958,982
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2,260,240
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Research and development expenses
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674,954
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630,598
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3,324,201
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2,258,127
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Selling and marketing expenses
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1,232,587
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664,033
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3,399,896
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2,015,655
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Operating loss
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(1,582,956
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(760,370
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(5,378,183
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(1,631,752
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Warrant benefit (expense)
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327,732
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(686,295
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707,320
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Interest income
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19,507
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27,380
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142,379
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30,168
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Interest expense
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(5,982
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(4,809
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(29,494
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(25,934
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Foreign currency exchange gain
(loss)
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26,411
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(1,199
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(31,195
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(15,744
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Other
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4,800
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(413
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Loss before income taxes
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(1,210,488
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(1,425,293
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(4,589,586
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(1,643,262
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Income tax expense (benefit)
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30,751
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37,020
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(46,873
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91,503
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Net loss
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$
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(1,241,239
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$
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(1,462,313
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$
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(4,542,713
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$
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(1,734,765
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Basic and diluted net loss per
common share
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$
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(0.18
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$
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(0.23
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$
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(0.67
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$
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(0.37
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Basic and diluted weighted average
common shares
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6,952,167
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6,351,245
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6,746,412
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4,651,732
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Consolidated
Balance Sheet Data:
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March 31,
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June 30, 2006
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2006
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2005
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(unaudited)
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Cash and cash equivalents
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$
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1,394,306
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$
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1,563,433
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$
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1,405,324
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Short-term investments
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1,137,647
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87,360
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Working capital
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1,861,233
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2,667,053
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2,374,514
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Property, plant and equipment, net
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1,445,778
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1,079,438
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1,040,253
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Total assets
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5,618,532
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6,401,244
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4,443,224
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Long-term debt, less current
portion
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400,101
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389,241
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461,265
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Shareholders equity
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2,618,782
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3,407,050
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2,791,896
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4
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risk factors set forth below
and all other information contained in this prospectus before
purchasing our common stock. If the following risks actually
occur, our business, financial condition and results of
operations could be seriously harmed, the price of our common
stock could decline and you could lose part or all of your
investment.
Risks
Relating to Our Company and Industry
We
continue to incur losses and may never reach
profitability
We have incurred net losses in each of the last six fiscal
years. As of June 30, 2006, we had an accumulated deficit
of approximately $12.3 million primarily as a result of
costs relating to the development, including seeking regulatory
approvals, and commercialization of our Macroplastique, I-Stop
sling, Urgent PC neuromodulation system and related products. We
expect our operating expenses relating to sales and marketing
activities and product development will continue to increase
during the foreseeable future. To achieve profitability, we must
generate substantially more revenue than we have in prior years.
Our ability to achieve significant revenue growth will depend,
in large part, on our ability to obtain FDA approval to market
Macroplastique, and our ability to achieve widespread market
acceptance for our products, which we cannot guarantee will
happen. We may never realize significant revenue from the sale
of our products or be profitable.
We
will require additional financing in the future which may not be
available to us when required, or may be available only on
unfavorable terms.
Our future liquidity and capital requirements will depend on
numerous factors including: the timing and cost associated with
obtaining final FDA approval of Macroplastique; the timing and
cost involved in manufacturing
scale-up and
in expanding our sales, marketing and distribution capabilities
in the United States markets; the cost and effectiveness of our
marketing and sales efforts with respect to our existing
products in international markets; the effect of competing
technologies and market and regulatory developments; and the
cost involved in protecting our proprietary rights. Because we
have yet to achieve profitability and generate positive cash
flows, we need to raise additional debt or equity financing in
fiscal 2007 to continue funding for product development and
continued expansion of our sales and marketing activities. There
can be no guarantee that we will be successful, as we currently
have no committed sources of, or other arrangements with respect
to, additional equity or debt financing. We therefore cannot
ensure that we will obtain additional financing on acceptable
terms, or at all.
This offering is structured as a best efforts offering, whereby
the selling agent is only required to use its best efforts to
sell our shares and has no firm commitment or obligation to
purchase any of the shares in this offering. This offering is
not conditioned on the sale of a minimum dollar amount or number
of shares. As a result, the amount of proceeds we raise in this
offering may be substantially less than the $12 million we
need to support our current growth plans. If we are unable to
raise substantial funds in this offering, we will need to rely
on our existing credit facilities and curtail our product
development, clinical studies and sales and marketing activities
in order to conserve cash and maintain our operations through
the balance of fiscal 2007. This would adversely impact our
future business and prospects. In any event, because we are not
profitable, we will need to raise substantial additional
financing to support our operations and planned growth
activities in fiscal 2008 and beyond. Any equity financing could
substantially dilute your equity interests in our company and
any debt financing could impose significant financial and
operational restrictions on us.
If we
fail to receive or experience a significant delay in receiving
regulatory approvals for sale of our products, our ability to
generate revenues will be limited and our business prospects may
suffer.
We cannot sell Macroplastique in the United States until we
obtain the requisite FDA approvals. If we suffer delays in
obtaining or fail to receive regulatory approvals, our ability
to generate revenues from the sale of these products will be
limited and our future growth may be significantly hampered.
5
In the United States, we have submitted a pre-market approval
application with respect to Macroplastique. The pre-market
approval process is very expensive, uncertain and time-consuming
and could materially delay our product coming to market. In
September 2006, we received an approvable letter from FDA
relating to our pre-market approval application for
Macroplastique Implants. The receipt of the approvable letter
follows FDAs completion of the scientific review of the
safety and efficacy of Macroplastique. FDA advised us that our
pre-market approval application is approvable subject to FDA
audit of our manufacturing facilities, methods and controls for
compliance with applicable Quality System Requirements. FDA has
completed its inspection of our manufacturing facilities in
Minneapolis, Minnesota and Eindhoven, The Netherlands, with no
findings noted. We expect to begin marketing the product in the
United States in early 2007, assuming FDA approves our
pre-market approval application. However, we cannot ensure when
or if FDA will ultimately approve our marketing of
Macroplastique in the United States or that we can market the
product profitably.
We are
primarily dependent on sales of one product and our business
would suffer if sales of this product decline.
We are dependent on sales of our products that contain our
Macroplastique bulking agent. Our Macroplastique product line
accounted for 67% and 76%, respectively, of total net sales
during fiscal 2006 and 2005. If our Macroplastique products were
no longer available for sale in any key market because of
regulatory, intellectual property or any other reason, our net
sales from these products would significantly decline. A
significant decline in our net sales could negatively impact our
product development activities, our business prospects and
profitability.
We are
unable to predict how quickly or how broadly our products will
be accepted by the market. If demand for our products fails to
develop as we expect, our revenues will decline or we may be
unable to increase our revenues and be profitable.
Although some of our products have received FDA approval, market
acceptance is uncertain. Our failure to achieve sufficient
market acceptance will significantly limit our ability to
generate revenue and be profitable. Market acceptance of our
products will depend on our ability to demonstrate the safety,
clinical efficacy, perceived benefits and cost-effectiveness of
our products compared to products or treatment options of our
competitors, and to train physicians in the proper application
of our products. We cannot ensure that we will be successful in
educating the marketplace about the benefits of using our
products. Even if customers accept our products, this acceptance
may not translate into sales if our competitors have developed
similar products that our customers prefer. If our products do
not achieve increasing market acceptance in the United States
and internationally, our revenues will decline or we may be
unable to increase our revenues and be profitable.
Our
products and facilities are subject to extensive regulation with
which compliance is costly and which exposes us to penalties for
non-compliance. We may not be able to obtain required regulatory
approvals for our products in a cost-effective manner or at all,
which could adversely affect our business and results of
operations.
The production and marketing of our products and our ongoing
research and development, preclinical testing and clinical trial
activities are subject to extensive regulation and review by
numerous governmental authorities both in the United States and
abroad. United States and foreign regulations applicable to
medical devices are wide-ranging and govern, among other things,
the testing, marketing and pre-market review of new medical
devices, in addition to regulating manufacturing practices,
reporting, advertising, exporting, labeling and record keeping
procedures. We are required to obtain FDA approval or clearance
before we can market our products in the United States and
certain foreign countries. The regulatory process requires
significant time, effort and expenditures to bring our products
to market, and we cannot ensure that any of our products will be
approved for sale. Any failure to obtain regulatory approvals or
clearances could prevent us from successfully marketing our
products, which could adversely affect our business and results
of operations. Our failure to comply with applicable regulatory
requirements could result in governmental agencies:
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imposing fines and penalties on us;
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preventing us from manufacturing or selling our products;
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bringing civil or criminal charges against us;
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delaying the introduction of our new products into the market;
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enforcing operating restrictions;
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recalling or seizing our products; or
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withdrawing or denying approvals or clearances for our products.
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If any or all of the foregoing were to occur, we may not be able
to meet the demands of our customers and our customers may
cancel orders or purchase products from our competitors, which
could adversely affect our business and results of operations.
Even if we receive regulatory approval or clearance of a
product, the approval or clearance could limit the uses for
which we may label and promote the product, which may limit the
market for our products. Further, for a marketed product, its
manufacturer and manufacturing facilities are subject to
periodic reviews and inspections by FDA and foreign regulatory
authorities. Subsequent discovery of problems with a product,
manufacturer or facility may result in restrictions on the
product, manufacturer or facility, including withdrawal of the
product from the market or other enforcement actions. In
addition, regulatory agencies may not agree with the extent or
speed of corrective actions relating to product or manufacturing
problems.
If additional regulatory requirements are implemented in the
foreign countries in which we sell our products, the cost of
developing or selling our products may increase. In addition, we
may rely on our distributors outside the United States in
seeking regulatory approval to market our devices in particular
countries. To the extent we do so, we are dependent on persons
outside of our direct control to make regulatory submissions and
secure approvals, and we do or will not have direct access to
health care agencies in those markets to ensure timely
regulatory approvals or prompt resolution of regulatory or
compliance matters. If our distributors fail to obtain the
required approvals or do not do so in a timely manner, our net
sales from our international operations and our results of
operations may be adversely affected.
In addition, our business and properties are subject to federal,
state and local laws and regulations relating to the protection
of the environment, natural resources and worker health and
safety and the use, management, storage, and disposal of
hazardous substances, wastes, and other regulated materials. The
costs of complying with these various environmental
requirements, as they now exist or may be altered in the future,
could adversely affect our financial condition and results of
operations.
If
third parties claim that we infringe upon their intellectual
property rights, we may incur liabilities and costs and may have
to redesign or discontinue selling the affected
product.
The medical device industry is litigious with respect to patents
and other intellectual property rights. Companies operating in
our industry routinely seek patent protection for their product
designs, and many of our principal competitors have large patent
portfolios. Companies in the medical device industry have used
intellectual property litigation to gain a competitive
advantage. Whether a product infringes a patent involves complex
legal and factual issues, the determination of which is often
uncertain. We face the risk of claims that we have infringed on
third parties intellectual property rights. Our efforts to
identify and avoid infringing on third parties
intellectual property rights may not always be successful. Any
claims of patent or other intellectual property infringement,
even those without merit, could:
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be expensive and time consuming to defend;
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result in us being required to pay significant damages to third
parties;
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cause us to cease making or selling products that incorporate
the challenged intellectual property;
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require us to redesign, reengineer or rebrand our products, if
feasible;
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require us to enter into royalty or licensing agreements in
order to obtain the right to use a third partys
intellectual property, which agreements may not be available on
terms acceptable to us or at all;
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divert the attention of our management; or
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result in our customers or potential customers deferring or
limiting their purchases or use of the affected products until
resolution of the litigation.
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In addition, new patents obtained by our competitors could
threaten a products continued life in the market even
after it has already been introduced.
If we
are unable to adequately protect our intellectual property
rights, we may not be able to compete effectively and we may not
be profitable.
Our success depends in part on our ability to protect our
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of trademark
laws and confidentiality, noncompetition and other contractual
arrangements to protect our proprietary technology. However,
these legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep any
competitive advantage. Our patents and patent applications if
issued, may not be broad enough to prevent competitors from
introducing similar products into the market. Our patents, if
challenged or if we attempt to enforce them, may not necessarily
be upheld by the courts of any jurisdiction. In addition, patent
protection in foreign countries may be different from patent
protection under United States laws and may not be favorable to
us. As a result, we may not be able to compete effectively.
We also rely on unpatented proprietary technology. We cannot
ensure that we can meaningfully protect all of our rights in our
unpatented proprietary technology or that others will not
independently develop substantially equivalent products or
processes or otherwise gain access to our unpatented proprietary
technology. We attempt to protect our trade secrets and other
unpatented proprietary technology through the use of
confidentiality agreements and noncompetition agreements with
our current employees and with other parties to whom we have
divulged trade secrets. However, these agreements may not be
enforceable or may not provide meaningful protection for our
proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event
competitors discover or independently develop similar
proprietary information.
Product
liability claims, recalls and improper use of our products could
each adversely affect our business and results of
operations.
The manufacture and sale of medical devices exposes us to
significant risk of product liability claims, some of which may
have a negative impact on our business. Our existing products
were developed relatively recently and defects or risks that we
have not yet identified may give rise to product liability
claims. Our existing $2 million of worldwide product
liability insurance coverage may be inadequate to protect us
from any liabilities we may incur or we may not be able to
maintain adequate product liability insurance at acceptable
rates. If a product liability claim or series of claims is
brought against us for uninsured liabilities or in excess of our
insurance coverage and it is ultimately determined that we are
liable, our business could suffer. Additionally, we could
experience a material design or manufacturing failure in our
products, a quality system failure, other safety issues or
heightened regulatory scrutiny that would warrant a recall of
some of our products. A recall of any of our products likely
would be costly, would be uninsured and could also result in
increased product liability claims. Further, while we train our
physician customers on the proper usage of our products, we
cannot ensure that they will implement our instructions
accurately. If our products are used incorrectly by our
customers, injury may result and this could give rise to product
liability claims against us. Any losses that we may suffer from
any liability claims, and the effect that any product liability
litigation may have upon the reputation and marketability of our
products, may divert managements attention from other
matters and may have a negative impact on our business and our
results of operations.
8
If we
are not able to successfully
scale-up
production of our products, our sales and revenues will
suffer.
In order to commercialize our products in the United States and
international markets, we need to be able to produce, or
subcontract the production, of our products in a cost-effective
way on a large scale to meet demand, while maintaining high
standards for quality and reliability. If we fail to
successfully commercialize our products, we will not be
profitable.
We may experience manufacturing and control problems as we begin
to scale-up
our future manufacturing operations, and we may not be able to
scale-up
manufacturing in a timely manner or at a reasonable cost to
enable production in sufficient quantities. If we experience any
of these problems, we may not be able to have our products
manufactured and delivered in a timely manner.
The I-Stop sling is designed and manufactured by CL Medical in
France for our distribution in the United States and the United
Kingdom. If CL Medical experiences problems with manufacturing
or control, encounters regulatory or compliance problems, or
incurs delays, we may not receive the I-Stop product in a timely
manner. This would limit our ability to generate revenues.
The
loss or interruption of materials from any of our key suppliers
could slow down the manufacture of our products, which would
limit our ability to generate sales and revenues.
We currently purchase several key materials used in our products
from single source suppliers. Our reliance on a limited number
of suppliers subjects us to several risks, including an
inability to obtain an adequate supply of required materials,
price increases, untimely delivery and difficulties in
qualifying alternative suppliers. We cannot be sure that
acceptable alternative arrangements could be made on a timely
basis. Additionally, the qualification of materials and
processes as a result of a supplier change could be deemed as
unacceptable to regulatory authorities and cause delays and
increased costs due to additional test requirements. A
significant interruption in the supply of materials, for any
reason, could delay the manufacture and sale of our products,
which would limit our ability to generate revenues.
If we
are not able to maintain sufficient quality controls, approval
of our products by the European Union, FDA or other relevant
authorities could be delayed or denied and our sales and
revenues will suffer.
Approval of our products could be delayed by FDA, European Union
or other related authorities if our manufacturing facilities do
not comply with applicable manufacturing requirements.
FDAs Quality System Regulations impose elaborate testing,
control, document and other quality assurance procedures. Canada
and the European Union also impose requirements on quality
control systems of manufacturers, which are inspected and
certified on a periodic basis and may be subject to additional
unannounced inspections. Failure by us or CL Medical to comply
with these requirements could prevent us from obtaining FDA
approval for our products and from marketing our products in the
United States. We cannot ensure that our manufacturing
facilities will comply with applicable requirements on a timely
basis or at all.
Even with approval to market our products in the European Union,
the United States and other countries, we must continue to
comply with relevant manufacturing requirements. If violations
of applicable requirements are noted during periodic inspections
of our manufacturing facilities, we may not be able to continue
to market our products and our revenues could be materially
adversely affected.
If we
are not able to attract, retain and motivate our sales force and
expand our distribution channels, our sales and revenues will
suffer.
To date, we have sold our products in foreign markets through a
network of independent distributors and our direct sales force.
Our ability to increase product sales in foreign markets will
largely depend on our ability to develop and maintain
relationships with our existing and additional distributors and
to recruit, retain and motivate additional sales personnel. We
may not be able to retain distributors who are willing to commit
the necessary resources to market and sell our products to the
level of our expectations. In the United States, we have a sales
organization consisting of a direct sales management group and a
nationwide network of independent sales representatives and a
marketing organization to market our products directly and
support our
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distributor organizations. We anticipate continuing to expand
our sales and marketing organization, as needed to support our
growth. We have and will continue to incur significant continued
and additional expenses to support this organization. We will
need to raise additional debt or equity financing to expand our
sales and marketing organizations. We may not be able to
recruit, train, motivate or retain qualified sales and marketing
personnel or independent sales representatives. Failure to
expand our distribution channels or to recruit, retain and
motivate qualified personnel could have a material adverse
effect on our product sales and revenues.
If we
are not able to acquire or license other products, our business
and future growth prospects could suffer.
As part of our growth strategy, we intend to acquire or license
additional products and product candidates for development and
commercialization. The success of this strategy depends upon our
ability to identify, select and acquire the right products. In
fact, we have an option to acquire the assets of CystoMedix,
Inc., the company that has licensed the
Urgent®
PC technology to us.
Any product candidate we license or acquire may require
additional development efforts prior to sale, including clinical
testing and approval by FDA. Product candidates may fail to
receive or experience a significant delay in receiving FDA
approval. In addition, we cannot ensure that any approved
products that we acquire or license will be manufactured
economically, successfully commercialized or widely accepted in
the marketplace. Other companies, including those with greater
financial, marketing and sales resources, may compete with us
for the acquisition or license of product candidates or approved
products. We may not be able to acquire or license the right to
other products on terms that we find acceptable, or at all.
Even if we complete future acquisitions, our business, financial
condition and the results of operations could be negatively
affected because:
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we may be unable to integrate the acquired business successfully
and realize anticipated economic, operational and other benefits
in a timely manner; and
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the acquisition may disrupt our ongoing business, distract our
management and divert our resources.
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The
loss of our key customers could result in a material loss of
revenues.
During fiscal 2006, we had two customers that individually
accounted for approximately 14% and 11% of our net sales. During
fiscal 2005, the same two customers individually accounted for
approximately 15% and 11% of our net sales. As a result, we face
the risk that one or more of our key customers may decrease its
or their business with us or terminate its or their
relationships with us. Any decrease in business from these
customers, if we are unable to replace them, could result in a
material decrease in our revenue. This could adversely affect
our financial condition.
Negative
publicity regarding the use of silicone material in medical
devices could harm our business and result in a material
decrease in revenues.
Macroplastique is comprised of medical grade, heat-vulcanized
polydimethylsiloxane, which results in a solid, flexible
silicone elastomer. In the early 1990s, the United States
breast implant industry became the subject of significant
controversies surrounding the possible effects upon the human
body of the use of silicone gel in breast implants, resulting in
product liability litigation and leading to the bankruptcy of
several companies, including our former parent, Bioplasty, Inc.
We use only medical grade solid silicone material in our tissue
bulking products and not semi-liquid silicone gel, as was used
in breast implants. Negative publicity regarding the use of
silicone materials in our products or in other medical devices
could have a significant adverse affect on the overall
acceptance of our products. We cannot ensure that the use by us
and others of solid silicone in medical devices implanted in the
human body will not result in negative publicity.
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The
risks inherent in operating internationally and the risks of
selling and shipping our products and of purchasing our
components and products internationally may adversely impact our
net sales, results of operations and financial
condition.
We currently derive substantially all of our net sales from
operations in international markets. We expect non-United States
sales to continue to represent a significant portion of our
revenues until we achieve sufficient market acceptance from
United States customers of the already FDA-approved products and
we obtain requisite FDA approvals for the remaining products.
The sale and shipping of our products and services across
international borders, as well as the purchase of components and
products from international sources, subject us to extensive
United States and foreign governmental trade regulations.
Compliance with such regulations is costly and exposes us to
penalties for non-compliance. Any failure to comply with
applicable legal and regulatory obligations could impact us in a
variety of ways that include, but are not limited to,
significant criminal, civil and administrative penalties,
including imprisonment of individuals, fines and penalties,
denial of export privileges, seizure of shipments, restrictions
on certain business activities, and exclusion or debarment from
government contracting. Also, the failure to comply with
applicable legal and regulatory obligations could result in the
disruption of our shipping and sales activities.
In addition, most of the countries in which we sell our products
are, to some degree, subject to political, economic and social
instability. Our international sales operations expose us and
our representatives, agents and distributors to risks inherent
in operating in foreign jurisdictions. These risks include:
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the imposition of additional United States and foreign
governmental controls or regulations;
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the imposition of costly and lengthy new export licensing
requirements;
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the imposition of United States and international sanctions
against a country, company, person or entity with whom we do
business that would restrict or prohibit continued business with
the sanctioned country, company, person or entity;
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political and economic instability;
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fluctuations in the value of the U.S. dollar relative to
foreign currencies;
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a shortage of high-quality sales people and distributors;
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loss of any key personnel that possess proprietary knowledge, or
who are otherwise important to our success in certain
international markets;
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changes in third-party reimbursement policies that may require
some of the patients who receive our products to directly absorb
medical costs or that may necessitate the reduction of the
selling prices of our products;
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changes in duties and tariffs, license obligations and other
non-tariff barriers to trade;
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the imposition of new trade restrictions;
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the imposition of restrictions on the activities of foreign
agents, representatives and distributors;
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scrutiny of foreign tax authorities which could result in
significant fines, penalties and additional taxes being imposed
on us;
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international pricing pressure;
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laws and business practices favoring local companies;
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longer payment cycles;
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difficulties in enforcing agreements and collecting receivables
through certain foreign legal systems;
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difficulties in enforcing or defending intellectual property
rights; and
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exposure to different legal and political standards due to our
conducting business in approximately 40 countries.
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We cannot ensure that one or more of these factors will not harm
our business. Any material decrease in our international sales
would adversely impact our net sales, results of operations and
financial condition. Our international sales are predominately
in Europe. In Europe, health care regulation and reimbursement
for medical devices vary significantly from country to country.
This changing environment could adversely affect our ability to
sell our products in some European countries.
Fluctuations
in foreign exchange rates could negatively impact our results of
operations.
Because our international sales are denominated primarily in
euros, currency fluctuations in countries where we do business
may render our products less price competitive than those of
competing companies whose sales are denominated in weaker
currencies. We report our financial results in
U.S. dollars, and fluctuations in the value of either the
dollar or the currencies in which we transact business can have
a negative impact on our results of operations and financial
condition. Consequently, we have exposure to foreign currency
exchange risks. We do not hedge any of our foreign currency risk.
If we
are unable to continue to develop and market new products and
technologies, we may experience a decrease in demand for our
products or our products could become obsolete, and our business
would suffer.
We are continually engaged in product development and
improvement programs, and we expect new products to represent a
significant component of our future business. We may not be able
to compete effectively with our competitors unless we can keep
up with existing or new products and technologies in the urinary
and fecal incontinence market. If we do not continue to
introduce new products and technologies, or if those products
and technologies are not accepted, we may not be successful and
our business would suffer. Moreover, our clinical trials have
durations of several years and it is possible that competing
therapies, such as drug therapies, may be introduced while our
products are still undergoing clinical trials. This could reduce
the potential demand for our products and negatively impact our
business prospects. Additionally, our competitors new
products and technologies may beat our products to market, may
be more effective or less expensive than our products or render
our products obsolete.
The
marketing of our products requires a significant amount of time
and expense and we may not have the resources to successfully
market our products, which would adversely affect our business
and results of operations.
The marketing of our products requires a significant amount of
time and expense in order to identify the physicians who may use
our products, invest in training and education and employ a
sales force that is large enough to interact with the targeted
physicians. We may not have adequate resources to market our
products successfully against larger competitors which have more
resources than we do. If we cannot market our products
successfully, our business and results of operations would be
adversely affected.
The
size and resources of our competitors may allow them to compete
more effectively than we can, which could adversely affect our
potential profitability.
Our products compete against similar medical devices and other
treatment methods, including drugs, for treating urinary and
fecal voiding dysfunctions. Many of our competitors have
significantly greater financial, research and development,
manufacturing and marketing resources than we have. Our
competitors could use these resources to develop or acquire
products that are safer, more effective, less invasive, less
expensive or more readily accepted than our products. Their
products could make our technology and products obsolete or
noncompetitive. Our competitors could also devote greater
resources to the marketing and sale of their products and adopt
more aggressive pricing policies than we can. If we are not able
to compete effectively, then we may not be profitable.
We are
dependent on the availability of third-party reimbursement for
our revenues.
Our success depends on the availability of reimbursement for the
cost of our products from third-party payors, such as government
health authorities, private health insurance plans and managed
care organizations.
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There is no uniform policy for reimbursement in the United
States and foreign countries. We believe that the ease of
obtaining, and the amount of, reimbursement for urinary
incontinence treatment has a significant impact on the decisions
of health care providers regarding treatment methods and
products. Accordingly, changes in the extent of coverage or a
reduction in reimbursement rates under any or all third-party
reimbursement programs may cause a decline in purchases of our
products, which would materially adversely affect the market for
our products. Alternatively, we might respond to reduced
reimbursement rates by reducing the prices of our products,
which could also reduce our revenues.
If
physicians do not recommend and endorse our products, our sales
may decline or we may be unable to increase our sales and
profits.
In order for us to sell our products, physicians must recommend
and endorse them. We may not obtain the necessary
recommendations or endorsements from physicians. Acceptance of
our products depends on educating the medical community as to
the distinctive characteristics, perceived benefits, safety,
clinical efficacy, cost-effectiveness and reimburseability of
our products compared to products of our competitors, and on
training physicians in the proper application of our products.
If we are not successful in obtaining the recommendations or
endorsements of physicians for our products, our sales may
decline or we may be unable to increase our sales and profits.
Our
business strategy relies on assumptions about the market for our
products, which, if incorrect, would adversely affect our
business prospects and profitability.
We are focused on the market for minimally invasive therapies
used to treat voiding dysfunctions. We believe that the aging of
the general population will continue and that these trends will
increase the need for our products. However, the projected
demand for our products could materially differ from actual
demand if our assumptions regarding these trends and acceptance
of our products by the medical community prove to be incorrect
or do not materialize. Actual demand for our products could also
be affected if drug therapies gain more widespread acceptance as
a viable alternative treatment, which in each case would
adversely affect our business prospects and profitability.
Proposals
to modify the health care system in the United States or other
countries could affect the pricing of our products. If we cannot
sell our products at the prices we plan to, our margins and
profitability could be adversely affected.
Proposals to modify the current health care system in the United
States to improve access to health care and control its costs
are continually being considered by the federal and state
governments. We anticipate that the United States Congress and
state legislatures will continue to review and assess
alternative health care reform proposals. We cannot predict
whether these reform proposals will be adopted, when they may be
adopted or what impact they may have on us if they are adopted.
Any spending decreases or other significant changes in
government programs such as Medicare could adversely affect the
pricing of our products.
Like the United States, foreign countries have considered health
care reform proposals and could materially alter their
government-sponsored health care programs by reducing
reimbursement rates. Any reduction in reimbursement rates under
United States or foreign health care programs could negatively
affect the pricing of our products. If we are not able to charge
a sufficient amount for our products, our margins and our
profitability will be adversely affected.
If our
information systems fail or if we experience an interruption in
their operation, our business and results of operations could be
adversely affected.
The efficient operation of our business is dependent on our
management information systems. We rely on our management
information systems to effectively manage accounting and
financial functions, order entry, order fulfillment and
inventory replenishment processes, and to maintain our research
and development and clinical data. The failure of our management
information systems to perform as we anticipate could disrupt
our business and product development and could result in
decreased sales, increased overhead costs, excess
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inventory and product shortages, causing our business and
results of operations to suffer. In addition, our management
information systems are vulnerable to damage or interruption
from:
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earthquake, fire, flood and other natural disasters;
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terrorist attacks and attacks by computer viruses or
hackers; and
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power loss or computer systems, Internet, telecommunications or
data network failure.
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Any such interruption could adversely affect our business and
results of operations.
If we
lose the services of our chief executive officer or other key
personnel, we may not be able to manage our operations and meet
our strategic objectives.
Our future success depends, in large part, on the continued
service of our senior management. We have no key person
insurance with respect to any of our senior managers, and any
loss or interruption of their services could significantly
reduce our ability to effectively manage our operations and
implement our business strategies. Also, we depend on the
continued service of key managerial, scientific, sales and
technical personnel, as well as our ability to continue to
attract and retain additional highly qualified personnel. We
compete for such personnel with other companies, academic
institutions, government entities and other organizations. Any
loss or interruption of the services of our other key personnel
could also significantly reduce our ability to effectively
manage our operations and grow our business because we cannot
ensure that we would be able to find an appropriate replacement
should the need arise.
We also compete for experienced medical device sales personnel.
If we are unable to hire and retain qualified sales personnel,
our sales could be negatively impacted.
Risks
Relating to this Offering
Your
investment is immediately at risk.
This is a best efforts offering with no minimum number or dollar
amount of securities that must be sold. As a result, any funds
received from investors in this offering will be available to us
regardless of the number of shares sold in this offering.
Therefore, your investment is immediately at risk.
We
will retain broad discretion in the allocation of the net
proceeds of this offering and may not allocate the proceeds in
the most profitable manner.
Our management will have broad discretion in determining the
specific timing and uses of the offering proceeds. We have not
made a specific allocation for the uses of the net proceeds.
Accordingly, investors will be relying on the judgment of our
management regarding the application of the proceeds of this
offering.
You
may be unable to sell your investment.
There is only a limited trading market for our common stock,
which is traded on the AMEX. Transactions in our common stock
may lack the volume, liquidity and orderliness necessary to
maintain a liquid and active trading market. Accordingly, an
investor should consider the potential lack of liquidity before
investing in our common stock.
Our
stock price may fluctuate and be volatile.
The market price of our common stock may be subject to
significant fluctuation due to the following factors, among
others:
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|
|
variations in our quarterly financial results;
|
|
|
|
developments regarding FDA approval of Macroplastique;
|
|
|
|
market acceptance of our products;
|
14
|
|
|
|
|
the success of our efforts to acquire or license additional
products;
|
|
|
|
announcements of new products or technologies by us or our
competitors;
|
|
|
|
developments regarding our patents and proprietary rights or
those of our competitors;
|
|
|
|
developments in United States or international reimbursement
systems;
|
|
|
|
changes in accounting standards, policies, guidance or
interpretations;
|
|
|
|
sales of substantial amounts of our stock by existing
shareholders; and
|
|
|
|
general economic conditions.
|
The stock market in recent years has experienced extreme price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of affected
companies. These broad market fluctuations may cause the price
of our common stock to fall abruptly or remain significantly
depressed.
Future
sales of our common stock in the public market could lower our
share price.
The market price of our common stock could decline due to sales
by our existing shareholders of a large number of shares of our
common stock or the perception that these sales could occur.
These sales could also make it more difficult for us to raise
capital through the sale of common stock at a time and price we
deem appropriate.
In August 2006, we completed a private placement in which we
sold 1,389,999 shares of our common stock at $1.50 per
share. In April 2005, we completed a private placement in which
we sold 2,147,142 shares of our common stock at
$3.50 per share. All of these shares have been registered
for resale under the Securities Act and are freely tradeable.
The following securities that may be exercised into shares of
our common stock were issued and outstanding as of
October 9, 2006:
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|
|
|
|
stock options to purchase 2,213,734 shares of our common
stock at a weighted average exercise price of $3.56 per
share; and
|
|
|
|
warrants to purchase 2,751,646 shares of our common stock
at a weighted average exercise price of $3.39 per share.
|
Further, if we exercise our option to acquire the assets of
CystoMedix, we will need to issue our common stock to CystoMedix
for the purchase price.
We
will be exposed to risks relating to evaluations of controls
required by Section 404 of the Sarbanes-Oxley
Act.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act and related regulations implemented by the SEC, are creating
uncertainty for public companies, increasing legal and financial
compliance costs and making some activities more time consuming.
We will be evaluating our internal controls systems to allow
management to report on, and our independent auditors to attest
to, our internal controls. We will be performing the system and
process evaluation and testing (and any necessary remediation)
required to comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act. While we anticipate being able to fully
implement the requirements relating to internal controls and all
other aspects of Section 404 by our March 31, 2008
deadline, we cannot be certain as to the timing of completion of
our evaluation, testing and remediation actions or the impact of
the same on our operations. If we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, we may be subject to sanctions or
investigation by regulatory authorities, including the SEC. This
type of action could adversely affect our financial results or
investors confidence in our company and our ability to
access capital markets and could cause our stock price to
decline. In addition, the controls and procedures that we will
implement may not comply with all of the relevant rules and
regulations of the SEC. If we fail to develop and maintain
effective
15
controls and procedures, we may be unable to provide the
required financial information in a timely and reliable manner.
Further, if we acquire any company in the future, we may incur
substantial additional costs to bring the acquired
companys systems into compliance with Section 404.
Changes
in accounting standards regarding stock option plans could limit
the desirability of granting stock options, which could harm our
ability to attract and retain employees, and would also
negatively impact our results of operations.
The Financial Accounting Standards Board has issued Statement
No. 123(R), Share-Based Payments, SFAS 123(R),
which requires all companies to treat the fair value of stock
options granted to employees as an expense, beginning in the
first fiscal year that begins after December 15, 2005, for
small business issuers. Accordingly, SFAS 123(R) became
effective for us beginning in fiscal 2007. For fiscal 2006 and
prior years, we generally have not recorded compensation expense
in connection with stock option grants to employees. Because we
are now required to expense the fair value of employee stock
option grants, granting stock options is less attractive because
of the additional expense recognized associated with these
grants, which will negatively impact our results of operations.
If we had adopted the fair value method for fiscal 2006 and
2005, our net loss for the respective fiscal years would have
been $3,062,324, and $2,321,745 higher than reported and net
loss per share would have increased by $0.46, and $0.50 per
common share, respectively. Nevertheless, stock options are an
important employee recruitment and retention tool, and we may
not be able to attract and retain key personnel if we reduce the
scope of our employee stock option program.
In February 2006, our board of directors approved a plan to
accelerate, effective February 2, 2006, the vesting of
out-of-the-money,
unvested stock options previously granted to our employees,
officers and directors. An option was considered
out-of-the-money
if the stated exercise price exceeded $2.85, the then closing
price of our common stock. Pursuant to this action, options to
purchase approximately 400,000 shares of our common stock
with a weighted average exercise price of $4.49 per share
became exercisable immediately.
We accelerated the vesting of these options to minimize the
amount of compensation expense we must recognize upon adoption
of SFAS No. 123(R). None of these options had
intrinsic value at the acceleration date under APB 25. We
expect that the acceleration of the vesting of these options
reduced the pre-tax stock option expense by approximately
$1.4 million, in the aggregate, calculated using the
Black-Scholes option valuation model, that we would have
otherwise recognized over the next three fiscal years, upon
adoption of SFAS No. 123(R). We have included the
charge attributed to the accelerated vesting of the options in
the pro forma disclosures to our consolidated financial
statements for the fiscal year ended March 31, 2006.
However, certain outstanding options, with a cashless exercise
provision, and certain outstanding options classified as
liabilities, could result in a significant charge to
compensation expense in future periods, as we will mark those
options to fair value at each reporting period until settlement.
Also, additional options as granted to attract or retain new
employees could result in significant charge to compensation
expense.
Our
corporate documents and Minnesota law contain provisions that
could discourage, delay or prevent a change in control of our
company.
Provisions in our articles of incorporation may discourage,
delay or prevent a merger or acquisition involving us that our
shareholders may consider favorable. For example, our articles
of incorporation authorize our board of directors to issue up to
40 million shares of stock which, without shareholder
approval, the board of directors has the authority to attach
special rights, including voting and dividend rights. With these
rights, the holders of such shares could make it more difficult
for a third party to acquire us. In addition, our articles of
incorporation provides for a staggered board of directors,
whereby directors serve for three year terms, with approximately
one third of the directors coming up for reelection each year.
Having a staggered board will make it more difficult for a third
party to obtain control of our board of directors through a
proxy contest, which may be a necessary step in an acquisition
of us that is not favored by our board of directors.
We are also subject to the anti-takeover provisions of
Section 302A.673 of the Minnesota Business Corporation Act.
Under these provisions, if anyone becomes an interested
shareholder, we may not enter
16
into a business combination with that person for
four years without special approval, which could discourage a
third party from making a takeover offer and could delay or
prevent a change of control. For purposes of
Section 302A.673, interested shareholder means,
generally, someone owning 10% or more of our outstanding voting
stock or an affiliate of ours that owned 10% or more of our
outstanding voting stock during the past four years, subject to
certain exceptions.
We do
not intend to declare dividends on our stock in the foreseeable
future.
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all future earnings, if
any, for the operation and expansion of our business and,
therefore, do not anticipate declaring or paying cash dividends
on our common stock in the foreseeable future. Any payment of
cash dividends on our common stock will be at the discretion of
our board of directors and will depend upon our results of
operations, earnings, capital requirements, financial condition,
future prospects, contractual restrictions and other factors
deemed relevant by our board of directors. Therefore, you should
not expect to receive dividend income from shares of our common
stock.
17
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All
statements other than statements of historical facts are
forward-looking statements, including statements regarding our
future financial position, business strategy, and plans and
objectives for future operations and products. The words
may, will, believe,
expect, estimate, continue,
anticipate, intend and similar
expressions are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our
current expectations and projections about future events and
trends that we believe may affect our financial condition,
results of operations, business strategy, business operations
and financial needs. These forward-looking statements are
subject to a number of risks, uncertainties and assumptions,
including, among other things:
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the highly competitive nature of the markets in which we sell
our products;
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|
regulatory hurdles that may prevent, delay or make more
expensive our introduction of products;
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the failure to continue developing innovative products;
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the loss of our customers;
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|
|
increases in prices for raw materials or the loss of key
supplier contracts;
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employee slowdowns, strikes or similar actions;
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|
|
product liability claims exposure;
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|
|
risks in connection with our operations outside the United
States;
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|
conditions and changes in the medical device industry generally;
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|
the failure in protecting our intellectual property;
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|
exposure to competitors assertions of intellectual
property claims;
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|
the failure to retain senior management or replace lost senior
management;
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|
changes in U.S. generally accepted accounting principles;
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|
changes in general economic and business conditions;
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|
changes in currency exchange rates and interest rates;
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introduction of competing products;
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lack of acceptance of new products;
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|
|
competitive pressures on the transactional sales and margins,
and competition from new market participants for our sales;
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|
adverse changes in applicable laws or regulations;
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|
the incurrence of additional debt, contingent liabilities and
expenses in connection with future acquisitions;
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|
the failure to integrate effectively newly acquired
operations; and
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|
the absence of expected returns from the amount of intangible
assets we have recorded.
|
We believe that the above factors are important, but not
necessarily all of the important factors that could cause actual
results to differ materially from those expressed in any
forward-looking statement. Unpredictable or unknown factors
could also have material adverse effects on us. Since our actual
results, performance or achievements could differ materially
from those expressed in, or implied by, the forward-looking
statements,
18
we cannot give any assurance that any of the events anticipated
by the forward-looking statements will occur or, if any of them
do, what impact they will have on our results of operations and
financial condition. All forward-looking statements included in
this prospectus are expressly qualified in their entirety by the
foregoing cautionary statements. You should not place undue
reliance on these forward-looking statements, which speak only
as of the date of this prospectus. We do not undertake any
obligation to update any of the forward-looking statements,
except as may be required under federal securities laws.
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $ , based on an
assumed offering price of $ per
share (the closing sale price of our common stock on the
American Stock Exchange
on ,
2006) and assuming all of the shares being offered are
sold, after deducting estimated offering expenses of
approximately $ . Because this is a
best efforts offering, there is no guarantee that all of the
shares will be sold.
We intend to use the net proceeds from this offering to fund
operations and for working capital purposes. We have not made a
specific allocation for the use of the net proceeds, and we will
have broad discretion in determining the specific timing and use
of any offering proceeds. The exact amount and timing of our
expenditures will depend on several factors, including the
amount of proceeds raised in this offering. Investors will be
relying on the judgment of our management regarding the
application of the net proceeds in this offering.
Until we use our net proceeds of the offering, we will invest
the funds in short-term, investment grade, interest-bearing
instruments or securities.
PRICE
RANGE OF COMMON STOCK
Effective October 3, 2005, our common stock became listed
on the American Stock Exchange under the symbol UPI.
On October 26, 2006, the closing price of our common stock
on the American Stock Exchange was $2.99 per share.
Previously, our common stock was quoted on the OTC
Bulletin Board under the symbol UPST.OB.
The following table sets forth the high and low closing prices
for our common stock as reported on the American Stock Exchange
and the high and low bid prices for our common stock as reported
by the OTC Bulletin Board, as applicable, for the periods
indicated. The OTC quotations represent interdealer prices,
without retail markup, mark down or commission, and do not
necessarily represent actual transactions.
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Fiscal Year 2007
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Low
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High
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April 1 June 30,
2006
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$
|
1.70
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$
|
2.60
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|
July 1
September 30, 2006
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$
|
1.62
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$
|
3.80
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|
October 1
October 26, 2006
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$
|
2.70
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$
|
3.40
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|
|
|
|
|
|
|
|
|
Fiscal Year 2006
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Low
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High
|
|
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April 1 June 30,
2005
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$
|
3.91
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$
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4.90
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July 1
September 30, 2005
|
|
|
2.60
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|
|
|
5.80
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|
October 1
December 31, 2005
|
|
|
2.60
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|
|
3.80
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January 1
March 31, 2006
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|
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2.30
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|
|
|
3.14
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|
19
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Fiscal Year 2005
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Low
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High
|
|
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April 1 June 30,
2004
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$
|
2.60
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|
|
$
|
5.25
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|
July 1
September 30, 2004
|
|
|
2.90
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|
|
|
4.60
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|
October 1
December 31, 2004
|
|
|
4.10
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|
|
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6.30
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January 1
March 31, 2005
|
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|
3.15
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5.50
|
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As of October 9, 2006, we had approximately 534 holders of
record of our common stock. Record ownership includes nominees
who may hold securities on behalf of multiple beneficial owners.
DIVIDEND
POLICY
We have never paid cash dividends on our common stock, and we do
not anticipate paying any cash dividends in the foreseeable
future. We intend to retain future earnings, if any, for the
development and expansion of our business.
20
SELECTED
FINANCIAL DATA
The following tables present our summary consolidated financial
data for our fiscal years ended March 31, 2006 and 2005,
which has been derived from our audited consolidated financial
statements. The financial data for our three months ended
June 30, 2006 and 2005 has been derived from our unaudited
consolidated financial statements which, in managements
opinion, have been prepared on the same basis as our audited
consolidated financial statements and include all normal and
recurring adjustments and accruals necessary for a fair
presentation of such information. You should read this
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes appearing elsewhere in this prospectus.
Consolidated
Statements of Operations Data:
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|
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Three Months Ended June 30,
|
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Fiscal Year Ended March 31,
|
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|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,764,210
|
|
|
$
|
1,645,653
|
|
|
$
|
6,142,612
|
|
|
$
|
6,657,726
|
|
Cost of goods sold
|
|
|
555,516
|
|
|
|
420,828
|
|
|
|
1,837,716
|
|
|
|
1,755,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,208,694
|
|
|
|
1,224,825
|
|
|
|
4,304,896
|
|
|
|
4,902,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
884,109
|
|
|
|
690,564
|
|
|
|
2,958,982
|
|
|
|
2,260,240
|
|
Research and development expenses
|
|
|
674,954
|
|
|
|
630,598
|
|
|
|
3,324,201
|
|
|
|
2,258,127
|
|
Selling and marketing expenses
|
|
|
1,232,587
|
|
|
|
664,033
|
|
|
|
3,399,896
|
|
|
|
2,015,655
|
|
Operating loss
|
|
|
(1,582,956
|
)
|
|
|
(760,370
|
)
|
|
|
(5,378,183
|
)
|
|
|
(1,631,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant benefit (expense)
|
|
|
327,732
|
|
|
|
(686,295
|
)
|
|
|
707,320
|
|
|
|
|
|
Interest income
|
|
|
19,507
|
|
|
|
27,380
|
|
|
|
142,379
|
|
|
|
30,168
|
|
Interest expense
|
|
|
(5,982
|
)
|
|
|
(4,809
|
)
|
|
|
(29,494
|
)
|
|
|
(25,934
|
)
|
Foreign currency exchange gain
(loss)
|
|
|
26,411
|
|
|
|
(1,199
|
)
|
|
|
(31,195
|
)
|
|
|
(15,744
|
)
|
Other
|
|
|
4,800
|
|
|
|
|
|
|
|
(413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,210,488
|
)
|
|
|
(1,425,293
|
)
|
|
|
(4,589,586
|
)
|
|
|
(1,643,262
|
)
|
Income tax expense (benefit)
|
|
|
30,751
|
|
|
|
37,020
|
|
|
|
(46,873
|
)
|
|
|
91,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,241,239
|
)
|
|
$
|
(1,462,313
|
)
|
|
$
|
(4,542,713
|
)
|
|
$
|
(1,734,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.37
|
)
|
Basic and diluted weighted average
common shares
|
|
|
6,952,167
|
|
|
|
6,351,245
|
|
|
|
6,746,412
|
|
|
|
4,651,732
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
June 30, 2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,394,306
|
|
|
$
|
1,563,433
|
|
|
$
|
1,405,324
|
|
Short-term investments
|
|
|
|
|
|
|
1,137,647
|
|
|
|
87,360
|
|
Working capital
|
|
|
1,861,233
|
|
|
|
2,667,053
|
|
|
|
2,374,514
|
|
Property, plant and equipment, net
|
|
|
1,445,778
|
|
|
|
1,079,438
|
|
|
|
1,040,253
|
|
Total assets
|
|
|
5,618,532
|
|
|
|
6,401,244
|
|
|
|
4,443,224
|
|
Long-term debt, less current
portion
|
|
|
400,101
|
|
|
|
389,241
|
|
|
|
461,265
|
|
Shareholders equity
|
|
|
2,618,782
|
|
|
|
3,407,050
|
|
|
|
2,791,896
|
|
21
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and the results of operations in conjunction with our
consolidated financial statements and related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements reflecting our current expectations
that involve risks and uncertainties. Actual results may differ
materially from those suggested by our forward-looking
statements due to various reasons, including those discussed in
the section entitled Risk Factors.
Overview
We are a medical device company that develops, manufactures and
markets innovative, proprietary products for the treatment of
voiding dysfunctions. Our minimally invasive products treat
urinary incontinence and overactive bladder symptoms. We believe
that our company is uniquely positioned because we offer a broad
and diverse set of products to address the various preferences
of doctors and patients, as well as the quality of life issues
presented by voiding dysfunctions. We currently offer three
medical devices for the treatment of incontinence and overactive
bladder symptoms.
Strategy
Our goal is to gain market share in the voiding dysfunction
market by increasing sales of our existing products and
expanding our portfolio of minimally invasive products for the
treatment of voiding dysfunctions, with a particular focus on
products and applications for outpatient and office-based
procedures. We believe that, with our suite of innovative
products, we can increasingly garner the attention of key
physicians, independent sales representatives and distributors
to enhance market acceptance of our products. The key elements
of our strategy are to:
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Focus on office-based solutions for physicians.
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Grow our United States sales and international distribution.
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Educate physicians and patients about the benefits of Urgent PC.
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Provide patient-driven alternatives.
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Develop, license or acquire new products.
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Our
Products
Macroplastique is a minimally invasive, implantable soft tissue
bulking agent for the treatment of urinary incontinence. When
Macroplastique is injected into tissue around the urethra, it
stabilizes and bulks tissues close to the urethra,
thereby providing the surrounding muscles with increased
capability to control the release of urine. Macroplastique has
been sold for urological indications in over 40 countries
outside the United States since 1991. In December 2004, FDA
accepted for filing our pre-market approval submission with
respect to Macroplastique for the treatment of female stress
urinary incontinence. In September 2006, we received an
approvable letter from FDA relating to our pre-market approval
application for Macroplastique. We expect to begin marketing
Macroplastique in the United States during 2007, assuming FDA
clearance of our pre-market approval application.
I-Stop is a minimally invasive biocompatible, polypropylene,
tension-free sling for the treatment of female urinary
incontinence. Our I-Stop sling can correct stress urinary
incontinence by providing tension-free hammock-type support for
the urethra to prevent its downward movement and the associated
leakage of urine. In August 2005, FDA granted 510(k) clearance
for the sale of I-Stop within the United States.
The Urgent PC neuromodulation system is a minimally invasive
device designed for office-based treatment of overactive bladder
symptoms of urge incontinence, urinary urgency and urinary
frequency. This product uses percutaneous tibial nerve
stimulation to deliver an electrical pulse that travels to the
sacral nerve plexus, a control center for bladder function. We
received regulatory approvals for the sale of Urgent PC in
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the United States and Canada in October 2005, and in Europe in
November 2005. Subsequently, we launched the product for sale in
those markets. We developed a second generation Urgent PC
product during 2006. Following CE mark approval and 510(k)
clearance, we launched this product for sale in Europe in
September 2006 and in the United States in October 2006.
Sales and
Marketing
We are focusing our sales and marketing efforts primarily on
office-based and outpatient surgery-based urologists,
urogynecologists and gynecologists with significant patient
volume. We believe the United States is a significant
opportunity for future sales of our products. In order to grow
our United States business, we recently established a sales
organization, consisting of a direct field sales management team
and independent sales representatives, and a marketing
organization to market our products directly to our customers.
By expanding our United States presence, we intend to develop
long-standing relationships with leading physicians treating
incontinence and overactive bladder symptoms.
Recent
Developments
In September 2006, FDA advised us that our pre-market approval
application for Macroplastique is approvable subject to FDA
audit of our manufacturing facilities, methods and controls for
compliance with applicable Quality System Requirements. FDA has
completed its inspection of our manufacturing facilities in
Minneapolis, Minnesota and Eindhoven, The Netherlands, with no
findings noted. We expect to begin marketing the product in the
Unites States during 2007, assuming FDA approves our pre-market
approval application. However, we cannot ensure when or if FDA
will ultimately approve our marketing of Macroplastique in the
Unites States or that we can market the product profitably.
Critical
Accounting Policies
We prepare our consolidated financial statements in accordance
with U.S. generally accepted accounting principles, which
require us to make estimates and assumptions in certain
circumstances that affect amounts reported. In preparing these
consolidated financial statements, we have made our best
estimates and judgments of certain amounts, giving due
consideration to materiality. We believe that of our significant
accounting policies, the following are particularly important to
the portrayal of our results of operations and financial
position. They may require the application of a higher level of
judgment by our management, and as a result are subject to an
inherent degree of uncertainty.
Revenue Recognition. The SECs Staff
Accounting Bulletin (SAB) No. 104,
Revenue Recognition in Financial Statements,
provides guidance on the application of generally accepted
accounting principles to selected revenue recognition issues. We
believe our revenue recognition policies comply with
SAB 104. We market and distribute our products primarily
through our direct and independent sales organization in the
United States and the United Kingdom, and primarily through
distributors in our other markets. We recognize revenue upon
shipment of product to our distributors and direct customers. We
have no customer acceptance provisions or installation
obligations. Our sales terms to our distributors and customers
provide no right of return outside of our standard warranty, and
payment terms consistent with industry standards apply. Sales
terms and pricing to our distributors are governed by the
respective distribution agreements. Our distribution partners
purchase our products to meet sales demand of their end-user
customers as well as to fulfill their internal requirements
associated with the sales process and, if applicable,
contractual purchase requirements under the respective
distribution agreements. Internal and other requirements include
purchases of products for training, demonstration and evaluation
purposes, clinical evaluations, product support, establishing
inventories, and meeting minimum purchase commitments. As a
result, the level of our net sales during any period is not
necessarily indicative of our distributors sales to
end-user customers during that period, which we estimate are not
substantially different than our sales to those distributors in
each of the last two years. Our distributors level of
inventories of our products, their sales to end-user customers
and their internal product requirements may impact our future
revenue growth.
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Accounts Receivable. We carry our accounts
receivable at the original invoice amount less an estimate made
for doubtful receivables based on a periodic review of all
outstanding amounts. We determine the allowance for doubtful
accounts based on customer health, and both historical and
expected credit loss experience. We write off our accounts
receivable when we deem them uncollectible. We record recoveries
of accounts receivable previously written off when received.
Inventories. We state inventories at the lower
of cost or market using the
first-in,
first-out method. We provide lower of cost or market reserves
for slow moving and obsolete inventories based upon current and
expected future product sales and the expected impact of product
transitions or modifications. While we expect our sales to grow,
a reduction in sales could reduce the demand for our products
and may require additional inventory reserves.
Foreign Currency Translation/Transactions. The
financial statements of our foreign subsidiaries were translated
in accordance with the provisions of SFAS No. 52
Foreign Currency Translation. Under this Statement,
we translate all assets and liabilities using period-end
exchange rates, and we translate statements of operations items
using average exchange rates for the period. We record the
resulting translation adjustment within accumulated other
comprehensive loss, a separate component of shareholders
equity. We recognize foreign currency transaction gains and
losses in the statement of operations, including unrealized
gains and losses on short-term intercompany obligations using
period-end exchange rates, resulting in an increase in the
volatility of our consolidated statements of operations. We
recognize unrealized gains and losses on long-term intercompany
obligations within accumulated other comprehensive loss, a
separate component of shareholders equity.
Impairment of Long-Lived Assets. Long-lived
assets at June 30, 2006 consist of property, plant and
equipment and intangible assets. We review our long-lived assets
for impairment whenever events or business circumstances
indicate that the carrying amount of an asset may not be
recoverable. We measure the recoverability of assets to be held
and used by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by
the asset. If we consider such assets impaired, we measure the
impairment to be recognized by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. We
report assets to be disposed of at the lower of the carrying
amount or fair value less costs to sell.
Share-Based Compensation. In December 2004,
the Financial Accounting Standards Board, or FASB, published
Statement No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)).
SFAS 123(R) requires that we recognize the compensation
cost relating to share-based payment transactions, including
grants of employee stock options, in our financial statements.
We must measure that cost based on the fair value of the equity
or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including stock
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
SFAS 123(R) is a replacement of Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes
APB 25, and its related interpretive guidance.
SFAS 123(R) requires us to measure the cost of employee
services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost
over the period we require our employee to provide services for
the award. FAS 123(R) permits us to use any option-pricing model
that meets the fair value objective in the Statement. We adopted
FAS 123(R) for the first time in the first quarter of fiscal
year 2007. FAS 123(R) allows two methods for determining
the effects of the transition: the modified prospective and the
modified retrospective. We have adopted the modified prospective
transition method beginning April 1, 2006. We calculated
the pro forma compensation costs presented previously and in our
prior filings using a Black-Scholes option pricing model. These
compensation costs may not be indicative of amounts which we
will incur in future years.
Income Taxes. We recognize deferred tax assets
and liabilities for future tax consequences attributable to
differences between the financial carrying amounts of existing
assets and liabilities and their respective tax bases. We
measure deferred tax assets and liabilities using enacted tax
rates we expect to apply to taxable income in the years in which
we expect to recover or settle those temporary differences. As
of March 31, 2006, we generated approximately $15,423,000
in U.S. net operating loss carryforwards that we cannot use
to
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offset taxable income in foreign jurisdictions. We recognize a
valuation allowance when we determine it is more likely than not
that we will not realize a portion of the deferred tax asset. We
have established a valuation allowance for United States and
certain foreign deferred tax assets due to the uncertainty that
we will generate enough income in those taxing jurisdictions to
utilize the assets.
In addition, U.S. tax rules impose limitations on the use
of net operating loss following certain changes in ownership.
Such a change in ownership may limit the amount of these
benefits that would be available to offset future taxable income
each year, starting with the year of ownership change.
Results
of Operations
Three
Months Ended June 30, 2006 Compared to Three Months Ended
June 30, 2005
Net Sales. In the first quarter ended
June 30, 2006, net sales were $1.8 million,
representing an $119,000 or 7% increase when compared to net
sales of $1.6 million for the quarter ended June 30,
2005. Excluding the impact of fluctuations in foreign currency
exchange rates, sales increased by approximately 4%. A 9%
decline in sales of Macroplastique products was more than offset
by sales of the Urgent PC and an increase in sales of the
I-STOP. In the first quarter ended June 30, 2005, we had no
sales of the Urgent PC and minimal sales of the I-STOP.
We attribute the decline in sales of the Macroplastique products
primarily due to adverse changes in the reimbursement policies
of the insurers and the increase in pricing competition. We
expect this to adversely impact our future sales in those
markets. In response, we have implemented targeted volume price
reductions, have stepped up training workshops targeted to our
sales personnel, distributors and key incontinence surgeons, and
are sponsoring scientific podium presentations and seminars at
key international incontinence congresses. We cannot ensure that
these initiatives will increase Macroplastique sales.
Gross Profit. Gross profit was
$1.2 million for both quarters ended June 30, 2006 and
2005, or 69% and 74% of net sales in the respective periods. We
attribute the decline in gross profit percent primarily to lower
manufacturing capacity utilization due to decline in
Macroplastique sales, duplicate manufacturing facilities in the
United States pending completion of our relocation to our new
corporate headquarters, higher costs for our new facility and an
increase in personnel-related costs. We expect to relocate the
remaining operations to our new corporate headquarters in the
third quarter of our current fiscal year after quality and
regulatory qualifications of our new manufacturing facility.
General and Administrative Expenses
(G&A). G&A expenses increased from
$691,000 during the first quarter of fiscal 2006 to $884,000
during the first quarter of fiscal 2007. Included in the fiscal
2007 first quarter is a $266,000 non-cash, SFAS 123(R)
charge for share-based employee compensation. Excluding this
charge, G&A expenses declined by $73,000, primarily because
fiscal 2005 first quarter contained certain charges related to
the installation of our new information system.
Research and Development Expenses
(R&D). R&D expenses increased from
$631,000 during the first quarter of fiscal 2006 to $675,000
during the first quarter of fiscal 2007. Included in the fiscal
2007 first quarter is an $11,000 non-cash, SFAS 123(R)
charge for share-based employee compensation. Excluding this
charge, R&D expenses increased by $33,000. We attribute the
increase primarily to the increase in spending for clinical
trials and testing.
Selling and Marketing Expenses
(S&M). S&M expenses increased from
$664,000 during the first quarter of fiscal 2006 to $1,233,000
during the first quarter of fiscal 2007. Included in the fiscal
2007 first quarter is a $22,000 non-cash, SFAS 123(R)
charge for share-based employee compensation. Excluding this
charge, S&M expenses increased by $547,000. We attribute the
increase to the $360,000 increase in compensation-related costs,
primarily for our United States direct sales force and marketing
organization, $110,000 for increase in travel-related costs and
an increase in other costs to support our expanded organization
and marketing activities.
Other Income (Expense). Other income (expense)
includes interest income, interest expense, warrant expense or
benefit, foreign currency exchange gains and losses and other
non-operating costs when incurred.
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Our financial results are subject to material fluctuations based
on changes in currency exchange rates. Other income (expense)
was $372,000 and $(665,000) for the first quarters ended
June 30, 2006 and 2005, respectively.
As a result of the suspension of the exercise of the 706,218
warrants we originally issued in July 2002, we granted a like
number of new common stock purchase warrants to the holders of
the expired warrants in April 2005. The new warrants will be
exercisable at $2.00 per share for 90 days after the
effective date of a registration statement covering the shares
underlying these warrants. As of June 30, 2006, such a
registration statement had been filed, however, the Securities
and Exchange Commission had not declared it effective. We
anticipate seeking effectiveness of the registration statement
before the end of calendar year 2006. In April 2005, we
recognized a liability and a charge to equity of approximately
$1.4 million associated with the grant of these new
warrants. We determined the fair value of these warrants using
the Black-Scholes option-pricing model. We have since reduced
the reported liability by approximately $1,062,000 due to the
decrease in the fair value of these warrants from their date of
issuance through June 30, 2006. We recorded a warrant
benefit of $328,000 for the three months ended June 30,
2006 and a warrant expense of $686,000 for the three months
ended June 30, 2005. We will continue to remeasure the
value of this liability in relation to its fair value and adjust
accordingly until such time as the warrants are exercised or
expire.
We recognize exchange gains and losses primarily as a result of
fluctuations in currency rates between the U.S. dollar (the
functional reporting currency) and the euro and British pound
(currencies of our subsidiaries), as well as their effect on the
dollar denominated short-term intercompany obligations between
us and our foreign subsidiaries. We recognized foreign currency
gains (losses) of $26,000 and $(1,000) for the first quarters
ended June 30, 2006 and 2005, respectively.
Income Tax Expense. Our Dutch subsidiaries
recorded income tax expense of $31,000 and $37,000 for the
quarters ended June 30, 2006 and 2005, respectively. For
fiscal 2007, the Dutch income tax rate is 25.5% for 22,689
(approximately $29,000) of profit and 29.6% for amounts above
22,689 compared to 27% and 31.5% in fiscal 2006,
respectively.
Non-GAAP Financial Measures. In addition
to disclosing financial results calculated in accordance with
U.S. generally accepted accounting principles (GAAP), our
discussion of the results of operations above contains non-GAAP
financial measures that exclude the effects of share-based
compensation and the requirements of FAS 123(R). The
non-GAAP financial measures used by management and disclosed by
us exclude the income statement effects of share-based
compensation and the effects of FAS 123(R). The non-GAAP
financial measures disclosed by us should not be considered a
substitute for, or superior to, financial measures calculated in
accordance with GAAP, and the consolidated financial results
calculated in accordance with GAAP and reconciliations to those
financial statements should be carefully evaluated. We may
calculate our non-GAAP financial measures differently from
similarly titled measures used by other companies. Therefore,
our non-GAAP financial measures may not be comparable to those
used by other companies. We have described the reconciliations
of each of our non-GAAP financial measures above to the most
directly comparable GAAP financial measures.
Because we excluded FAS 123(R) compensation expense in some
of our discussion above, these financial measures are treated as
a non-GAAP financial measure under SEC rules.
Management uses our non-GAAP financial measures for internal
managerial purposes, including as a means to compare
period-to-period
results on a consolidated basis and as a means to evaluate our
results on a consolidated basis compared to those of other
companies.
We disclose this information to the public to enable investors
who wish to more easily assess our performance on the same basis
applied by management and to ease comparison on both a GAAP and
non-GAAP basis among peer companies.
Years
Ended March 31, 2006 Compared to Year Ended March 31,
2005
Net Sales. In fiscal 2006, net sales of all
products were $6.1 million, representing an 8% decrease
when compared to net sales of $6.7 million for fiscal 2005.
Excluding fluctuations in foreign currency exchange
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rates, we had a sales decrease of approximately 5% primarily due
to a $810,000 decline in sales of our Macroplastique products
offset by a $506,000 net increase in all of our other
products. We attribute this decline primarily to adverse changes
in reimbursement policies of the insurers and the increase in
pricing competition. We expect these reimbursement changes and
the increase in price competition to adversely impact our future
sales in those markets. In these markets we have launched a
strategy to increase sales of our existing products, and to
expand our platform of products for the treatment of voiding
dysfunctions. We are conducting training workshops targeted to
our sales personnel, distributors and key incontinence surgeons,
and we are sponsoring scientific podium presentations and
seminars at key international incontinence congresses. We are
also seeking to broaden our patient base to include Urgent PC
treatment for symptoms of overactive bladder (OAB), the I-Stop
sling procedure for treatment of female stress urinary
incontinence (SUI) and hypermobility and PTQ Implants and Urgent
PC treatments for fecal incontinence. We cannot ensure that
these initiatives will increase sales.
Gross Profit. Gross profit was
$4.3 million and $4.9 million for the fiscal years
ended March 31, 2006 and 2005, respectively, or 70% and 74%
of net sales. The decline in gross profit percent is attributed
primarily to the decline in sales of the above-average gross
margin Macroplastique product, and certain one-time costs
related to updating our manufacturing quality systems. Gross
profit as a percentage of net sales between periods fluctuates
based on the following factors: our unit sales, our utilization
of manufacturing capacity, the mix of products sold with
different gross margins, the mix of customers (and different
discounts to them), the mix of direct sales versus sales through
distributors (with higher margins on direct sales), and currency
fluctuations. Historically, our gross margin has ranged from
approximately 70-80% of net sales.
General and Administrative Expenses
(G&A). G&A expenses increased from
$2.3 million during fiscal 2005 to $3.0 million during
fiscal 2006. The increase in expense is attributed to: $590,000
increase in salary costs, including $150,000 for severance pay
and $100,000 option expense for former executives, $170,000
increase in information (IT) expense, $100,000
increase in legal and accounting fees, $80,000 increase in
recruiting costs, $50,000 of expenses related to our listing on
the American Stock Exchange, $110,000 increase in depreciation
and amortization expense, general price increases and
fluctuations in foreign currency exchange rates, offset by a
decrease in bad debt expense of $330,000. The IT consulting
expense relates to the implementation of a new computer software
system, including training and post-implementation support.
Research and Development Expenses
(R&D). R&D expenses increased 47% from
$2.3 million during fiscal 2005 to $3.3 million during
fiscal 2006. The increase in expense is attributed to a $350,000
increase in salary costs, including $170,000 for severance pay
to a former executive, and $770,000 for consulting expense for
product development and regulatory approvals, offset by a
$130,000 reduction in costs for clinical trials and testing.
Selling and Marketing Expenses
(S&M). S&M expenses increased 69% from
$2.0 million during fiscal 2005 to $3.4 million during
fiscal 2006. The increase in expenses is attributed to $940,000
for expansion of our direct sales force and marketing
organizations in the United States, $190,000 for increase in
costs for travel, trade-shows and conventions, $90,000 for
increase in consulting expense, and general price increases and
fluctuations in foreign currency exchange rates.
Other Income (Expense). Other income (expense)
includes interest income, interest expense, warrant expense or
benefit, foreign currency exchange gains and losses and other
non-operating costs when incurred. Our financial results are
subject to material fluctuations based on changes in currency
exchange rates. Other income (expense) was $788,597 and
$(11,510) for fiscal 2006 and fiscal 2005, respectively.
In July 2002, we conducted a rights offering pursuant to which
our stockholders purchased certain units consisting of shares of
our common stock and common stock purchase warrants exercisable
for two years at $2.00 per share. However, we suspended the
exercise of the warrants when we delayed the filing of our
annual report on
Form 10-KSB
for the fiscal year ended March 31, 2004. As a result,
706,218 of the warrants lapsed unexercised at July 31,
2004. In April 2005, we granted a like number of new common
stock purchase warrants to the holders of the expired warrants.
The new warrants will be exercisable at $2.00 per share for
90 days after the effective date of a new registration
statement covering the resale of the shares underlying these
warrants. We have filed a registration statement covering such
warrants on
Form SB-2
with the Securities
27
and Exchange Commission (SEC). In April 2005, we recognized a
liability and equity charge of $1.4 million associated with
the grant of these warrants. A net warrant benefit of $707,320
for fiscal 2006 is included in the statement of operations which
represents the change in the fair value of the warrants since
their issuance due to the change in value of the common stock
which may be acquired by the exercise of these warrants.
We recognize exchange gains and losses primarily as a result of
fluctuations in currency rates between the U.S. dollar (the
functional reporting currency) and the euro and British pound
(currencies of our subsidiaries), as well as their effect on the
dollar denominated short-term intercompany obligations between
us and our foreign subsidiaries. We recognized foreign currency
losses of $31,195 and $15,744 for fiscal 2006 and fiscal 2005,
respectively.
Income Tax Expense (Benefit). Our Dutch
subsidiaries recorded income tax expense (benefit) of $(46,873)
and $91,503 for fiscal 2006 and fiscal 2005, respectively. We
cannot use the U.S. net operating loss carry forwards to
offset taxable income in foreign jurisdictions. For fiscal 2006,
the Dutch income tax rate was 25.5% for 22,689
(approximately $27,500) of profit and 29.6% for amounts above
22,689 compared to 27% and 31.5% in fiscal 2005,
respectively.
Liquidity
and Capital Resources
Cash Flows. As of June 30, 2006, our cash
and cash equivalents balances totaled $1.4 million.
At June 30, 2006, we had working capital of approximately
$1.9 million. During the three months ended of fiscal 2007,
we used $1.1 million of cash in operating activities,
compared to $870,000 of cash used in the same period of fiscal
2006. The usage of cash over the three months was primarily
attributable to the net loss incurred of $1.2 million and
fluctuations in accounts receivable, other current assets,
accounts payable and accrued expenses, due to the timing of
payments and fluctuations in foreign currency exchange rates.
Fluctuations in foreign currency exchange rates, weak economic
conditions in foreign markets where we sell and distribute our
products, changes in regulatory environment and changes in
third-party reimbursement polices could materially affect our
financial condition and results of operations. The effects of
these conditions could include reduced unit sales and reduced
sales in dollars when converted from foreign currency amounts
and material gains and losses on transactions denominated in
foreign currencies. Furthermore, because our United States
operations are funded by sales denominated in foreign currency,
the strengthening of the U.S. dollar against the euro or
the British pound could have an adverse effect on our cash flow
and results of operations.
Sources of Liquidity. In April 2005, we
conducted a private placement in which we sold
2,147,142 shares of our common stock at a price per share
of $3.50, together with warrants to purchase
1,180,928 shares of our common stock, for an aggregate
purchase price of approximately $7.5 million. The stock
sale proceeds are offset by costs of approximately $935,000,
resulting in net proceeds of approximately $6.6 million.
The warrants are exercisable for five years at an exercise price
of $4.75 per share.
In October 2006, we amended our business loan agreement with
Venture Bank. The amended agreement provides for a credit line
of up to $500,000 secured by our assets, and will expire in
April 2007 if not renewed. We may borrow up to 50% of the value
of the inventory on hand in the United States and 75% of the
U.S. accounts receivable value. The bank charges interest
on the loan at the rate of 1 percentage point over the
prime rate, subject to a minimum interest rate of 7% per
annum. In addition, Uroplasty BV, one of our subsidiaries,
entered into an arrangement with Rabobank of The Netherlands for
a 200,000 (approximately $258,500) credit line. Currently,
we have no outstanding borrowings under our credit lines.
In August 2006, we entered into a securities purchase agreement
with certain investors pursuant to which we sold approximately
1.4 million shares of our common stock for $1.50 per
share, together with warrants to purchase 695,000 shares of
our common stock, for an aggregate proceeds of approximately
$2.1 million. After offset for our estimated costs of
$183,000, we received net proceeds of $1.9 million. The
warrants are exercisable for 5 years (but commencing
181 days after closing) at an exercise price of
$2.50 per share.
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In May 2006, we also entered into a $100,000
3-year, term
loan agreement with Venture Bank, at an interest rate of
8.25% per annum. We used the loan for certain capital
expenditures relating to the relocation of our facility to our
Minnetonka, Minnesota location.
Commitments and Contingencies. Because we have
yet to achieve profitability and generate positive cash flows,
we need to raise additional debt or equity financing in fiscal
2007 to continue funding for product development and continued
expansion of our sales and marketing activities. There can be no
guarantee that we will be successful, as we currently have no
committed sources of, or other arrangements with respect to,
additional equity or debt financing. We therefore cannot ensure
that we will obtain additional financing on acceptable terms, or
at all. If we are unable to raise substantial funds in fiscal
2007, we will need to rely on our existing credit facilities and
curtail our product development, clinical studies and sales and
marketing activities in order to conserve cash and maintain our
operations through the balance of fiscal 2007. This would
adversely impact our future business and prospects. In any
event, because we are not profitable, we will need to raise
substantial additional financing to support our operations and
planned growth activities in fiscal 2008 and beyond. Ultimately,
we will need to achieve profitability and generate positive cash
flows from operations to fund our operations and grow our
business.
For the balance of fiscal 2007, we expect to continue to incur
research and development expenses, including those relating to
clinical trials for the Urgent PC. We also expect that during
the balance of fiscal 2007, we will continue to incur
significant expenses as we expand our selling and marketing
organization in the United States to market our products.
In April 2005, we entered into an exclusive manufacturing and
distribution agreement with CystoMedix for the Urgent PC
product. The agreement required us to pay CystoMedix an initial
payment of $225,000 and an additional payment of $250,000 in
12 monthly installments of $20,833, with the last
installment payment made in the first quarter of fiscal 2007. We
capitalized the aggregate amount as licensed technology and are
amortizing it over the term of the agreement. We will also pay
CystoMedix a 7% royalty on product sales. However, the 7%
royalty is first offset against the monthly royalty
installments. Currently we do not project making any additional
royalty payments to CystoMedix in fiscal 2007.
CystoMedix has also granted us an exclusive option to acquire
its assets. The purchase price is $3,485,000, reduced by up to
$50,000 of liabilities assumed by us. However, the $3,485,000
amount used to compute the purchase price will increase at a
rate of 10% per year after April 2007. The purchase price
is payable in shares of our common stock valued at the average
of the closing bid price of our shares for the 20 trading days
prior to our exercise of the option. We may exercise the option
until June 2008. If we exercise the option, we will also assume
up to $1.4 million of bridge loan advances made to
CystoMedix by its Chairman. We would repay up to
$1.1 million of the bridge loan advances at closing and
would issue our common stock for the balance of the bridge loan
based on the above option price. We also have certain rights of
first refusal to acquire CystoMedixs assets in the event
CystoMedix receives a third party offer in advance of any
exercise of our option. We may need to raise additional equity
or debt funds in order to consummate the CystoMedix acquisition,
should we elect to do so.
We have two exclusive distribution agreements with CL Medical
allowing us to market and sell the I-STOP urethral sling:
(1) effective February 2006, a six-year agreement, with a
right to renew it for successive five-year terms, for
distribution in the United States, and (2) effective May
2005, a one-year agreement, with automatic renewal for up to two
years, for distribution in the United Kingdom. Under the
agreements, one of which was modified in October 2006, we are
required to purchase a minimum of $527,000 of units in the first
12-month
period following January 1, 2006, increasing to
$2.7 million of units in the fifth year of the agreement,
for an aggregate commitment of approximately $6.9 million
of units over the five-year period, subject to periodic
adjustment based on the value of the euro.
We were obligated to pay royalties of 5% of net sales of
Macroplastique products in the U.S. with a minimum of
$50,000 per year. This royalty agreement terminated on
May 1, 2006. Under another royalty agreement, we pay
royalties, in the aggregate, of 3 to 5% of net sales of
Macroplastique, Bioplastique, and PTQ Implants subject to a
monthly minimum of $4,500. The royalties payable under this
agreement will continue until the patent referenced in the
agreement expires in 2010. Under a license agreement for the
29
Macroplastique Implantation System, we pay a royalty of 10
British pounds for each unit sold during the life of the patent.
We have a pension plan covering 16 employees in The Netherlands,
reported as a defined benefit plan. We pay premiums to an
insurance company to fund annuities for these employees.
However, we are responsible for funding additional annuities
based on continued service and future salary increases. We
closed this defined benefit plan for new employees in April
2005. As of that date, the Dutch subsidiary established a
defined contribution plan that now covers new employees. We also
closed our United Kingdom subsidiarys defined benefit plan
to further accrual for all employees effective December 31,
2004. In March 2005, the United Kingdom subsidiary established a
defined contribution plan that now covers new employees. At
June 30, 2006, our accrued pension liability for the closed
defined benefit plans was $573,267.
In January 2006, we entered into a long-term lease with Liberty
Property Limited Partnership for an 18,258 square foot
facility for our United States headquarters located at 5420
Feltl Road, Minnetonka, Minnesota. The lease effective date was
May 1, 2006, has a term of 96 months, requires average
annual minimum rent payments of approximately $140,000 and
requires payments for operating expenses estimated to be
approximately $82,000 in the first 12 months.
Repayments of our contractual obligations as of June 30,
2006, consisting of royalties, notes payable (inclusive of
interest), and operating leases, are summarized below:
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Payments Due by Period
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Remainder
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Fiscal
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Fiscal
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Fiscal
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of Fiscal
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2008 and
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2010 and
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2012 and
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Total
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2007
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2009
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2011
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Thereafter
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Minimum royalty payments
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$
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234,000
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$
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40,500
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|
$
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108,000
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|
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$
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85,500
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$
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|
Minimum purchase agreement
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6,996,482
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721,696
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2,129,973
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4,144,813
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Notes payable
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756,607
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165,980
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193,478
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107,869
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289,280
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Operating lease commitments
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1,367,331
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242,763
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401,668
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285,773
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437,127
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Total contractual obligations
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$
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9,354,420
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$
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1,170,939
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$
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2,833,119
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$
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4,623,955
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$
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726,407
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Recent
Accounting Pronouncements
In September 2006, FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, or SFAS 158, which requires
employers to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in
its financial statements and to recognize changes in that funded
status in the year in which the changes occur. The effective
date would be for any full fiscal years ending after
December 15, 2006. We are currently evaluating the impact,
if any, of adopting SFAS 158 on our financial statements.
In September 2006, FASB issued Statement No. 157, Fair
Value Measurements, or SFAS 157, which defines fair
value and establishes a framework for measuring fair value in
generally accepted accounting principles. More precisely,
SFAS 157 sets forth a standard definition of fair value as
it applies to assets or liabilities, the principal market (or
most advantageous market) for determining fair value (price),
the market participants, inputs and the application of the
derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and
interim periods beginning after November 15, 2007. We are
currently evaluating the impact, if any, of adopting
SFAS 157 on our financial statements.
In July 2006, FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement 109, or FIN 48,
which clarifies the accounting for uncertainty in tax positions.
FIN 48 provides that the tax effects from an uncertain tax
position can be recognized in financial statements, only if the
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective as of the beginning of our 2008 fiscal
year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact, if any, of
adopting FIN 48 on our financial statements.
30
In May 2005, FASB issued Statement No. 154, Accounting
Changes and Error Corrections, or SFAS 154, which
requires retrospective application of a voluntary change in
accounting principle with all prior period financial statements
presented using the new accounting principle, unless it is
impracticable to do so. SFAS 154 also requires accounting
for a change in method of depreciating or amortizing a
long-lived nonfinancial asset prospectively as a change in
estimate (prospectively) affected by a change in accounting
principle. Further, SFAS 154 requires that corrections of
errors in previously issued financial statements be termed a
restatement. The new standard is effective for
accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of
errors made in fiscal years beginning after June 1, 2005.
We do not believe the adoption of SFAS 154 will have a
material effect on our financial position or results of
operations.
In March 2005, FASB issued FASB Interpretation No. 47, or
FIN 47, which clarifies when an entity has sufficient
information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 was effective for us in our
2006 fiscal year. Adoption of FIN 47 did not have a
material impact on our consolidated financial statements.
In December 2004, FASB issued SFAS No. 123(R),
Share-Based Payment, which requires all share-based
payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to
be expensed over the applicable vesting period. SFAS 123(R)
was effective for us beginning on April 1, 2006. Please
refer to the discussion in Critical Accounting
Policies Stock Based Compensation and Accelerated
Vesting.
In November 2004, FASB issued SFAS No. 151,
Inventory Costs, An Amendment of Accounting Research
Bulletin No. 43, Chapter 4, which requires us
to treat abnormal freight, handling costs and wasted materials
(spoilage) as current period charges rather than as a portion of
inventory cost. Additionally, the standard clarifies that we
should allocate fixed production overhead based on the normal
capacity of a production facility. The statement is effective
for us beginning in our 2007 fiscal year. Adoption of SFAS
No. 151 did not have a material impact on our consolidated
financial statements.
31
BUSINESS
Overview
We are a medical device company that develops, manufactures and
markets innovative, proprietary products for the treatment of
voiding dysfunctions. Our minimally invasive products treat
urinary incontinence and overactive bladder symptoms. We believe
that our company is uniquely positioned because we offer a broad
and diverse set of products to address the various preferences
of doctors and patients, as well as the quality of life issues
presented by voiding dysfunctions. We currently offer three
medical devices for the treatment of incontinence and overactive
bladder symptoms.
Macroplastique is a minimally invasive, implantable soft tissue
bulking agent for the treatment of urinary incontinence. When
Macroplastique is injected into tissue around the urethra, it
stabilizes and bulks tissues close to the urethra,
thereby providing the surrounding muscles with increased
capability to control the release of urine. Macroplastique has
been sold for urological indications in over 40 countries
outside the United States since 1991. In December 2004, FDA
accepted for filing our pre-market approval (PMA) submission
with respect to Macroplastique for the treatment of female
stress urinary incontinence. In September 2006, we received an
approvable letter from FDA relating to this PMA application for
Macroplastique. We expect to begin marketing Macroplastique in
the Unites States during 2007, assuming FDA clearance of our PMA
application.
I-Stop is a minimally invasive biocompatible, polypropylene,
tension-free sling for the treatment of female urinary
incontinence. Our I-Stop sling can correct stress urinary
incontinence by providing tension-free hammock-type support for
the urethra to prevent its downward movement and the associated
leakage of urine. In August 2005, FDA granted 510(k) clearance
for the sale of I-Stop within the United States.
The Urgent PC neuromodulation system is a minimally invasive
device designed for office-based treatment of overactive bladder
symptoms of urge incontinence, urinary urgency and urinary
frequency. This product uses percutaneous tibial nerve
stimulation to deliver an electrical pulse that travels to the
sacral nerve plexus, a control center for bladder function. We
received regulatory approvals for sale of Urgent PC in the
United States and Canada in October 2005, and in Europe in
November 2005. Subsequently, we launched the product for sale in
those markets. We developed a second generation Urgent PC
product during 2006. Following CE mark approval and 510(k)
clearance, we launched this product for sale in Europe in
September 2006 and in the United States in October 2006.
We are focusing our sales and marketing efforts primarily on
office-based and outpatient surgery-based urologists,
urogynecologists and gynecologists with significant patient
volume. We believe the United States is a significant
opportunity for future sales of our products. In order to grow
our United States business, we recently established a sales
organization, consisting of a direct field sales management team
and independent sales representatives, and a marketing
organization to market our products directly to our customers.
By expanding our United States presence, we intend to develop
long-standing relationships with leading physicians treating
incontinence and overactive bladder symptoms.
Market
Voiding dysfunctions affect urinary or fecal control and can
result in unwanted leakage (urinary or fecal incontinence) or
uncontrolled bladder sensations (overactive bladder). The Agency
for Health Care Policy and Research (AHCPR), a division of the
Public Health Service, U.S. Department of Health and Human
Services, estimates that urinary incontinence affects about
13 million people in the United States, of which 85%
(11 million) are women. AHCPR estimates the total cost of
treating incontinence (management and curative approaches) of
all types in the United States as $16 billion. Overactive
bladder (OAB) is a prevalent and challenging urologic problem
affecting an estimated 34 million Americans. Historically,
only a small percentage of the patients suffering from these
disorders have sought treatment. In recent years, however, the
number of people seeking treatment has grown as a result of the
publicity associated with new minimally invasive treatment
alternatives.
32
When patients seek treatment, physicians generally assess the
severity of the symptoms as mild, moderate or severe. Regardless
of the degree of severity, however, patients will often consider
drug therapy and minimally invasive treatment first. We believe
that our company is uniquely positioned because we provide a
broad product offering of minimally invasive solutions.
We believe that over the next several years a number of key
demographic and technological factors will accelerate growth in
the market for medical devices to treat urinary incontinence and
overactive bladder. These factors include the following:
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Aging population. The number of individuals
developing voiding dysfunctions will increase significantly as
the population ages and as life expectancies continue to rise.
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Technology advances and patient
awareness. Patients often weigh the clinical
benefits against the invasiveness of the procedures when
choosing a treatment alternative. In recent years, with the
publicity associated with new technology and minimally invasive
treatment alternatives, the number of patients visiting their
physicians to seek treatment for voiding dysfunctions has
increased. As a result, we believe more patients will begin to
choose treatments other than drug therapy, which may have
adverse side effects, or other alternatives, which simply manage
their disorder.
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Emphasis on quality of life. Patients have
placed an increased emphasis on quality of life issues and
maintaining active lifestyles. Their desire to improve quality
of life is usually an important factor in selecting a treatment
for their disorder. We believe patients seeking treatment are
increasingly considering alternatives designed to cure or treat
a voiding dysfunction rather than simply manage it. As a result,
we believe patients will increasingly choose minimally invasive
surgical treatments or other effective treatments such as
neuromodulation.
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Uroplasty
Strategy
Our goal is to gain market share in the voiding dysfunction
market by increasing sales of our existing products and
expanding our portfolio of minimally invasive products for the
treatment of voiding dysfunctions, with a particular focus on
products and applications for outpatient and office-based
procedures. We believe that, with our suite of innovative
products, we can increasingly garner the attention of key
physicians, independent sales representatives and distributors
to enhance market acceptance of our products. The key elements
of our strategy are to:
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Focus on office-based solutions for
physicians. We believe that our company is
uniquely positioned to provide a broad product offering of
office-based solutions for physicians. By expanding our United
States presence, we intend to develop long-standing
relationships with leading physicians treating incontinence and
overactive bladder symptoms. These relationships will provide us
with a source of new product ideas and a conduit through which
to introduce new products. We also intend to develop marketing
programs to assist physicians in marketing their practices and
to provide innovative programs focused on helping physicians
attract patients and develop referral networks. Building these
relationships is an important part of our growth strategy,
particularly for the development and introduction of new
products.
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Grow our United States sales and international
distribution. We believe that in addition to
international market, the United States is a significant
opportunity for future sales of our products. In order to grow
our United States business, which represented approximately 1%
of our total 2006 net sales, we recently established a
sales organization, consisting of a direct field sales
management team and independent sales representatives, and a
marketing organization to market our products directly to our
customers. We anticipate further increasing our sales and
marketing organization in the United States, as needed, to
support our sales growth. In addition, we intend to expand our
European presence by creating new distribution partnerships.
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Educate physicians and patients about the benefits of Urgent
PC. We believe education of physicians and
patients regarding the benefits of Urgent PC are critical to the
successful adoption of this product. To this end, we have
initiated a United States multi-center randomized prospective
clinical trial
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33
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comparing the Urgent PC device to the most commonly prescribed
pharmaceutical treatment of OAB symptoms. We believe the results
of this and other studies, if successful, will allow us to
expand our marketing and clinical sales efforts. These sales and
marketing efforts may include physician training and education
programs which will emphasize the clinical efficacy and ease of
use of our Urgent PC product as well as patient-oriented
marketing materials for physicians to use to inform patients of
the availability and potential benefits of our Urgent PC product.
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Provide patient-driven alternatives. Patients
often weigh the quality of life benefits of electing to undergo
a surgical procedure against the invasiveness of the procedure.
We intend to continue to expand our marketing efforts to build
patient awareness of these treatment alternatives and encourage
patients to see physicians. We believe this will help physicians
build their practices and simultaneously increase sales of our
products.
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Develop, license or acquire new products. We
believe that our broad and diverse product offering is an
important competitive advantage because it allows us to address
the various preferences of doctors and patients, as well as the
quality of life issues presented by voiding dysfunctions. An
important part of our growth strategy is to broaden our product
line further to meet customer needs by developing new products
internally, licensing or acquiring new products through
acquisitions.
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Background
of Urinary Incontinence
Causes
of Urinary Incontinence
The mechanisms of urinary continence are complicated and involve
the interaction among several anatomical structures. In females,
urinary continence is controlled by the sphincter muscle and
pelvic floor support structures that maintain proper urethral
position. The sphincter muscle surrounds the urethra and
provides constrictive pressure to prevent urine from flowing out
of the bladder. Urination occurs when the sphincter relaxes as
the bladder contracts, allowing urine to flow through the
urethra. The urinary sphincter and pelvic floor support are also
responsible for maintaining continence during periods of
physical stress. Incontinence may result when any part of the
urinary tract fails to function as intended. Incontinence may be
caused by damage during childbirth, pelvic trauma, spinal cord
injuries, neurological diseases (e.g., multiple sclerosis and
poliomyelitis), birth defects (e.g., spina bifida) and
degenerative changes associated with aging.
Male incontinence is most often associated with prostate
conditions or nerve problems, such as complications arising from
diabetes, stroke or Parkinsons disease. In the United
States, approximately 22% of adults over age 65 with
urinary incontinence are men.
Types
of Urinary Incontinence
There are four types of urinary incontinence:
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Stress Urinary Incontinence Stress urinary
incontinence, or SUI, refers to the involuntary loss of urine
due to an increase in intra-abdominal pressure from ordinary
physical activities, such as coughing, sneezing, laughing,
straining or lifting. For the majority of women with SUI
(9 million of the 11 million in the United States),
incontinence is caused by urethral hypermobility. Urethral
hypermobility abnormal movement of the bladder neck
and urethra occurs when the anatomic supports for
the bladder neck and urethra have weakened. This anatomical
change is often the result of childbirth. Stress urinary
incontinence can also be caused by intrinsic sphincter
deficiency, or the inability of the sphincter valve or muscle to
function properly. Intrinsic sphincter deficiency, or ISD, can
be due to congenital sphincter weakness or can result from
deterioration of the urethral muscular wall due to changes of
aging or damage following trauma, spinal cord lesion or
radiation therapy. SIU is the most common form of incontinence,
accounting for almost one-half of the total worldwide prevalence
of urinary incontinence.
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Urge Incontinence Urge incontinence refers to
the involuntary loss of urine associated with an abrupt, strong
desire to urinate. Urge incontinence often occurs when
neurologic problems cause the bladder to contract and empty with
little or no warning.
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34
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Overflow Incontinence Overflow incontinence
is associated with an over-distention of the bladder. This can
be the result of an under-active bladder or an obstruction in
the bladder or urethra.
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Mixed Incontinence Mixed incontinence is the
combination of both urge and stress incontinence (and, in some
cases, overflow). Since prostate enlargement often obstructs the
urethra, older men often have urge incontinence coupled with
overflow incontinence.
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There are two general approaches to dealing with urinary
incontinence. One approach is to manage symptoms and the other
is to undergo curative treatments in an attempt to restore
continence, such as injection of urethral bulking agents or
surgery. We believe that patients prefer less invasive
treatments that provide the most benefit and have little or no
side effects.
Management
of Urinary Incontinence
Absorbent Products. Absorbent products are the
most common form of management for urinary incontinence because
men and women can use them without consulting a physician. The
cost of adult diapers and pads can be substantial and create a
continuous financial burden for patients. Additionally, this
management technique may require frequent changing of diapers
and pads to control patient embarrassment due to odor or soiling.
Behavior Modification. Techniques used in
behavior modification include bladder training, scheduled
voiding and pelvic floor muscle exercises known as Kegels. Some
of the tools used in conjunction with these training regimes are
vaginal cones or weights, biofeedback devices and pelvic floor
stimulation. Because these techniques rely on active, frequent
participation of the individual, these techniques are seldom
effective.
Occlusion and Compression Devices. Penile
clamps, pessaries and urethral occlusion devices are typically
reserved for temporary use. Complications such as tissue
erosion, urinary tract infections, edema, pain and obstruction
are associated with extended or improper use.
Urinary Catheters and Collection Devices. The
type and severity of incontinence and an individuals
physical and mental condition determine the choice of catheter.
Catheters may be inserted as needed for bladder drainage, may be
a closed, indwelling system, or may be external collection
devices.
Drug Therapy. Drug treatment is used to manage
multiple types of urinary incontinence. Therapeutic drug
activity is matched to the individuals urinary
dysfunction, e.g., activity targeted to contract muscle tissue
of the bladder or bladder neck or to improve the quality of the
bladder neck and urethra mucosal lining. Drugs seldom cure
stress urinary incontinence. Common side effects include dry
mouth, constipation and headache. Other potential side effects
include urinary retention, nausea, dizziness, blurred vision and
the possibility of unwanted interactions with other drugs.
Curative
Treatment of Urinary Incontinence
Injectable Bulking Agents. Urethral bulking
agents are inserted with a needle into the area around the
urethra, augmenting the surrounding tissue for increased
capacity to control the release of urine. Hence, these materials
are often called bulking agents or
injectables. Urethral bulking agents may be either
synthetic or biologically derived and are an attractive
alternative to surgery because they are considerably less
invasive and do not require use of an operating room for
placement; urethral bulking agents can be implanted in an office
or out-patient facility. Active women benefit from the use of
urethral bulking agents since they will often return to normal
activities in a matter of days instead of weeks of recovery
following invasive surgical procedures. Bulking agents also
represent a desirable treatment option for the elderly or infirm
who may not otherwise be able to withstand the trauma and
morbidity resulting from a fully invasive surgical procedure.
Additionally, the use of a urethral bulking agent does not
preclude the subsequent use of more invasive treatments if
required. Furthermore, for patients who have had more invasive
treatments, such as slings which do not completely resolve their
stress urinary incontinence conditions, bulking agents may be
used to bring together any remaining urethral opening that may
exist. This combination therapy may be particularly suitable for
those patients with coexisting hypermobility issues along with
intrinsic sphincter deficiency.
35
Biologically derived bulking agents include a patients own
fat cells, polysaccharides (not commercially available in the
United States) or bovine collagen. Fat injections involve
complex, invasive harvesting of the patients own fat cells
and re-injecting them into the bladder neck. Collagen injections
require pre-treatment allergy skin tests and, since the body
absorbs collagen over time, the patient may require subsequent
re-injections.
Synthetic bulking agents include solid silicone elastomers,
pyrolytic carbon-coated beads, dimethyl sulfoxide (DMSO) and
polyvinyl alcohol.
Surgery. In women, stress urinary incontinence
can be corrected through surgery with a sling which provides a
hammock-type support for the urethra to prevent its downward
movement and the associated leakage of urine. Market adoption of
sling procedures is demonstrated by over 10% annual growth
during the last five years. Over 160,000 sling procedures are
estimated to be performed annually in the United States, with
the majority of these procedures using a tension-free sling
product, usually implanted in an outpatient setting. In men, the
surgical options for treating urinary incontinence are a male
sling or an implanted artificial urinary sphincter. Reserved as
a last resort, surgical implantation of an artificial urinary
sphincter provides patient-control of a device that keeps the
urethra closed until the patient is ready to urinate. Surgery to
place the artificial sphincter requires general or spinal
anesthesia.
Uroplasty
Solutions for Urinary Incontinence
We believe that we are uniquely positioned with differentiable,
minimally invasive products to address urinary incontinence.
Macroplastique
Macroplastique is an injectable soft tissue-bulking agent used
to treat stress urinary incontinence, the most common form of
urinary incontinence in women. It is designed to restore the
patients urinary continence immediately following
treatment. Additionally, men who experience incontinence as a
result of prostate surgery are also candidates for
Macroplastique treatment.
Macroplastique is a soft-textured, permanent implant placed
endoscopically around the urethra distal to the bladder neck. It
is a proprietary composition of heat vulcanized, solid, soft,
irregularly shaped polydimethylsiloxane (solid silicone)
implants suspended in a biocompatible carrier gel. We believe
our compound is better than other commercially available bulking
agents because, with its unique composition, shape and size, it
does not degrade, is not absorbed into surrounding tissues and
does not migrate from the implant site. This reduces the need
for
follow-up
treatments. Additionally, there is no need for special storage,
cumbersome preparation or mixing for use, nor is there a need
for patient allergy testing.
We currently market Macroplastique outside the United States on
the basis that our outpatient, minimally invasive treatment can
lead to lower surgical risk with shorter recovery time, and that
it is less expensive when compared to invasive alternatives. Its
safety and efficacy are evidenced by 14 years of successful
use outside the United States with over 70,000 patients
treated.
Although Macroplastique is traditionally implanted with the aid
of an endoscope, we also market outside the United States a
patented, non-endoscopic delivery kit called the Macroplastique
Implantation
Systemtm,
or MIS, for office-based treatment of female stress urinary
incontinence. Our MIS enables easy and consistent product
placement. Following FDA approval of Macroplastique, we intend
to seek regulatory approval for the MIS.
In December 2004, FDA accepted for filing our PMA submission
with respect to Macroplastique for the treatment of female
stress urinary incontinence. In September 2006, FDA advised us
that our PMA application is approvable subject to FDA audit of
our manufacturing facilities, methods and controls for
compliance with applicable Quality System Requirements. FDA has
completed its inspection of our manufacturing facilities in
Minneapolis, Minnesota and Eindhoven, The Netherlands, with no
findings noted. We expect to begin marketing the product in the
United States during 2007, assuming FDA approves our PMA
application.
36
However, we cannot ensure when or if FDA will ultimately approve
our marketing of Macroplastique in the Unites States or that we
can market the product profitably.
I-Stop
Sling
We believe that the I-Stop product is the only synthetic,
mid-urethral sling made of monofilament knitted polypropylene
with closed loop edges, making it non-damaging to surrounding
tissue without the need for a delivery sheath. We also believe
that the I-Stop design provides greater strength and controlled
flexibility, and improved resistance to fragmentation,
stretching and deformity during the outpatient implant
procedure, than competitive sling devices. We believe that our
tape design results in less irritation and fewer overall
complications for patients. We believe our product is
competitively priced and we offer components to address the
retropubic and transobturator surgical approaches. The I-Stop
sling has received 510(k) clearance and is CE marked for the
treatment of female urinary incontinence due to urethral
hypermobility.
In response to the market interest for an in-office sling, we
are working in partnership with CL Medical to develop our
proprietary in-office mid-urethral sling product. In addition,
we will pursue opportunities to treat male stress incontinence
with our I-Stop sling. Capitalizing on clinical studies
currently underway in Europe, we anticipate launching our I-Stop
male sling in the United Kingdom market within the next few
months, followed by a launch in the United States.
Background
of Overactive Bladder Symptoms
For individuals with overactive bladder symptoms, the nervous
system control for bladder filling and urinary voiding is
incompetent. Signals to indicate a full bladder are sent early
and frequently, triggers to allow the bladder to relax for
filling are ineffective and nervous control of the urethral
sphincter, to keep the bladder closed until an appropriate time,
is inadequate. An individual with OAB may exhibit one or all of
the symptoms that characterize overactive bladder: urinary
urgency, urinary frequency and urge incontinence. Urgency is the
strong, compelling need to urinate and frequency is a repetitive
need to void. For most individuals, normal urinary voiding is
eight times per day while individuals with an overactive bladder
may seek to void over 20 times per day and at least two times
during the night. Urge incontinence is an immediate, compelling
need to urinate that typically results in an accident before the
individual can reach the restroom.
Treatment
of Overactive Bladder Symptoms
Drug Therapy. The most common treatment for
OAB is drug therapy using an anticholinergic agent. However, for
some individuals, the drugs are ineffective or the side effects
so bothersome that the patient discontinues the medications.
Common side effects include dry mouth, constipation and
headaches.
Biofeedback and Behavioral
Modification. Bladder training and scheduled
voiding techniques, often accompanied by the use of voiding
diaries, are a non-invasive approach to managing OAB. Because
these techniques rely on the diligence and compliance of the
individual, these techniques are seldom effective. In addition,
for OAB symptoms, these techniques may not affect the underlying
cause of the condition.
Neuromodulation. Normal urinary control is
dependent upon properly functioning neural pathways and
coordination among the central and peripheral nervous systems,
the nerve pathways, bladder and sphincter. Unwanted,
uncoordinated or disrupted signals along these pathways can lead
to overactive bladder symptoms. Therapy using neuromodulation
incorporates electrical stimulation to target specific neural
tissue and jam the pathways transmitting unwanted
signals. To alter bladder function, the stimulation must be
delivered to the sacral nerve plexus, the neural tissue
affecting bladder activity. Neuromodulation for OAB is presently
conducted through sacral nerve stimulation or percutaneous
tibial nerve stimulation.
The sacral nerve stimulator uses a small device, a
neurostimulator, to send mild electrical pulses to the sacral
nerve. The sacral nerve is located in the lower back, just above
the tailbone. The surgically implanted neurostimulator contains
a battery and electronics to create the electrical pulses and is
connected to a neurostimulation lead (an insulated wire)
containing electrodes through which stimulation is delivered to
the
37
nerve. The device is most frequently placed under the skin of
the buttock, with the lead under the skin near the spine.
Alternatively, percutaneous tibial nerve stimulation (PTNS)
delivers stimulation to the sacral nerve plexus by temporarily
applying electrical pulses to the tibial nerve. The tibial nerve
is an easily accessed nerve in the lower leg. Neuromodulation
using PTNS has a similar therapeutic effect as the implantable
sacral nerve stimulator, but requires no surgery. PTNS is
minimally invasive, has a low risk of complication and is
typically performed in a physicians office.
Uroplasty
Solutions for Overactive Bladder Symptoms
Urgent
PC Neuromodulation System
The Urgent PC is a minimally invasive nerve stimulation device
designed for office-based treatment of urge incontinence,
urinary urgency and urinary frequency symptoms of an
overactive bladder. Using percutaneous tibial nerve stimulation
near the ankle, the product delivers an electrical pulse that
travels to the sacral nerve plexus, a control center for bladder
function.
We believe that the Urgent PC system is the only non-surgical
neuromodulation device in the United States market for treatment
of overactive bladder symptoms. Components of the Urgent PC
system include a hair-width needle electrode, a lead set and an
external, handheld, battery-powered stimulator. For each
30-minute
office-based therapeutic session, the physician temporarily
inserts the needle electrode in the patients lower leg and
connects the electrode to the stimulator. Typically, a patient
undergoes 12 treatment sessions at one-week intervals, with
follow-up
treatments as required to maintain symptom reduction.
The Urgent PC device previously received 510(k) clearance for
sale within the United States. However, following product
revisions, we submitted our own 510(k) pre-market application in
August 2005. We received regulatory approvals for sale of this
product in the United States and Canada in October 2005, and in
Europe in November 2005. Subsequently, we launched the product
for sale in those markets. We developed a second generation
Urgent PC product during 2006. Following CE mark approval and
510(k) clearance, we launched this product for sale in Europe in
September 2006 and in the United States in October 2006.
Other
Uroplasty Products
We have, and are developing additional, minimally invasive
products to address fecal incontinence. Our PTQ Implants offer a
minimally invasive treatment for patients with fecal
incontinence. They are soft-textured, permanent implants. For
treatment of fecal incontinence, PTQ Implants are implanted
circumferentially into the submucosa of the anal canal.
Injection creates a bulking and supportive effect
similar to that of Macroplastique injection for the treatment of
stress urinary incontinence. The product is CE marked and
currently sold outside the United States in various
international markets.
In addition to urological applications, we market our
proprietary tissue bulking material outside the United States
for reconstructive and cosmetic plastic surgery under the trade
name Bioplastique Implants and for otolaryngology vocal cord
rehabilitation applications under the trade name VOX Implants.
In The Netherlands and United Kingdom only, we distribute
certain wound care products in accordance with a distributor
agreement. Under the terms of the distributor agreement, we are
not obligated to purchase any minimum level of wound care
products.
Marketing,
Distribution and Sales
We currently sell two products in the United States
the I-Stop sling and the Urgent PC Neuromodulation system. Upon
receiving FDA approval to market Macroplastique in the United
States, we intend to use our current sales organization to sell
Macroplastique. We are focusing our sales and marketing efforts
primarily on office-based and outpatient surgery-based
urologists with significant patient volume. Our United States
sales organization is made up of 5 employed Regional Sales
Managers who are geographically spread around the country. Each
of these Regional Sales Managers has been building a network of
independent sales
38
representatives in order to effectively provide sales coverage
in all major markets in the United States. Currently, we have
contractual relationships with 32 independent representative
groups, which total 64 independent sales representatives. In
addition to our field sales organization, we employ a Director
of North American Sales and Marketing who has direct
responsibility for our United States sales and marketing
operations. We also have internal customer service and
administrative support for the sales and marketing organization.
We anticipate continuing to increase and refine our sales and
marketing organization, as needed, to support sales growth.
Outside of the United States, in addition to the I-Stop sling
and Urgent PC Neuromodulation system, we market and sell
Macroplastique and related ancillary products. We sell our
products primarily through a direct sales force in the United
Kingdom. In all other markets we sell our products primarily
through distributors. International sales managers in The
Netherlands manage and train a network of distributors in
approximately 40 countries, including Australia, countries
within Europe and Latin America. Each of our distributors has a
territory-specific distribution agreement, including
requirements indicating they may not sell injectable products
that compete directly with Macroplastique. Collectively, our
distributors accounted for approximately 65% and 70% of total
net sales for fiscal 2006 and 2005, respectively.
We use clinical studies and scientific community awareness
programs to demonstrate the safety and efficacy of our products.
This data is important to obtain regulatory approval and to
support our sales staff and distributors in securing product
reimbursement in their territories. Publications of clinical
data in peer-reviewed journals add to the scientific community
awareness of our products, including patient indications,
treatment technique and expected outcomes. Our clinical research
department provides a range of activities designed to support
surgeons in their clinical evaluation study design, abstract
preparation, manuscript creation and review and submission. This
team works closely with our sales and marketing and regulatory
departments in the area of technical support, submissions,
literature review, and analysis and synopsis of technical
presentations and publications.
Researchers have designed clinical trials to provide outcome
evidence on new products recently developed by us. These include
randomized controlled clinical trials on our PTQ Implants,
Macroplastique Sling Support Kit (MIS-SK) and a United States
multi-center randomized prospective study comparing the Urgent
PC device to the most commonly prescribed pharmaceutical
treatment of OAB symptoms. Evidence-based clinical research
broadens the surgeons acceptance by providing detailed
information related to product safety and efficacy when applied
to patient selection and comparative surgical and non-surgical
treatment regimens, and publication of the clinical outcome will
provide physicians, patients and reimbursement systems with the
evidence they require to make informed decisions.
Distribution
Agreements
CL
Medical
We are the exclusive distributor in the United Kingdom of the
I-Stop, a biocompatible, tension-free, mid-urethral sling
manufactured by CL Medical SAS of Lyon, France. In February
2006, we entered into a new distribution agreement with CL
Medical which replaces and supersedes the manufacturing and
distribution agreement dated September 2, 2004. The new
distribution agreement appoints us as the exclusive distributor
of the I-Stop sling in the United States, and obligates CL
Medical to supply us with the products entire
requirements, sterilized, packaged, labeled and ready for sale,
all manufactured in accordance with FDA laws and regulations.
The new distribution agreement is for six years, with our right
to renew it for successive five-year terms. If we fail to reach
our minimum purchase requirement in any
12-month
period, CL Medical has the right to terminate our exclusive
distribution rights in the United States.
Under the new distribution agreement, CL Medical has agreed to
provide us with any improvements or modifications it makes to
the I-Stop sling during the term of the agreement without
additional charge. In addition, CL Medical has granted us a
right of first refusal for exclusive distribution rights in the
United States to any new medical devices or procedures it
develops during the term of the agreement. We have agreed that
during, and for one year after, the term of our agreement, we
will not manufacture our own, or market any other partys
tension-free vaginal tape product for the treatment of female
stress urinary incontinence. If for
39
some reason CL Medical is prohibited from exporting the I-Stop
sling into the United States, CL Medical is required to supply
us with the components necessary to manufacture, package and
label the I-Stop sling for the United States market.
In May 2005, we entered into a one-year exclusive distribution
agreement with CL Medical for the United Kingdom. The agreement
is renewable for up to 2 years, subject to certain
performance requirements of us to distribute the I-Stop sling in
Great Britain.
Under the agreements with CL Medical, one of which was modified
in October 2006, we are required to purchase a minimum of
$527,000 of units in the first
12-month
period following January 1, 2006, increasing to
$2.7 million of units in the fifth year of the agreement,
for an aggregate commitment of approximately $6.9 million
of units over the five-year period, subject to periodic
adjustment based on the value of the euro. The purchase price is
payable in euros.
CystoMedix
In April 2005, we entered into an exclusive manufacturing and
distribution agreement with CystoMedix, Inc., an Andover,
Minnesota medical device company, to license the exclusive
rights to manufacture and market the Urgent PC device for the
United States, Canada and all countries recognizing the CE mark.
Under our agreement with CystoMedix, we are responsible for
regulatory applications and compliance within all markets
outlined in the agreement. Although the Urgent PC as marketed by
CystoMedix was CE marked and 510(k) cleared, following minor
revisions to the product, we secured 510(k) clearance for our
device in October 2005 and CE mark approval in November 2005. In
2006, we developed a second generation Urgent PC and received
510(k) clearance, CE mark approval and Canadian regulatory
approval to sell our second generation Urgent PC system. We
launched this product for sale in Europe in September 2006 and
in the United States in October 2006.and initiated trade-out
programs to exchange the old device with the new device. Our new
device provides an enhanced user interface, programmed treatment
settings, visual and auditory feedback during device operation.
Our agreement with CystoMedix is for five years, with no right
to renew it. In connection with the agreement, we purchased 75%
of CystoMedixs inventory of component parts and
subassemblies for $25,000. We paid an initial royalty payment of
$225,000 in May 2005 and paid an additional aggregate of
$250,000 in royalties in monthly installments through May 2006.
During the agreements term, we also will pay CystoMedix
further royalties of 7% of our net product revenues from the
sale of licensed products, offset by payments made against the
above $250,000 amount. We have agreed to sell licensed products
we manufacture back to CystoMedix, on a non-exclusive basis, on
terms and for such price as we may mutually negotiate for
CystoMedixs own sales outside of the territories
exclusively licensed to us.
Between January 2006 and June 2008, we may elect to purchase all
of CystoMedixs assets. The option price is $3,485,000,
reduced by up to $50,000 of liabilities assumed by us. However,
the $3,485,000 amount used to compute the option price will
increase at a rate of 10% per year after April 2007. The
option price is payable in shares of our common stock valued at
the average of the closing bid price of our shares for the 20
trading days prior to our exercise of the option. If we exercise
our option, we will also assume up to $1.4 million of
bridge loan advances made to CystoMedix by its Chairman. We
would repay up to $1.1 million of the bridge loan advances
at closing and would issue our common stock for the balance of
the bridge loan based on the above option price. We also have
certain rights of first refusal to acquire CystoMedixs
assets in the event CystoMedix receives a third party offer in
advance of any exercise of our option.
Manufacturing
and Suppliers
We manufacture our tissue bulking products at our own
facilities. Components are manufactured in the United States,
and finished products are manufactured in The Netherlands. Our
facilities utilize dedicated heating, ventilation and high
efficiency particulate air (HEPA) filtration systems to provide
a controlled working environment. Trained production technicians
perform all critical manufacturing processes in a cleanroom
environment according to established written procedures. An
outside vendor sterilizes our products using validated methods
and returns the products to us for final inspection and testing.
40
Our manufacturing facilities and systems are periodically
audited to ensure compliance with ISO 13485 (medical device
quality management systems), and applicable European and
Canadian medical device requirements. Our European facilities
and systems were last audited by AMTAC Certification Services in
October 2006. No major deficiencies were noted, and we were
found to be in compliance with all standards and requirements
audited. Prior to marketing our products in the United States,
our facilities need to be compliant with FDAs Quality
System Regulations and will be subject to additional state,
local, and federal government regulations applicable to the
manufacture of our products. In connection with its review of
our pre-market approval application for Macroplastique, FDA
recently completed its inspection of our manufacturing
facilities in Minneapolis, Minnesota and Eindhoven, The
Netherlands, with no findings noted.
CL Medical in Lyon, France manufactures the I-Stop sling.
Pursuant to our distribution agreement with CL Medical, we are
the exclusive distributor of the I-Stop sling in the United
States and the United Kingdom. Among other things, we are
required to purchase a minimum number of I-Stop product sets
from CL Medical. We have minimum purchase requirements of
$527,000 of units in the first
12-month
period following January 1, 2006, increasing to
approximately $2.7 million of units over a five-year
period, subject to periodic adjustment based on the value of the
euro. CL Medical has agreed to supply us the I-Stop sling with
the products entire requirements, sterilized, packaged,
labeled and ready for sale, all manufactured in accordance with
FDA laws and regulations. The agreement has an initial term of
six years, with successive five-year renewal terms at our option.
Under our manufacturing and distribution agreement with
CystoMedix, Inc., we are responsible for establishing our own
manufacturing facility or for subcontracting the manufacture of
the Urgent PC device. We currently subcontract the manufacture
of major subassemblies for the product.
We purchase medical grade materials for use in our finished
products from single source suppliers. Our quality department
has qualified these suppliers. Although we believe our sources
of supply could be replaced if necessary without due disruption,
it is possible that the process of qualifying suppliers for
certain raw materials could cause an interruption in our ability
to manufacture our products, which could have a negative impact
on sales. In fact, one of the suppliers of a component material
of our Macroplastique product recently ceased production of this
material. We have located an alternative supplier.
Competition
The market for voiding dysfunction products is intensely
competitive. We face competition from existing manufacturers of
management and curative treatments, competing manufacturers of
commercially available bulking agents, sling products and
neurostimulation devices, drug companies and firms developing
new or improved treatment methods. We believe the principal
decision factors among treatment methods include physician and
patient acceptance of the method, with increasing preferences
for minimally invasive and office-based therapies, therapeutic
cost, availability of third party reimbursement, marketing and
sales capability and the existence of meaningful patent
protection. Our ability to compete in this market will also
depend on the consistency of our product quality as well as
delivery and product pricing. Other factors within and outside
our control include our product development and innovation
capabilities, clinical study results, ability to obtain required
regulatory approvals, ability to protect our proprietary
technology, manufacturing and marketing capabilities and ability
to attract and retain skilled employees.
Soft-tissue injectable bulking agents competing directly with
Macroplastique both outside and in the United States include
Contigen®
and
Tegress®,
both FDA-approved bulking agents manufactured by C.R. Bard,
Inc.;
Zuidex®
and
Deflux®
(Deflex FDA approved for VUR use only) manufactured by Q-Med AB;
Durasphere®(FDA-approved
for female SUI) manufactured by Carbon Medical Technologies; and
Coaptite®
manufactured by BioForm, Inc. In contrast to the products
currently approved for sale both inside and outside this
country, Macroplastique, marketed outside the United States
since 1991, is a synthetic material that will not degrade,
become resorbed or migrate, and does not require the patient to
have a skin test prior to the procedure. The silicone-elastomer
material has been studied for over 50 years in medical use
for such urological applications as penile implants, stents and
catheters. Our patented Macroplastique Implantation
41
System offers a unique, non-endoscopic, minimally invasive
outpatient procedure that can be performed in the
physicians office.
Sling procedures have become the preferred method for treating
urethral hypermobility. The tension-free sling market is
dominated by Gynecares TVT Tension-free Support device.
Other companies competing in this market include American
Medical Systems, C.R. Bard, Boston Scientific and Coloplast A/S.
We believe our current I-Stop sling offers benefits of multiple
surgical approaches for the physician and a tape design to
resist stretching, deformity (i.e., preventing the cord
effect) and fragmentation. In partnership with CL Medical,
we are developing an in-office sling product to meet changing
market requirements.
The Urgent PC neurostimulation device is an alternative to the
more invasive Medtronic
InterStim®
device. The Medtronic unit, which stimulates the sacral nerve,
requires surgical implantation in the upper buttocks or abdomen.
In contrast, the Urgent PC device allows minimally invasive
stimulation of the sacral nerve plexus in an office-based
setting without surgical intervention. Neotonus markets a
non-surgical device to deliver extracorporeal magnetic
neuromodulation. In addition, Boston Scientifics
Bion®
Microstimulator, a device implanted with a needle-like
instrument to stimulate the pudendal nerve, is CE mark approved
for the treatment of urinary urge incontinence and is undergoing
clinical studies in the United States.
Many medications treat urge incontinence, some by preventing
unwanted bladder contractions, others by tightening the bladder
or urethra muscles and some by relaxing bladder muscles.
Sometimes, these drugs have unwanted side effects such as dry
mouth, vision problems or urine buildup. Among these medications
are
Detrol®
(Pfizer Inc.),
Ditropan®
(Alza Corporation) and
Flomax®
(Abbott Laboratories).
Many of our competitors and potential competitors have
significantly greater financial, manufacturing, marketing and
distribution resources and experience than us. In addition, many
of our competitors offer broader product lines within the
urology market, which may give these competitors the ability to
negotiate exclusive, long-term supply contracts and to offer
comprehensive pricing for their products. It is possible other
large health care and consumer products companies may enter this
industry in the future. Furthermore, smaller companies, academic
institutions, governmental agencies and other public and private
research organizations will continue to conduct research, seek
patent protection and establish arrangements for commercializing
products. These products may compete directly with any products
that we may offer in the future.
Government
Regulation
The testing, manufacturing, promotion, marketing and
distribution of our products in the United States, Europe and
other parts of the world are subject to regulation by numerous
governmental authorities, including the U.S. Food and Drug
Administration, or FDA, the European Union and other analogous
agencies.
United
States
Our products are regulated in the United States as medical
devices by FDA under the Food, Drug and Cosmetic Act, or FDC
Act. Noncompliance with applicable requirements can result in,
among other things:
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fines, injunctions, and civil penalties;
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recall or seizure of products;
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operating restrictions, or total or partial suspension of
production;
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denial of requests for 510(k) clearance or pre-market approval
of new products;
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withdrawal of existing approvals; and
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criminal prosecution.
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Depending on the degree of risk posed by the medical device and
the extent of controls needed to ensure safety and
effectiveness, there are two pathways for FDA marketing
clearance of medical devices. For devices deemed by FDA to pose
relatively less risk (Class I or Class II devices),
manufacturers, in most instances, must submit a pre-market
notification requesting permission for commercial distribution;
known as 510(k)
42
clearance. Devices deemed by FDA to pose the greatest risk
(Class III devices), such as life-sustaining,
life-supporting or implantable devices, or a device deemed not
to be substantially equivalent to a previously cleared 510(k)
device, require the submission of a pre-market approval
application. FDA can also impose restrictions on the sale,
distribution or use of devices at the time of their clearance or
approval, or subsequent to marketing.
510(k) Clearance. To obtain 510(k) clearance,
the pre-market notification must demonstrate that the proposed
device is substantially equivalent in intended use and in safety
and effectiveness to a previously 510(k) cleared device or a
device that was commercially distributed before May 28,
1976 and for which FDA has not yet called for submission of a
pre-market approval application. FDA attempts to respond to a
510(k) pre-market notification within 90 days of submission
of the notification, but the response may be a request for
additional information, sometimes including clinical data. As a
practical matter, 510(k) clearance can take significantly longer
than 90 days, including up to one year or more.
After a device receives 510(k) clearance for a specific intended
use, modifications or enhancements that could significantly
affect the safety or effectiveness of the device or that would
constitute a major change to the intended use of the device will
require a new 510(k) pre-market notification submission or could
require pre-market approval. FDA requires each manufacturer to
make this determination initially, but FDA can review any such
decision. If FDA disagrees with a manufacturers
determination that a new clearance or approval is not required
for a particular modification, FDA can require the manufacturer
to cease marketing or recall the modified device until 510(k)
clearance or pre-market approval is obtained. Also, in these
circumstances, a company may be subject to significant
regulatory fines or penalties.
Pre-market Approval. A pre-market approval, or
PMA, application must be submitted if the device cannot be
cleared through the 510(k) process. The PMA process is much more
demanding than the 510(k) notification process. A PMA applicant
must provide extensive preclinical and clinical trial data as
well as information about the device and its components
regarding, among other things, device design, manufacturing and
labeling. As part of the PMA process, applicants must file an
Investigational Device Exemption, or IDE, application prior to
commencing human clinical trials. If the IDE application is
approved by FDA, human clinical trials may begin at a specific
number of investigational sites with a maximum number of
patients. The results of clinical testing may not be sufficient
to obtain approval of the product.
After FDA determines that a PMA submission is complete, FDA
accepts the submission and begins an in-depth review of the
submitted information. FDA, by statute and regulation, has
180 days to review an accepted PMA submission, although the
review generally occurs over a significantly longer period of
time, and can take up to several years. During this review
period, FDA may request additional information, testing or
clarification of information already provided. Also during this
review period, an advisory panel of experts from outside FDA may
be convened to review and evaluate the application and provide
recommendations to FDA as to the approvability of the device. In
addition, FDA will conduct clinical inspections at
investigational sites and a pre-approval inspection of the
manufacturing facility to ensure compliance with FDAs
Quality System Regulations. New PMA submissions or supplemental
PMA submissions are required for significant modifications to
the manufacturing process, labeling, use and design of a device
that is approved through the PMA process. Pre-market approval
supplements often require submission of the same type of
information as a PMA submission, except that the supplement is
limited to information needed to support any changes from the
device covered by the original PMA submission, and may not
require as extensive clinical data or the convening of an
advisory panel.
Continuing FDA Regulation. After a device is
placed on the market, numerous regulatory requirements apply.
These include:
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Quality System Regulations, which require manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
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labeling regulations, which govern product labels and labeling,
prohibit the promotion of products for unapproved or
off-label uses and impose other restrictions on
labeling and promotional activities;
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medical device reporting regulations, which require that
manufacturers report to FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serous
injury if it were to recur; and
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notices of correction or removal, and recall regulations.
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FDA Approval Status of Our Products. FDA has
determined that urethral bulking agents, such as Macroplastique,
are Class III devices and require FDA clearance of a
pre-market approval submission. In 1999, FDA approved our IDE
application with respect to Macroplastique for the treatment of
female stress urinary incontinence. In 2000, we commenced a
multi-center human clinical trial using Macroplastique in a
minimally invasive, office-based procedure for treating female
stress urinary incontinence resulting from internal sphincter
deficiency, or a weakening of the muscles that seal off the flow
of urine. In December 2004, FDA accepted for filing our
pre-market approval submission with respect to Macroplastique
for the treatment of female stress urinary incontinence. In
September 2006, we received an approvable letter from FDA
relating to our pre-market approval application for
Macroplastique Implants. The receipt of the approvable letter
follows FDAs completion of the scientific review of the
safety and efficacy of Macroplastique. FDA determined that our
pre-market approval application is approvable subject to FDA
audit of our manufacturing facilities, methods and controls for
compliance with applicable Quality System Requirements. FDA
completed its inspection of our manufacturing facilities in
Minneapolis, Minnesota and Eindhoven, The Netherlands, with no
findings noted. We expect to begin marketing the product in the
United States during 2007, assuming FDA approves our PMA
application. However, we cannot ensure when or if FDA will
ultimately approve our marketing of Macroplastique in the United
States or that we can market the product profitably.
In August 2005, the I-Stop product received 510(k) clearance for
sale within the United States.
The Urgent PC device previously received 510(k) clearance for
sale within the United States. However, following product
revisions, we submitted our own 510(k) pre-market application in
August 2005. In October 2005, our initial version of the Urgent
PC device received 510(k) clearance for sale within the United
States. In July 2006, our second generation Urgent PC device
received 510(k) clearance for sale within the United States.
FDA Oversight of Manufacturing Operations. The
FDC Act requires that medical devices be manufactured in
accordance with FDAs current Quality System Regulations,
which require, among other things, that we:
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regulate our design and manufacturing processes and control them
by the use of written procedures;
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investigate any deficiencies in our manufacturing process or in
the products we produce;
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keep detailed records and maintain a corrective and preventative
action plan; and
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allow FDA to inspect our manufacturing facilities on a periodic
basis to monitor our compliance with Quality System Regulations.
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Our manufacturing facilities and processes have been inspected
and certified in compliance with ISO 13485, applicable European
medical device directives and Canadian Medical Device
Requirements. FDA is currently auditing our manufacturing
facilities for compliance with Quality System Regulations. We
cannot ensure you that our facilities and processes will be
found to comply with Quality System Regulations and there is a
risk that approval will, therefore, be delayed by FDA until such
compliance is achieved.
European
Union and Other Regions
The European Union has adopted rules that require that medical
products receive the right to affix the CE mark, which stands
for Conformité Européenne. The CE mark demonstrates
adherence to quality assurance standards and compliance with
relevant European medical device directives. Products that bear
the CE mark can be imported to, sold or distributed within, the
European Union.
We received CE marking approval for Macroplastique in 1996 for
the treatment of male and female stress urinary incontinence and
vesicoureteral reflux; for VOX in 2000 for vocal cord
rehabilitation applications; for
44
PTQ in 2002 for the treatment of fecal incontinence; and for
Bioplastique in 1996 for dermal augmentation applications. Our
manufacturing facilities and processes have been inspected and
certified by AMTAC Certification Services, a recognized Notified
Body, testing and certification firm based in the United
Kingdom. The I-Stop sling received CE marking approval in July
2002. CystoMedix, the company that granted us rights to
manufacture and distribute the Urgent PC nerve stimulation
device, obtained its own CE mark. Our initial version of the
Urgent PC device received CE marking approval in November 2005.
Our second generation Urgent PC device received CE marking
approval and approval from the Canadian Therapeutic Products
Directorate of Health in June 2006.
We currently sell our products in approximately 40 foreign
countries, including those within the European Union.
Requirements pertaining to medical devices vary widely from
country to country, ranging from no health regulations to
detailed submissions such as those required by FDA. We have
obtained regulatory approval where required for us to sell our
products in the country. We believe the extent and complexity of
regulations for medical devices such as those produced by us are
increasing worldwide. We anticipate that this trend will
continue and that the cost and time required to obtain approval
to market in any given country will increase.
Third-Party
Reimbursement
In the United States as well as in foreign countries, sales of
our products will depend in part on the availability of
reimbursement from third-party payors. Outside of the United
States, government managed health care systems and private
insurance control reimbursement for devices and procedures.
Reimbursement systems in international markets vary
significantly by country. In the European Union, reimbursement
decision-making is neither regulated nor integrated at the
European Union level. Each country has its own system, often
closely protected by its corresponding national government.
Reimbursement for Macroplastique has been successful in multiple
international markets where hospitals and physicians have been
able to get budgets approved by fund-holder trusts or global
hospital budgets.
In the United States, third-party payors consist of government
programs, such as Medicare, private health insurance plans,
managed care organizations and other similar programs. For any
product, three factors are critical to reimbursement:
|
|
|
|
|
coding, which ensures uniform descriptions of procedures,
diagnoses and medical products;
|
|
|
|
coverage, which is the payors policy describing the
clinical circumstances under which it will pay for a given
treatment; and
|
|
|
|
payment amount.
|
Reimbursement for tension-free sling products has been addressed
by numerous competitors. As a result, coding, coverage and
payment for the I-Stop is already well established.
As a relatively new therapy, nerve stimulation using the Urgent
PC has not been assigned a reimbursement code unique to the
technology. However, a number of practitioners are using an
existing reimbursement code that closely describes the
procedure. In addition, Aetna and Blue Cross Blue Shield of
Minnesota and Maryland have published policies providing
coverage for PTNS under an existing reimbursement code. We will
need to continue to work with third-party payers for coverage
policies and the American Medical Association to develop
definitive and uniform reimbursement for the therapy. In
addition, we will need to provide customer reimbursement as we
market the product and secure medical community acceptance.
We believe there are appropriate codes available to describe
endoscopic use of Macroplastique to treat female SUI. Following
FDA approval to market Macroplastique, we expect we will need to
foster coverage policies and payer acceptance to support the
United States launch. There is no guarantee that Macroplastique
will be reimbursed at the levels expected by us, if at all.
45
Patents,
Trademarks and Licenses
Our success depends in part on our ability to obtain and
maintain patent protection for our products, preserve our trade
secrets and operate without infringing the proprietary rights of
third parties. We seek to protect our technology by filing
patent applications for patentable technologies we consider
important to the development of our business based on an
analysis of the cost of obtaining a patent, the likely scope of
protection and the relative benefits of patent protection
compared to trade secret protection, among other considerations.
We hold multiple patents covering our Macroplastique materials,
processes and applications. As of the date of this prospectus,
we have four issued patents in the United States and 19 granted
patents in the United Kingdom, Japan, Germany, France, Spain,
Italy, Portugal, The Netherlands and Canada. Our patents will
expire in the United States at various times between 2011 and
2016 and in other countries between 2009 and 2017. There can be
no assurance any of our issued patents are of sufficient scope
or strength to provide meaningful protection of our products. In
addition, there can be no assurance any current or future United
States and foreign patents of ours will not be challenged,
narrowed, invalidated or circumvented by competitors or others,
or that our patents will provide us with any competitive
advantage. Any legal proceedings to maintain, defend or enforce
our patent rights could be lengthy and costly, with no guarantee
of success. CystoMedix and CL Medical also have certain patent
rights which they licensed to us as part of their respective
manufacturing and distribution agreements. We also have pending
United States patent applications with respect to our second
generation Urgent PC.
In 1992, we agreed to settle alleged patent infringement claims
by Collagen Corporation (now Inamed Corporation). Under the
settlement agreement, we paid Collagen a royalty of 5% of net
sales in the United States of Macroplastique products with a
minimum of $50,000 per year. The agreement terminated on
May 1, 2006.
Although we intend to apply for additional patents and
vigorously defend issued patents, management believes our
business success will depend primarily upon our development and
marketing skills, and the quality and economic value of our
products rather than on our ability to obtain and defend patents.
We also seek to protect our trade secrets by requiring
employees, consultants, and other parties to sign
confidentiality agreements and noncompetition agreements, and by
limiting access by outside parties to confidential information.
There can be no assurance, however, these measures will prevent
the unauthorized disclosure or use of this information or that
others will not be able to independently develop this
information.
We have registered Macroplastique and Bioplastique as trademarks
with the U.S. Patent and Trademark Office. Our
non-registered trademarks include VOX and PTQ, for which
trademark registration applications are pending in the
U.S. Patent and Trademark Office. CystoMedix has
U.S. registration of the Urgent PC trademark and has
licensed the mark to us as part of our exclusive manufacturing
and distribution agreement. In addition, CL Medical has licensed
its non-registered trademark for the I-Stop sling to us as part
of our agreement with it.
We have a royalty agreement with three individuals, two of whom
are former officers and directors. Under this royalty agreement,
we pay aggregate royalties of 3 to 5% of net sales of
Macroplastique and Bioplastique, subject to a monthly minimum of
$4,500. The royalties payable under this agreement will continue
until the patent referenced in the agreement expires in 2010.
In October 1998, we received an absolute assignment from a
British surgeon of a worldwide patent relating to the
Macroplastique Implantation System in return for a royalty of
£10 for each unit sold during the life of the patent. We
began commercialization of the product outside the United States
in March 2000.
Research
and Development
We have a research and development program to develop new
incontinence products. We are also continually evaluating
potential improvements to our products as well as new methods
and devices. Research and development expenses also include the
costs of clinical studies and regulatory compliance. Our
46
expenditures for research and development totaled approximately
$3.3 million for fiscal 2006 and approximately
$2.3 million for fiscal 2005. None of these costs were
borne directly by our customers.
Product
Liability
The medical device industry is subject to substantial
litigation. As a manufacturer of a long-term implantable device,
we face an inherent risk of liability for claims alleging
adverse effects to the patient. We currently carry
$2 million of worldwide product liability insurance, plus
another policy specific to the United Kingdom only. There can be
no assurance, however, our existing insurance coverage limits
are adequate to protect us from any liabilities we might incur.
There can be no assurance that liability claims will not exceed
coverage limits. Product liability insurance is expensive and in
the future may not be available to us on acceptable terms, if at
all. Furthermore, we do not expect to be able to obtain
insurance covering our costs and losses as a result of any
product recall. A successful claim in excess of our insurance
coverage could materially deplete our assets. Moreover, any
claim against us could generate negative publicity, which could
decrease the demand for our products and our ability to generate
revenues.
Compliance
with Environmental Laws
Compliance by us with applicable environmental requirements
during fiscal years 2006 and 2005 has not had a material effect
upon our capital expenditures, earnings or competitive position.
Dependence
on Major Customers
During fiscal 2006, two customers individually accounted for
approximately 14% and 11% of our net sales. During fiscal 2005,
the same two customers individually accounted for approximately
15% and 11% of our net sales.
Employees
As of October 9, 2006, we had 51 employees, of which 49
were full-time and 2 were part-time. No employee has a
collective bargaining agreement with us. We believe we maintain
good relations with our employees.
Properties
Effective May 1, 2006, we moved our corporate headquarters
to a 18,258 square foot facility located in Minnetonka,
Minnesota. The Minnetonka property is subject to a lease that
extends for a term of 96 months. We own 9,774 square
feet of office and warehouse space in Geleen, The Netherlands.
We will vacate our 6,205 square foot facility in
Minneapolis, Minnesota, by the end of October 2006. We also
lease 5,800 square feet of office, warehouse, laboratory
and manufacturing space through June 2012 in Eindhoven, The
Netherlands.
Legal
Proceedings
We are not currently a party to any pending legal proceeding.
47
MANAGEMENT
Executive
Officers and Directors
The following table sets forth the name, age and position of
each of our executive officers and directors:
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Name
|
|
Age
|
|
Position
|
|
R. Patrick Maxwell
|
|
|
62
|
|
|
Chairman
|
David B. Kaysen
|
|
|
57
|
|
|
President, Chief Executive Officer
and Director
|
Thomas E. Jamison
|
|
|
46
|
|
|
Director
|
Lee A. Jones
|
|
|
49
|
|
|
Director
|
James P. Stauner
|
|
|
52
|
|
|
Director
|
Sven A. Wehrwein
|
|
|
55
|
|
|
Director
|
Mahedi A. Jiwani
|
|
|
58
|
|
|
Vice President, Chief Financial
Officer and Treasurer
|
Susan Hartjes Holman
|
|
|
52
|
|
|
Chief Operating Officer and
Secretary
|
Larry Heinemann
|
|
|
54
|
|
|
Vice President Sales &
Marketing
|
Arie J. Koole
|
|
|
42
|
|
|
Controller and Managing Director
Dutch subsidiaries
|
Marc M. Herregraven
|
|
|
41
|
|
|
Vice President of Manufacturing
|
R. Patrick Maxwell has served as Chairman of our
Board since June 2006 and has served as a director of our
company since April 1994. Mr. Maxwell has over
30 years of experience as a turn around management
specialist, an entrepreneur and executive in both the business
and non-profit sectors. Mr. Maxwell has been CEO of
Entronix Inc. since November 2005. Mr. Maxwell is cofounder
and a director of Telnet Services Limited of Auckland, New
Zealand since September 1995, cofounder and Chief Financial
Officer of Tele Resources, Inc. since October 1996 and Chief
Financial Officer of Magnum Tire Corporation since March 2003.
Mr. Maxwell has served on numerous boards of directors of
both business and charitable organizations. He has a B.A. in
philosophy from St. Johns University and a J.D. from
Northwestern University School of Law.
David B. Kaysen has served as our President and Chief
Executive Officer and as a director since May 2006. From July
2005 to May 2006, Mr. Kaysen served as President, Chief
Executive Officer and a director of Advanced Duplications
Services, LLC, a privately-held replicator and duplicator of
optical media, such as CDs and DVDs. Between December 2002 and
June 2005, he served as President, Chief Executive Officer and a
director of Diametrics Medical, Inc., then a publicly-traded
manufacturer and marketer of critical care blood analysis
systems that provide continuous diagnostic results at point of
care. From 1992 to 2002, Mr. Kaysen served as Chief
Executive Officer, President and a director of Rehabilicare
Inc., since renamed Compex Technologies, Inc., a publicly-traded
manufacturer and marketer of electromedical rehabilitation and
pain management products for clinician, home and industrial use.
Mr. Kaysen currently serves on the board of directors of
MedicalCV, Inc. and Zevex International. Mr. Kaysen holds a
B.S. in Business Administration from the University of Minnesota.
Thomas E. Jamison became a director of our company in
August 2000. Mr. Jamison is a shareholder of Fruth,
Jamison & Elsass, P.A., a business litigation firm in
Minneapolis, Minnesota. From 1996 to 1999, Mr. Jamison
served as an investment banker in the Corporate Finance
Department of R.J. Steichen & Company. From 1991 to
1996, Mr. Jamison practiced law at Fruth &
Anthony, P.A. in Minneapolis. Mr. Jamison graduated magna
cum laude from William Mitchell College of Law in 1991.
Lee A. Jones has been a director of our company since
August 2006. She has more than 20 years of healthcare and
medical device industry experience. Since 1997, she has served
as President and Chief Executive Officer of Inlet Medical, Inc.
(a Cooper Surgical company since November 2005), specializing in
minimally interventional laparoscopic products. Prior to joining
Inlet, she had a
14-year
career at Medtronic, Inc., where she held various technical and
operating positions, most recently serving as Director, General
48
Manager of Medtronic Urology/Interstim division. Ms. Jones
currently serves as a member of the Board of Directors of
Impress Medical, Inc. She holds a B.S. in Chemical Engineering
from the University of Minnesota.
James P. Stauner has been a director of our company since
August 2006. Mr. Stauner has over 27 years of
experience in the healthcare industry. Since July 2005, he has
been the Operating Principal with Roundtable Healthcare
Partners, a private equity firm focused on the healthcare
industry. Prior to joining Roundtable Healthcare Partners,
Mr. Stauner held various positions between 1999 and 2005 at
Cardinal Health, Inc., most recently as President of the
Manufacturing Business Groups and a member of the Senior
Management Operating Committee. He holds a B.S. in Business
Administration from the University of Illinois.
Sven A. Wehrwein has been a director of our company since
August 2006. He has over 25 years of experience in
corporate finance and investment banking, including serving as
Chief Financial Officer of InStent Inc. and Digi International.
Since 1999, he has provided financial-consulting services to
emerging growth companies. Mr. Wehrwein also serves on the
Board of Directors of Vital Images, Inc., Synovis Life
Technologies, Inc., Image Sensing Systems, Inc. and Van Wagoner
Funds, Inc. He holds a Masters of Management degree in Finance
from the Sloan School at the Massachusetts Institute of
Technology and is a Certified Public Accountant
Mahedi A. Jiwani has served as our Vice President, Chief
Financial Officer and Treasurer since November 2005. From 2003
to 2005, Mr. Jiwani served as Chief Financial Officer of
M.A. Gedney Company, a Minnesota-based food products
distributor. Between 1997 and 2003, he was employed by Telex
Communications, Inc., most recently as Vice President of
Finance. Mr. Jiwani holds an M.B.A. and a Master of
Engineering from the University of Minnesota.
Susan Hartjes Holman has served as our Chief Operating
Officer since November 2002 and as Secretary since September
1996. She served as our Vice President of Operations and
Regulatory Affairs from November 1994 to October 2002. She
joined Bioplasty, Inc. in September 1991 as Director of
Operations and served as Vice President of Operations and
Regulatory Affairs from April 1993 until May 1996.
Ms. Holman was Director of Operations at Bio-Vascular, Inc.
in St. Paul, Minnesota from November 1989 to September 1991.
Prior to that time, she served at various other pharmaceutical
and medical device companies in management positions in
manufacturing, quality assurance, and research. Ms. Holman
has B.A. degrees in Biology-Microbiology and Biomedical Science
from St. Cloud State University, and has done graduate work in
the biological sciences. Ms. Holman is a Senior Member and
a Certified Quality Auditor of the American Society for Quality,
has served several years on its Executive Committee and
subcommittees, and is a member of the Regulatory Affairs
Professionals Society and its Ethics Task Force, and the Henrici
Society for Microbiologists. She has served on several national
and international scientific and regulatory committees, and is a
cofounder for the Biomedical Focus Conference and the Biomedical
Consortium, Minneapolis, Minnesota.
Larry Heinemann joined us in September 1998 as Director
of Sales for North and South America. In July 1999,
Mr. Heinemann was promoted to Vice President of Sales and
Marketing and in August 2001, he was appointed as Vice President
of Marketing & Corporate Development. In August 2003,
he was again appointed to his current position as our Vice
President of Sales and Marketing. Mr. Heinemann holds a
B.S. in marketing and personnel management from the School of
Business of Eastern Illinois University.
Arie J. Koole joined Bioplasty B.V. in May 1993 as
Financial Manager in The Netherlands. Since January 2000, he has
been the Managing Director of our subsidiaries in The
Netherlands. In June 1996, Mr. Koole was appointed as
Director of Finance and in January 2000, Mr. Koole was
appointed as our Controller. From 1987 to 1993, Mr. Koole
was a financial auditor with the international accounting firm
Deloitte & Touche in The Netherlands. Mr. Koole
has a bachelors degree in Business Economics.
Marc M. Herregraven has served as our Vice President of
Manufacturing since November 2002. He joined Bioplasty, Inc. in
April 1992 as Plant Manager, and became Director of
Manufacturing in 1994 and Director of Operations in 1999.
Previously, he served with Advanced Bio-Surfaces, Inc., a
Minnesota-based medical device developer, as Director of
Manufacturing, and with Bio-Vascular, Inc., a Minnesota-based
49
medical device manufacturer, in an engineering function.
Mr. Herregraven has a B.S. in Mechanical Engineering and
has been a member of the American Society for Quality since 1996.
Board
Composition
Our board of directors currently consists of five directors and
is divided into three classes. The members of each class serve
for a three-year term. At each annual meeting of shareholders, a
class of directors will be elected for a three-year term.
Corporate
Governance
Compensation
Committee
The members of our Compensation Committee are
Messrs. Jamison (Chair) and Stauner and Ms. Lee. The
function of the Compensation Committee is to set the
compensation for officers, to set the terms of and grants of
awards under our stock option plans and to act on other matters
relating to compensation as the committee deems appropriate.
Audit
Committee
The members of our Audit Committee are Messrs. Wehrwein
(Chair), Maxwell and Jamison. The Audit Committee assists the
board by reviewing the integrity of our financial reporting
processes and systems of internal controls, the qualifications,
independence and performance of our independent registered
public accounting firm and our compliance with certain legal and
regulatory requirements. Our Audit Committee has the sole
authority to retain, compensate, oversee and terminate our
independent registered public accounting firm. The Audit
Committee reviews our annual audited consolidated financial
statements, quarterly consolidated financial statements and
filings with the SEC. The Audit Committee reviews reports on
various matters, including our critical accounting policies,
significant changes in our selection or application of
accounting principles and our internal control processes. The
Audit Committee also pre-approves all audit and non-audit
services performed by our independent registered public
accounting firm.
Our board of directors has determined that all members of the
Audit Committee are independent directors under SEC
rules and has determined that Mr. Wehrwein qualifies as an
audit committee financial expert under the rules of
the SEC.
Nominating
Committee
Our board of directors created a Nominating Committee effective
October 1, 2005. The members of our Nominating Committee
are Messrs. Maxwell (Chair) and Stauner and Ms. Jones.
The purpose of the Nominating Committee is to identify qualified
individuals for membership on the board and recommend to the
board the nominees for election at our annual meetings of
shareholders.
Our board of directors and the Nominating Committee believe the
committees current member composition satisfies the
American Stock Exchanges (AMEX) rule governing
committee composition, including the requirement that committee
members all be independent directors as that term is
defined by AMEX rules.
Code
of Ethics
We have adopted a Code of Ethics that applies to all of our
directors, officers and employees, including our Chief Executive
Officer, Chief Financial Officer, Controller and other finance
organization employees. The Code of Ethics is publicly available
as an exhibit to our Annual Report on
Form 10-KSB
for the year ended March 31, 2004.
50
Director
Compensation
During fiscal 2006, we paid non-employee independent board
members $500 per board meeting and $500 per Audit Committee
meeting attended. In addition, directors participated in our
stock option plan.
On August 16, 2006, the Board adopted a new compensation
plan for non-employee directors. All non-employee directors
receive an annual fee of $10,000 payable in cash in four equal
quarterly installments of $2,500, and attendance fees of
$1,000 per in-person board meeting, $500 per
telephonic board meeting, and $500 per committee meeting.
In addition, the Chairs of the Board, Audit Committee and
Compensation Committee are paid an additional annual fee of
$1,500, $750 and $500 per year, respectively, payable in
the quarter of appointment.
All non-employee directors also receive an automatic grant of
stock options upon such directors initial appointment or
election to the Board for 45,000 shares of common stock,
one-third of which vests on the date of grant and the first and
second anniversaries thereafter. Each non-employee director will
be granted an annual stock option for 15,000 shares of
common stock all of which are vested on the date of grant,
except that such annual grant does not commence for newly
appointed or elected directors until one year following full
vesting of the initial grant.
On August 28, 2006, in connection with their initial
appointment to our board, we granted to each of Ms. Jones,
Mr. Stauner and Mr. Wehrwein an option to purchase
45,000 shares of our common stock at an exercise price of
$1.82 per share.
We pay no additional remuneration to Mr. Kaysen for serving
as director.
Mr. Pitlor, a former director, received $2,000 per
month as consulting fees from us under an annually renewable
consulting agreement dated January 2, 2002. This contract
terminated effective June 30, 2005.
Executive
Compensation
The following table sets forth, in summary form, the
compensation earned in fiscal years 2006, 2005 and 2004 by our
Chief Executive Officers and each of the other four most highly
compensated executive officers (whom we refer to collectively as
the named executive officers). Mr. Kaysen
joined us as our President and Chief Executive Officer in May
2006.
Summary
Compensation Table
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
Annual Compensation
|
|
Compensation Awards
|
|
|
|
|
Salary
|
|
Bonus
|
|
Securities Underlying
|
Name and Principal Position
|
|
Fiscal Year
|
|
($)
|
|
($)
|
|
Options (#)
|
|
Sam B. Humphries(1)
|
|
|
2006
|
|
|
|
241,961
|
|
|
|
88,880
|
|
|
|
|
|
Former President and
CEO
|
|
|
2005
|
|
|
|
50,558
|
|
|
|
29,875
|
|
|
|
400,000
|
|
Daniel G. Holman(2)
|
|
|
2006
|
|
|
|
251,364
|
|
|
|
|
|
|
|
|
|
Former Chairman, CEO and
CFO
|
|
|
2005
|
|
|
|
224,019
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
2004
|
|
|
|
212,192
|
|
|
|
|
|
|
|
|
|
Mahedi A. Jiwani(3)
|
|
|
2006
|
|
|
|
60,577
|
|
|
|
15,050
|
|
|
|
100,000
|
|
Vice President, CFO and
Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan Hartjes Holman
|
|
|
2006
|
|
|
|
164,231
|
|
|
|
|
|
|
|
|
|
COO
|
|
|
2005
|
|
|
|
153,692
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
2004
|
|
|
|
145,754
|
|
|
|
|
|
|
|
|
|
Arie J. Koole
|
|
|
2006
|
|
|
|
139,428
|
|
|
|
|
|
|
|
|
|
Controller
|
|
|
2005
|
|
|
|
137,219
|
|
|
|
|
|
|
|
50,000
|
|
Managing Director Dutch
subsidiaries
|
|
|
2004
|
|
|
|
120,546
|
|
|
|
|
|
|
|
|
|
Larry Heinemann
|
|
|
2006
|
|
|
|
142,691
|
|
|
|
26,782
|
|
|
|
|
|
VP Sales &
Marketing
|
|
|
2005
|
|
|
|
106,346
|
|
|
|
17,960
|
|
|
|
75,000
|
|
|
|
|
2004
|
|
|
|
91,692
|
|
|
|
15,500
|
|
|
|
|
|
51
|
|
|
(1) |
|
Mr. Humphries served as our President and Chief Executive
Officer from January 1, 2005 to April 26, 2006. |
|
(2) |
|
Mr. Holman resigned as our President and Chief Executive
Officer effective January 1, 2005 and as our Chief
Financial Officer effective November 2005. Mr. Holman
continued to serve as a director until he passed away on
June 1, 2006. |
|
(3) |
|
Mr. Jiwani joined us as our Vice President, Chief Financial
Officer and Treasurer in November 2005. |
Option
Grants in Fiscal 2006
The following table sets forth information concerning options
granted to each of the named executive officers during fiscal
year 2006. The outstanding options listed below may be exercised
only upon the vesting of the options. Mr. Jiwanis
options are 100% vested.
Option
Grants in Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants
|
|
|
|
Number of
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Total Options
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Granted to
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employees in
|
|
|
Exercise Price
|
|
|
Expiration
|
|
Name
|
|
Granted
|
|
|
Fiscal 2006
|
|
|
($/Unit)
|
|
|
Date
|
|
|
Sam B. Humphries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel G. Holman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mahedi A. Jiwani
|
|
|
100,000
|
|
|
|
30
|
%
|
|
|
3.00
|
|
|
|
11/14/2015
|
|
Susan Hartjes Holman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arie J. Koole
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Heinemann
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Exercises in Fiscal 2006 and Fiscal Year-End Option
Values
None of our named executive officers exercised stock options
during fiscal 2006. The following table sets forth the number of
shares of common stock subject to options and the value of those
options held by each of the named executive officers as of
March 31, 2006. The table assumes a per share price of
$2.34, which was the closing bid price on March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
In-the-Money
|
|
|
|
Shares
|
|
|
Value
|
|
|
Underlying Unexercised
|
|
|
Options at
|
|
|
|
Acquired on
|
|
|
Realized
|
|
|
Options at Fiscal Year End (#)
|
|
|
Fiscal Year End ($)
|
|
Name
|
|
Exercise
|
|
|
($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Sam B. Humphries
|
|
|
|
|
|
|
|
|
|
|
468,000
|
|
|
|
12,000
|
|
|
|
1,620
|
|
|
|
1,080
|
|
Daniel G. Holman
|
|
|
|
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
|
|
62,000
|
|
|
|
|
|
Mahedi A Jiwani
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan Hartjes Holman
|
|
|
|
|
|
|
|
|
|
|
117,000
|
|
|
|
8,000
|
|
|
|
39,680
|
|
|
|
9,920
|
|
Arie J. Koole
|
|
|
|
|
|
|
|
|
|
|
88,666
|
|
|
|
8,000
|
|
|
|
39,680
|
|
|
|
9,920
|
|
Larry Heinemann
|
|
|
|
|
|
|
|
|
|
|
113,666
|
|
|
|
8,000
|
|
|
|
39,680
|
|
|
|
9,920
|
|
Employment
Agreements
Mr. Kaysen. We entered into an employment
agreement dated May 17, 2006 with David B. Kaysen, our
President and Chief Executive Officer. The agreement provides
him with an annual base salary of $255,000, subject to annual
review. He is entitled to receive an annual cash bonus, not to
exceed 50% of his base salary, based on achievement of certain
financial and business milestones. For fiscal 2007, he is
entitled to a minimum cash bonus of 25% of his base salary. We
will reimburse him up to $11,500 annually for his
52
personal life and disability insurance policies. We also granted
him options, with a
10-year
term, to acquire 300,000 shares of our common stock at an
exercise price of $2.50 per share. The options vest in
one-third installments on the start date of his employment and
first and second anniversaries of the signing date of his
agreement. However, Mr. Kaysen must be employed with us
through the applicable anniversary date in order to vest in the
options for such anniversary date.
The employment agreement has a one-year term, unless terminated
earlier, and will continue to automatically renew on a
year-to-year
basis. If we terminate the agreement without good
cause (as defined in the agreement), we will pay
Mr. Kaysen an amount equal to 100% of his then annual base
salary as severance pay. However, if we terminate his employment
without good cause in connection with a change in control of
Uroplasty, Inc., we will pay him an amount equal to 160% of his
then annual base salary as severance pay.
Mr. Jiwani. Effective November 14,
2005, we entered into an employment agreement with
Mr. Jiwani that provides for an initial base salary of
$175,000. He is also entitled to receive annual bonuses based on
achievement of financial and business milestones to be agreed
upon. We have granted him ten-year options to purchase
100,000 shares of our common stock at an exercise price of
$3.00 per share which is equal to the closing price of our stock
on the American Stock Exchange on the start date of his
employment. These options are not under any of our option plans
and will not be treated as incentive options under the Internal
Revenue Code of 1986. His stock options were scheduled to vest
25% on his start date and on each of the first, second and third
anniversaries of his employment. Nevertheless, he must be
employed with us for at least one year in order to exercise any
of his options. His options would also vest if we terminate his
employment without good cause (including upon non-renewal of his
employment annually) and upon particular changes in control of
us. Notwithstanding the terms of his employment agreement, on
February 2, 2006, the Board approved a plan, accelerating
the vesting of these options, effective February 2, 2006.
He may exercise vested options by paying cash or on a net
cashless basis. We have agreed to include the shares underlying
Mr. Jiwanis options on an
S-8
registration statement with the SEC.
We have agreed to pay severance compensation at varying levels
to Mr. Jiwani in the event of termination of his
employment, including if we do not annually renew his employment
agreement. He has agreed to a one-year non-competition agreement
with us after any termination of employment.
Mr. Holman. Effective January 1,
2005, we entered into an employment and consulting agreement
with Daniel G. Holman. Under this agreement, Mr. Holman
agreed to serve as Chairman of our Board during the first year
of the agreement and as a part-time consultant with the
continuing title of Chairman during the second year of the
agreement. He also served as our Chief Financial Officer. This
agreement provided him with a base salary of $239,000 per
year during the first year of the agreement, and a consulting
fee of $100,000 per year during the second year of the
agreement. We also granted him options to purchase
100,000 shares of our common stock at an exercise price
equal to $5.19 per share. On February 2, 2006, the
Board approved a plan, accelerating the vesting of these
options, effective February 2, 2006. On March 27,
2006, we amended Mr. Holmans employment agreement to
allow him to pay the minimum statutory withholding taxes upon
the exercise of his options by canceling then-exercisable
options in an amount equal to such withholding taxes.
On April 26, 2006, as a result of Mr. Humphries
resignation as President and Chief Executive Officer, we amended
Mr. Holmans employment and consulting agreement,
pursuant to which he agreed to act as our interim President and
Chief Executive Officer for a special consulting fee of
$8,333 per month and a particular cash bonus upon certain
events which did not occur. Due to illness, on May 8, 2006,
we terminated this arrangement and paid his special consulting
fees through the end of May 2006. Mr. Holman passed away on
June 1, 2006.
Other Employment Agreements. We also have
employment agreements with each of Susan Hartjes Holman and
Larry Heinemann. The employment agreement of each executive
specifies a base salary subject to annual adjustment by mutual
agreement of the employee and us, and a severance payment to the
employee upon employment termination without cause as defined.
Any severance amounts payable under the agreement are limited to
the employees base salary for not less than four months
and not longer than twelve months
53
after employment termination, depending on the employees
years of service. Contemporaneously with the execution of their
employment agreements, each of these executives executed an
Employee Confidentiality, Inventions, Non-Solicitation and
Non-Compete Agreement, under which the executive agreed not to
disclose confidential information, to assign to us without
charge all intellectual property relating to our business which
is created or conceived during the term of employment, to not
encourage employees to leave our employment for any reason and
to not compete with us during the term of employment and for a
period of eighteen months thereafter. Also, in connection with
the execution of these agreements, we granted these executives
varying amounts of stock options to purchase our common stock at
the fair market value at date of grant of $7.50 per share.
All of these options have lapsed without exercise.
Separation
Agreement
On April 26, 2006, we entered into an agreement with Sam B.
Humphries relating to his resignation as President and Chief
Executive Officer. Under the terms of the agreement,
Mr. Humphries received his base salary and company-provided
benefits through April 26, 2006. He is not entitled to any
severance payments. Mr. Humphries agreed to remain on our
Board, subject to the right of the remaining directors to remove
him by a majority vote, and to recuse himself from any
deliberations or votes relating to any future relationship
between us and his new employer, HealthTronics, Inc. The
agreement further outlines the scope of Mr. Humphries
non-competition agreement with us, which includes prohibiting
Mr. Humphries (and consequently HealthTronics, Inc.) from
engaging in any business activities relating to the diagnosis or
treatment of urinary and fecal voiding dysfunctions or
initiating or entering into any agreement or other arrangement
with a third party relating to the diagnosis or treatment of
urinary or fecal voiding dysfunctions. Mr. Humphries
resigned from our Board effective August 28, 2006.
2006
Stock and Incentive Plan
On February 2, 2006, our board adopted the Uroplasty, Inc.
2006 Stock and Incentive Plan (the 2006 Plan). Our
shareholders approved the 2006 Plan at a special meeting of the
shareholders on May 3, 2006. Our Compensation Committee
administers the 2006 Plan.
The 2006 Plan permits the granting of:
|
|
|
|
|
stock options (including both incentive and non-qualified stock
options);
|
|
|
|
stock appreciation rights;
|
|
|
|
restricted stock and restricted stock units;
|
|
|
|
performance awards of cash, stock or property or a combination
thereof;
|
|
|
|
phantom stock; and
|
|
|
|
other stock grants or share-based awards.
|
All awards will be evidenced by an award agreement. Awards may
be granted alone, in addition to, in combination with or in
substitution for, any other award granted under the 2006 Plan or
any other compensation plan of us or our subsidiaries and
affiliates. Awards can be granted for no cash consideration or
for cash or other consideration as determined by the committee
or as required by applicable law. The term of awards will be
determined by the committee but may not be longer than
10 years from the date of grant. Any employee, officer,
director, consultant, advisor or other natural person providing
services to us or our subsidiaries, who is selected by the
committee, is eligible to receive an award under the 2006 Plan.
The aggregate number of shares of our common stock that may be
issued under the 2006 Plan is 1,200,000. Shares issuable under
the 2006 Plan are authorized but unissued shares. The committee
may adjust the number of shares available for issuance to
prevent dilution or enlargement of the benefits or potential
benefits intended to be provided under the 2006 Plan in the
event of stock splits, stock dividends, or other changes in our
capitalization or for a merger or a similar corporate
transaction or event. If any shares of our common stock subject
to any award or to which an award relates are forfeited or are
reacquired by us, or if
54
any award terminates without the delivery of any shares, the
shares previously set aside for such awards will be available
for future awards under the 2006 Plan. In addition, prior to
February 2, 2016, (i) any previously issued shares, or
(ii) shares under an award that are withheld, (in each case
of (i) or (ii)) in full or partial payment to us to satisfy
part or all of the minimum statutory withholding taxes relating
to an award (other than an incentive stock option) will again be
available for granting awards under the 2006 Plan. As of
October 9, 2006, 1,027,000 shares remain available for
grant.
55
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In January 2002, we entered into a consulting agreement with
Joel R. Pitlor, one of our former directors, for management
consulting services. Compensation under the agreement was
$2,000 per month. The agreement was terminated as of
June 30, 2005.
In April 2003, we entered into a consulting agreement with
Executive Advisory Group (EAG) for general management advice and
guidance as well as strategic and tactical planning services.
Sam B. Humphries, our former President, Chief Executive Officer
and director, is President of EAG. We initially paid EAG
$4,000 per month for Mr. Humphries services, but
increased the monthly fee to $6,000 in connection with the
increased use of Mr. Humphries time. We have also
granted EAG a five-year option to purchase up to
50,000 shares of our common stock, exercisable at
$2.80 per share. The agreement was terminated on
January 1, 2005.
On April 18, 2005, we entered into an exclusive
manufacturing and distribution agreement with CystoMedix. Sam B.
Humphries, our former President, Chief Executive Officer and
director, is a former director and consultant of CystoMedix. In
connection with his former service to CystoMedix (which
terminated prior to negotiations of this agreement), he received
200,000 options to purchase CystoMedix common stock.
In April 2005, we issued a total of 706,218 of new common stock
purchase warrants to holders of our warrants that expired in
July 2004. The new warrants are exercisable at $2.00 per
share for 90 days after the effective date of the
registration statement covering the resale of the shares
underlying the warrants. Daniel G. Holman, our former Chairman,
Interim President and Chief Executive Officer, received warrants
to purchase 66,665 shares of common stock; Susan Hartjes
Holman, our COO, received warrants to purchase 1,783 shares
of common stock; R. Patrick Maxwell, our Chairman, received
warrants to purchase 10,050 shares of common stock; and
Larry Heinemann, our Vice President of Sales and Marketing,
received warrants to purchase 1,250 shares of common stock.
In March 2006, we entered an agreement with Daniel G. Holman,
our former Chairman, Interim President and Chief Executive
Officer, to extend the term by which he could exercise 70,000
vested options granted to Mr. Holman under the 1995 Stock
Option Plan, the 1997 Stock Option Plan and the 2002 Stock
Option Plan from March 31, 2006 to December 31, 2006.
We further agreed that Mr. Holman would be fully vested in
10,000 options granted under the 2002 Stock Option Plan, which
had not vested upon the termination of his employment as our
Chief Financial Officer, and that such options can be exercised
through December 31, 2006. We recorded a compensation
charge of $105,000 related to this agreement in March 2006.
Mr. Holman passed away on June 1, 2006.
On April 26, 2006, we entered into a separation agreement
with Sam B. Humphries relating to his resignation as President
and Chief Executive Officer. Under the terms of the agreement,
Mr. Humphries received his base salary and benefits through
April 26, 2006. He did not receive any severance payments
in connection with his resignation. Mr. Humphries agreed to
remain on our board of directors, subject to the right of the
remaining directors to remove him by a majority vote and that he
would recuse himself from any deliberations or votes relating to
any future relationship between the Company and his new
employer, HealthTronics, Inc. The agreement further outlines the
scope of Mr. Humphries noncompetition agreement with
us, which includes prohibiting Mr. Humphries (and,
consequently, HealthTronics, Inc.) from engaging in any business
activities relating to the diagnosis or treatment of urinary and
fecal voiding dysfunctions or initiating or entering into any
agreement or other arrangement with a third party relating to
the diagnosis or treatment of urinary or fecal voiding
dysfunctions. Mr. Humphries resigned from our board of
directors effective August 28, 2006.
56
PRINCIPAL
SHAREHOLDERS
The following table sets forth the number and percentage of
shares of our common stock beneficially owned as of
October 9, 2006, by (i) each person known to us to be
the beneficial owner of more than 5% of our common stock,
(ii) each director, (iii) each of our named executive
officers, and (iv) all directors and executive officers as
a group.
The number of shares of our common stock outstanding on
October 9, 2006 was 8,411,188. Unless otherwise indicated
in the footnotes to the table, the address for each shareholder
is c/o Uroplasty, Inc., 5420 Feltl Road, Minnetonka,
Minnesota 55343, and to our knowledge, each shareholder
identified in the table possesses sole voting and investment
power over its shares of common stock, except for those jointly
owned with that persons spouse.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Percent of Common
|
|
Name of Beneficial Owner
|
|
Beneficially Owned
|
|
|
Stock Outstanding
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
SF Capital Partners Ltd(1)
|
|
|
1,390,014
|
|
|
|
16.5
|
%
|
Bruce Mindich, M.D.(2)
|
|
|
742,101
|
|
|
|
8.8
|
%
|
Heartland Advisors, Inc.(3)
|
|
|
725,000
|
|
|
|
8.7
|
%
|
Perkins Capital Management(4)
|
|
|
594,768
|
|
|
|
7.0
|
%
|
Sam B. Humphries(5)
|
|
|
468,000
|
|
|
|
5.3
|
%
|
Officers and
Directors
|
|
|
|
|
|
|
|
|
R. Patrick Maxwell(6)
|
|
|
143,584
|
|
|
|
1.7
|
%
|
David B. Kaysen(7)
|
|
|
100,000
|
|
|
|
1.2
|
%
|
Thomas E. Jamison(8)
|
|
|
100,100
|
|
|
|
1.2
|
%
|
Lee A. Jones(9)
|
|
|
15,000
|
|
|
|
0.2
|
%
|
James P. Stauner(10)
|
|
|
15,000
|
|
|
|
0.2
|
%
|
Sven A. Wehrwein(11)
|
|
|
15,000
|
|
|
|
0.2
|
%
|
Mahedi A. Jiwani(12)
|
|
|
100,000
|
|
|
|
1.2
|
%
|
Susan Hartjes Holman(13)
|
|
|
390,409
|
|
|
|
4.5
|
%
|
Larry Heinemann(14)
|
|
|
119,750
|
|
|
|
1.4
|
%
|
Arie J. Koole(15)
|
|
|
91,666
|
|
|
|
1.1
|
%
|
All directors and executive
officers as group(16)
|
|
|
1,177,175
|
|
|
|
12.5
|
%
|
|
|
|
(1) |
|
The address of SF Capital Partners Ltd. is c/o Stark
Offshore Management, LLC, 3600 South Lake Drive, St. Francis,
Wisconsin 53235. Excludes 500,000 shares underlying
immediately exercisable warrants expiring in April 2010 and
204,167, shares underlying warrant, not exercisable until
February 4, 2007, expiring in August 2011. The warrants are
subject to exercise caps that preclude the holder thereof from
utilizing its exercise rights to the extent that it would
beneficially own in excess of 4.9% and 9.9% of our outstanding
common stock, giving effect to such exercise. The holder may
waive the 4.9% ownership cap, but such waiver will not be
effective until the 61st day after delivery thereof. As a
result, the holder is not deemed to be the beneficial owner of
the shares underlying the warrants as of October 9, 2006.
Michael A. Roth and Brian J. Stark are the managing members of
Stark Offshore Management, LLC, which acts as investment manager
and has sole power to direct the management of SF Capital
Partners. Through Stark Offshore Management, Messrs. Roth
and Stark possess voting and dispositive power over the shares
held by SF Capital Partners and therefore may be deemed to be
beneficial owners of the shares. Messrs. Roth and Stark
disclaim such beneficial ownership based on Schedule 13G
filed May 3, 2005. |
|
(2) |
|
Dr. Mindichs address is 200 Route 17 North, Paramus,
New Jersey 07652. Of the shares listed, 541,665 shares are
directly owned by the Mindich Family Limited Liability Company,
the General Member of which is Dr. Mindich. Helaine
Brick-Cabot possesses shared voting and investment power over
the shares held by Dr. Mindich and the Mindich Family
Limited Liability Company and therefore may be |
57
|
|
|
|
|
deemed to beneficially own those shares. Ms. Brick-Cabot
also holds an additional 4,500 shares. Based on
Schedule 13D/A-10
filed by Bruce P. Mindich M.D. on September 18, 2006,
Schedule 13D/A-9
filed by Helaine Brick-Cabot filed on September 18, 2006,
Schedule 13D/A-10
filed by the Mindich Family Limited Liability Company on
September 18, 2006 and, four Form 4s filed by
Dr. Mindich from July 20, 2006 to August 14, 2006. |
|
(3) |
|
The address of Heartland Advisors, Inc. is 789 North Water
Street, Milwaukee, Wisconsin 53202. Excludes 62,500 shares
underlying warrants, not exercisable until February 4,
2007, expiring in August 2011. The warrants are subject to
exercise caps that preclude the holder thereof from utilizing
its exercise rights to the extent that it would beneficially own
in excess of 4.9% and 9.9% of our outstanding common stock,
giving effect to such exercise. The holder may waive the 4.9%
ownership cap, but such waiver will not be effective until the
61st day after delivery thereof. As a result, the holder is
not deemed to be the beneficial owner of the shares underlying
the warrants as of October 9, 2006. Heartland Advisors and
William J. Nasgovitz, President and a principal shareholder of
Heartland Advisors, may be deemed to have shared voting and
investment power over the shares. Each disclaims beneficial
ownership over the shares. The shares are held in an investment
advisory account of Heartland Advisors for the benefit of Turn
the Tide, LP, a Wisconsin limited partnership. |
|
(4) |
|
The address of Perkins Capital 730 East Lake Street, Wayzata,
Minnesota 55391. Includes 85,000 shares that may be
acquired upon the exercise of warrants within 60 days of
October 9, 2006. |
|
(5) |
|
Includes 468,000 shares that Mr. Humphries may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006. Of the shares listed,
50,000 shares are beneficially owned by the Executive
Advisory Group, the President of which is Mr. Humphries. |
|
(6) |
|
Includes 80,000 shares that Mr. Maxwell may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006. |
|
(7) |
|
Includes 100,000 shares that Mr. Kaysen may acquire
upon the exercise of options that are exercisable within
60 days of October 9, 2006. |
|
(8) |
|
Includes 80,000 shares that Mr. Jamison may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006. |
|
(9) |
|
Includes 15,000 shares that Ms. Jones may acquire upon
the exercise of options that are exercisable within 60 days
of October 9, 2006 |
|
(10) |
|
Includes 15,000 shares that Mr. Stauner may acquire
upon the exercise of options that are exercisable within
60 days of October 9, 2006 |
|
(11) |
|
Includes 15,000 shares that Mr. Wehrwein may acquire
upon the exercise of options that are exercisable within
60 days of October 9, 2006 |
|
(12) |
|
Includes 100,000 shares that Mr. Jiwani may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006. |
|
(13) |
|
Includes 295,000 shares that Ms. Holman may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006 and shares acquired by
inheritance from the estate of Daniel G. Holman,
Ms. Holmans deceased spouse. Excludes
253,072 shares owned by the estate of Daniel G. Holman,
Ms. Holmans deceased spouse. |
|
(14) |
|
Includes 115,000 shares that Mr. Heinemann may acquire
upon exercise of options that are exercisable within
60 days of October 9, 2006. |
|
(15) |
|
Includes 90,000 shares that Mr. Koole may acquire upon
exercise of options that are exercisable within 60 days of
October 9, 2006. |
|
(16) |
|
Includes 981,666 shares that our directors and executive
officers may acquire upon exercise of options that are
exercisable within 60 days of October 9, 2006. |
58
DESCRIPTION
OF CAPITAL STOCK
General
Our authorized capital stock consists of 40,000,000 shares
of common stock, $0.01 par value per share. As of
October 9, 2006, we had outstanding 8,411,188 shares
of common stock and 534 holders of records with respect to our
common stock.
The following summary of provisions of our capital stock
describes the material provisions of our restated articles of
incorporation, as amended, and our bylaws, which are included as
exhibits to the registration statement of which this prospectus
forms a part.
Common
Stock
Each outstanding share of common stock is entitled to one vote
on all matters submitted to a vote of our shareholders. There is
no cumulative voting. Holders of our common stock are entitled
to share equally, share for share, if dividends are declared on
our common stock. Upon liquidation, dissolution or winding up of
our company, the holders of common stock are entitled to share
equally, share for share, in our assets which are legally
available for distribution, after payment of amounts payable to
creditors. The shares of our common stock are not convertible
and holders thereof have no preemptive rights. All issued and
outstanding shares of common stock are fully paid and
nonassessable.
Warrants
In connection with a private placement of our common stock on
August 7, 2006, we issued warrants to purchase
764,500 shares of our common stock at an exercise price of
$2.50 per share. Subject to various exceptions, the
exercise price will be reduced in the event that within one year
after the closing we issue shares at less than $1.50 per
share. The warrants are exercisable for five years, beginning on
February 4, 2007. We generally may call for the investors
to exercise their warrants beginning one year after the closing
if, for 30 consecutive trading days prior to making this call,
the closing price for our stock is at least $4.00 per share
and the average daily trading volume is 5,000 shares.
In connection with a private placement of our common stock on
April 21, 2005, we issued warrants to purchase
1,180,928 shares of common stock. The warrants are
exercisable for five years at an exercise price of
$4.75 per share. We generally may call for the investors to
exercise their warrants beginning two years after the closing
if, for 30 consecutive trading days prior to making this call,
the closing price for our stock is at least $9.00 per share
and the average daily trading volume is 5,000 shares.
As part of a consulting agreement with CCRI Corporation, we
issued a warrant to purchase 50,000 shares of common stock
at a price of $3.00 per share on April 1, 2003, and an
additional warrant to purchase 50,000 shares at a price of
$5.00 per share on November 2, 2003. The warrants
expire five years from the date of issue.
In connection with our subscription rights offering in July
2002, we issued 798,213 warrants to purchase our common stock,
exercisable for two years at $2.00 per share. However, we
suspended the exercise of these warrants when we delayed the
filing of our annual report on
Form 10-KSB
for the fiscal year ended March 31, 2004. As a result,
706,218 of unexercised warrants lapsed unexercised at
July 31, 2004. In April 2005, we granted a like number of
new common stock purchase warrants to the holders of the expired
warrants. The new warrants will be exercisable at $2.00 per
share for 90 days after the effective date of a
registration statement covering the shares underlying the new
warrants.
Indemnification
of Directors and Officers and Limitation on Liability
Our restated articles of incorporation, as amended, provide that
our directors will not be liable to us or our shareholders for
monetary damages for any breach of fiduciary duty, except to the
extent otherwise not permitted under Section 302A.251 of
the Minnesota Business Corporation Act. This provision will not
prevent
59
our shareholders from obtaining injunctive or other relief
against our directors nor does it shield our directors from
liability under federal or state securities laws.
Our bylaws require us to indemnify our directors and officers to
the extent permitted by Section 302A.521 of the Minnesota
Business Corporation Act.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and
controlling persons in accordance with the provisions contained
in our articles and bylaws, or otherwise, we have been advised
that, in the opinion of the Securities and Exchange Commission,
this indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
StockTrans, Inc.
PLAN OF
DISTRIBUTION
Under an agency agreement
dated ,
2006, between us and Craig-Hallum Capital Group LLC, we have
agreed to offer up to $12 million of our common stock by
this prospectus and Craig-Hallum has agreed to use its best
efforts to obtain purchasers for the common stock, upon the
terms and conditions of the agency agreement. While Craig-Hallum
has agreed to use its best efforts to sell the common stock in
this offering, Craig-Hallum is not obligated to purchase any
common stock that is being sold.
Pursuant to the terms of the agency agreement, the consideration
to Craig-Hallum will consist of 6% of the gross proceeds raised
in the offering and that number of warrants equal to 5% of the
shares of common stock sold in this offering. The exercise price
of the warrants will be 120% of the price of the common stock
issued in this offering. The exercise price of the warrants was
established to comply with the applicable NASD requirements. The
warrants issued to Craig-Hallum will have a term of five years
and become exercisable one year after the closing of this
offering. The warrants will incorporate a mandatory exercise for
cash of the warrant, beginning one year after the issuance date,
if the average closing price of the our common stock as quoted
on AMEX, or the exchange where our common stock is then traded,
for 20 consecutive trading days is greater than or equal to 150%
of the exercise price of the warrant.
We will also reimburse Craig Hallum for its costs and expenses
in connection with the offering, including fees of its counsel,
in an amount not to exceed the greater of $75,000 and 1% of the
gross proceeds of the offering.
We estimate that the total expenses of the offering payable by
us will be approximately $ .
The offering will continue until the earlier of the sale of all
shares offered by this prospectus or December ,
2006. All common stock will be sold at the closing date of this
offering. We expect to deliver the common stock to purchasers on
or about December , 2006, upon receipt of the
purchase price of the common stock and subject to customary
closing conditions.
We have agreed to indemnify Craig-Hallum and its partners,
employees, directors, officers, consultants, agents, affiliates
and persons deemed to be in Craig-Hallums control within
the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act against certain liabilities
and expenses, including liabilities under the Securities Act, or
to contribute to payments that Craig-Hallum may be required to
make in respect of those liabilities.
Our executive officers and directors have entered into
lock-up
agreements with Craig-Hallum. Under these agreements, subject to
limited exceptions, each of these persons may not sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise dispose of any shares of our common stock or any
securities convertible into or exercisable or exchangeable for
any shares of our common stock, enter into any swap or other
arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock or any
securities convertible into or exercisable or exchangeable for
our common stock, whether the transaction is to be settled by
delivery of our common stock or other securities, in cash, or
60
otherwise, or otherwise effect any disposition of our
securities. These restrictions are in effect for the period
commencing on October 27, 2006 and ending 90 days
after the closing of this offering. The restrictions on
transferability do not apply to:
shares issued pursuant to the exercise of options
that by their terms expire prior to February 28, 2007;
the sale of a number of previously owned shares
sufficient to pay the exercise price and applicable taxes of the
options and all of the proceeds from the sale are used to pay
the exercise price, applicable taxes of the options and
applicable brokerage fees;
|
|
|
|
|
the sale of a specified number of shares;
|
the sale of the warrants granted by us in April 2005
in an amount equivalent to the warrants purchased in our
subscription rights offering in July 2002 (the 2005
Warrants);
the sale of a number of shares issuable upon
exercise of the 2005 Warrants sufficient to pay the exercise
price, applicable taxes and applicable brokerage fees of the
2005 Warrants; or
the sale of a number of previously owned shares
sufficient to pay the exercise price and applicable taxes of the
2005 Warrants and all of the proceeds from the sale are used to
pay the exercise price, applicable taxes and applicable
brokerage fees of the 2005 Warrants.
Our common stock is listed on the AMEX under the symbol
UPI. We expect to receive approval to have the
common stock sold in this offering listed on the AMEX.
Craig-Hallum has acted as placement agent in connection with our
private placements completed in April 2005 and August 2006, for
which it received customary compensation.
VALIDITY
OF COMMON STOCK
The validity of the shares of common stock offered by this
prospectus will be passed upon by Messerli & Kramer P.
A.
EXPERTS
Our consolidated financial statements as of and for the years
ended March 31, 2006 and March 31, 2005 included in
this prospectus have been so included in reliance upon the
report of McGladrey & Pullen, LLP, independent
registered public accounting firm, given on the authority of
said firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a Registration Statement on
Form SB-2
under the Securities Act with the SEC with respect to this
offering. This prospectus, which is included in the registration
statement, does not contain all of the information included in
the registration statement. Parts of the registration statement
are omitted in accordance with the rules and regulations of the
SEC. For further information about us and our common stock, we
refer you to the registration statement.
We are subject to the informational requirements of the Exchange
Act and file reports, proxy statements, and other information
with the SEC. You can inspect and copy the registration
statement as well as the reports, proxy statements and other
information we have filed with the SEC at the public reference
room maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public at the website
maintained by the SEC at http://www.sec.gov.
61
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Uroplasty, Inc.
Minneapolis, Minnesota
We have audited the consolidated balance sheets of Uroplasty,
Inc. and Subsidiaries as of March 31, 2006 and 2005, and
the related consolidated statements of operations,
shareholders equity and comprehensive loss, and cash flows
for the years then ended. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Uroplasty, Inc. and subsidiaries as of
March 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
/s/ McGladrey &
Pullen, LLP
Minneapolis, Minnesota
June 27, 2006
F-2
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March 31,
2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,563,433
|
|
|
$
|
1,405,324
|
|
Short-term investments
|
|
|
1,137,647
|
|
|
|
87,360
|
|
Accounts receivable, net
|
|
|
716,587
|
|
|
|
944,527
|
|
Income tax receivable
|
|
|
270,934
|
|
|
|
114,189
|
|
Inventories
|
|
|
757,062
|
|
|
|
547,476
|
|
Other
|
|
|
353,178
|
|
|
|
161,920
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,798,841
|
|
|
|
3,260,796
|
|
Property, plant, and equipment, net
|
|
|
1,079,438
|
|
|
|
1,040,253
|
|
Intangible assets, net of
accumulated amortization of $327,586 and $225,090, respectively
|
|
|
411,604
|
|
|
|
39,100
|
|
Deferred tax assets
|
|
|
111,361
|
|
|
|
103,075
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,401,244
|
|
|
$
|
4,443,224
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March 31,
2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Liabilities and
Shareholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities
notes payable
|
|
$
|
41,658
|
|
|
$
|
44,606
|
|
Accounts payable
|
|
|
506,793
|
|
|
|
362,994
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Compensation and payroll taxes
|
|
|
350,558
|
|
|
|
284,255
|
|
Sales tax
|
|
|
16,791
|
|
|
|
181
|
|
Royalties
|
|
|
12,748
|
|
|
|
24,710
|
|
Clinical
|
|
|
21,350
|
|
|
|
12,702
|
|
Audit and tax-consulting
|
|
|
109,255
|
|
|
|
45,566
|
|
Legal
|
|
|
24,791
|
|
|
|
22,750
|
|
Warrant liability
|
|
|
665,356
|
|
|
|
|
|
Other
|
|
|
382,488
|
|
|
|
88,518
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,131,788
|
|
|
|
886,282
|
|
Notes payable less
current maturities:
|
|
|
389,241
|
|
|
|
461,265
|
|
Accrued pension liability
|
|
|
473,165
|
|
|
|
303,781
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,994,194
|
|
|
|
1,651,328
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock $.01 par value;
20,000,000 shares authorized, 6,937,786 and
4,699,597 shares issued and outstanding at March 31,
2006 and 2005, respectively
|
|
|
69,378
|
|
|
|
46,996
|
|
Additional paid-in capital
|
|
|
14,831,787
|
|
|
|
9,366,644
|
|
Accumulated deficit
|
|
|
(11,034,100
|
)
|
|
|
(6,491,387
|
)
|
Accumulated other comprehensive
loss
|
|
|
(460,015
|
)
|
|
|
(130,357
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
3,407,050
|
|
|
|
2,791,896
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
6,401,244
|
|
|
$
|
4,443,224
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
6,142,612
|
|
|
$
|
6,657,726
|
|
Cost of goods sold
|
|
|
1,837,716
|
|
|
|
1,755,456
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,304,896
|
|
|
|
4,902,270
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,958,982
|
|
|
|
2,260,240
|
|
Research and development
|
|
|
3,324,201
|
|
|
|
2,258,127
|
|
Selling and marketing
|
|
|
3,399,896
|
|
|
|
2,015,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,683,079
|
|
|
|
6,534,022
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,378,183
|
)
|
|
|
(1,631,752
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Warrant benefit
|
|
|
707,320
|
|
|
|
|
|
Interest income
|
|
|
142,379
|
|
|
|
30,168
|
|
Interest expense
|
|
|
(29,494
|
)
|
|
|
(25,934
|
)
|
Foreign currency exchange loss
|
|
|
(31,195
|
)
|
|
|
(15,744
|
)
|
Other
|
|
|
(413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
788,597
|
|
|
|
(11,510
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(4,589,586
|
)
|
|
|
(1,643,262
|
)
|
Income tax expense (benefit)
|
|
|
(46,873
|
)
|
|
|
91,503
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,542,713
|
)
|
|
$
|
(1,734,765
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.67
|
)
|
|
$
|
(0.37
|
)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
6,746,412
|
|
|
|
4,651,732
|
|
See accompanying notes to consolidated financial statements.
F-5
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
LOSS
Years
ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Other Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
Balance at March 31, 2004
|
|
|
4,584,802
|
|
|
$
|
45,848
|
|
|
$
|
9,130,580
|
|
|
$
|
(4,756,622
|
)
|
|
$
|
(315,573
|
)
|
|
$
|
4,104,233
|
|
Exercise of stock options
|
|
|
38,300
|
|
|
|
383
|
|
|
|
67,638
|
|
|
|
|
|
|
|
|
|
|
|
68,021
|
|
Warrants conversion
|
|
|
68,395
|
|
|
|
684
|
|
|
|
136,107
|
|
|
|
|
|
|
|
|
|
|
|
136,791
|
|
Employee retirement savings plan
contribution
|
|
|
8,100
|
|
|
|
81
|
|
|
|
32,319
|
|
|
|
|
|
|
|
|
|
|
|
32,400
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,734,765
|
)
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,505
|
|
|
|
|
|
Additional pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,711
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,549,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
4,699,597
|
|
|
|
46,996
|
|
|
|
9,366,644
|
|
|
|
(6,491,387
|
)
|
|
|
(130,357
|
)
|
|
|
2,791,896
|
|
Proceeds from private placement
|
|
|
2,147,142
|
|
|
|
21,471
|
|
|
|
7,493,526
|
|
|
|
|
|
|
|
|
|
|
|
7,514,997
|
|
Cost of private placement
|
|
|
|
|
|
|
|
|
|
|
(934,679
|
)
|
|
|
|
|
|
|
|
|
|
|
(934,679
|
)
|
Reissuance of warrants
|
|
|
|
|
|
|
|
|
|
|
(1,372,676
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,372,676
|
)
|
Warrant registration costs
|
|
|
|
|
|
|
|
|
|
|
(21,324
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,324
|
)
|
Liquidated damages settlement shares
|
|
|
57,381
|
|
|
|
574
|
|
|
|
150,403
|
|
|
|
|
|
|
|
|
|
|
|
150,977
|
|
Exercise of stock options
|
|
|
33,666
|
|
|
|
337
|
|
|
|
45,362
|
|
|
|
|
|
|
|
|
|
|
|
45,699
|
|
Extension of employee options after
termination
|
|
|
|
|
|
|
|
|
|
|
104,531
|
|
|
|
|
|
|
|
|
|
|
|
104,531
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,542,713
|
)
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206,356
|
)
|
|
|
|
|
Additional pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,302
|
)
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,872,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
6,937,786
|
|
|
$
|
69,378
|
|
|
$
|
14,831,787
|
|
|
$
|
(11,034,100
|
)
|
|
$
|
(460,015
|
)
|
|
$
|
3,407,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
ended March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,542,713
|
)
|
|
$
|
(1,734,765
|
)
|
Adjustments to reconcile net loss
to net cash used in operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
261,496
|
|
|
|
163,879
|
|
Loss on disposal of assets
|
|
|
1,343
|
|
|
|
3,751
|
|
Stock-based severance expense
|
|
|
104,531
|
|
|
|
|
|
Warrant benefit
|
|
|
(707,320
|
)
|
|
|
|
|
Deferred tax assets
|
|
|
(16,015
|
)
|
|
|
23,680
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
163,701
|
|
|
|
168,779
|
|
Inventories
|
|
|
(280,505
|
)
|
|
|
21,896
|
|
Other current assets
|
|
|
(362,009
|
)
|
|
|
78,867
|
|
Accounts payable
|
|
|
158,381
|
|
|
|
162,526
|
|
Accrued liabilities
|
|
|
585,992
|
|
|
|
(221,646
|
)
|
Accrued pension liability
|
|
|
192,759
|
|
|
|
(38,909
|
)
|
Additional pension liability
|
|
|
(130,305
|
)
|
|
|
36,537
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(4,570,664
|
)
|
|
|
(1,335,405
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(4,768,323
|
)
|
|
|
(87,360
|
)
|
Proceeds from short-term
|
|
|
3,718,036
|
|
|
|
|
|
Payments for property, plant and
equipment
|
|
|
(252,238
|
)
|
|
|
(74,966
|
)
|
Payments relating to intangible
assets
|
|
|
(454,167
|
)
|
|
|
(7,277
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,756,692
|
)
|
|
|
(169,603
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(41,847
|
)
|
|
|
(43,356
|
)
|
Net proceeds from issuance of
common stock and warrants
|
|
|
6,604,693
|
|
|
|
204,812
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
6,562,846
|
|
|
|
161,456
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
(77,381
|
)
|
|
|
51,206
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
158,109
|
|
|
|
(1,292,346
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
1,405,324
|
|
|
|
2,697,670
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
1,563,433
|
|
|
$
|
1,405,324
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for
interest
|
|
$
|
21,299
|
|
|
$
|
24,751
|
|
Cash paid during the year for
income taxes
|
|
$
|
94,442
|
|
|
$
|
304,018
|
|
Supplemental disclosure of
non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Shares issued for 401(k) plan
profit sharing contribution
|
|
$
|
|
|
|
$
|
32,400
|
|
Shares issued for liquidated
damages settlement
|
|
$
|
150,977
|
|
|
$
|
|
|
Additional pension liability, net
of tax
|
|
$
|
123,302
|
|
|
$
|
(34,711
|
)
|
See accompanying notes to consolidated financial statements.
F-7
UROPLASTY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and 2005
|
|
1.
|
Summary
of Significant Accounting Policies
|
Nature of Business. Uroplasty, Inc. and
subsidiaries (the Company) is a medical device
company that develops, manufactures and markets innovative,
proprietary products for the treatment of voiding dysfunctions.
The Company has developed, and is developing, minimally invasive
products primarily for the treatment of urinary and fecal
incontinence and overactive bladder symptoms. The Company
currently sells its products in and outside of the United States
and is pursuing regulatory approvals to market additional
products in the United States. The Company recently staffed its
sales and marketing organization in the United States. The
Company is currently seeking FDA approval for one of its
products and the regulatory process can be costly, lengthy and
uncertain.
Principles of Consolidation. The consolidated
financial statements include the accounts of the Company and its
wholly owned foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition. The Company recognizes
revenue upon shipment of product to customers. Upon shipment,
the risks and rewards of ownership are passed on to the buyer.
There are no customer acceptance provisions. The Company sells
its products to end users and to distributors who sell to other
distributors and end users. Sales to distributors were
approximately $4,000,000 and $4,700,000 in fiscal 2006 and 2005,
respectively, or 65% and 70%, respectively, of net sales.
Payment terms range from prepayment to 60 days. The
distributor payment terms are not contingent on the distributor
selling the product to other distributors or end users.
Customers do not have the right to return unsold products to the
Company except for warranty claims. The Company offers customary
product warranties. During fiscal 2006, two customers accounted
for approximately 14% and 11% of the Companys net sales.
During fiscal 2005, the same two customers accounted for
approximately 15% and 11% of the Companys net sales.
Use of Estimates. The preparation of financial
statements in conformity with U.S. generally accepted
accounting principles 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 these estimates. The Companys
significant accounting policies and estimates include revenue
recognition, accounts receivable, valuation of inventory,
foreign currency translation/transactions, and the determination
of recoverability of long-lived and intangible assets.
Disclosures About Fair Value of Financial
Instruments. The following methods and assumption
were used to estimate the fair value of each class of certain
financial instruments for which it is practicable to estimate
that value:
|
|
|
|
|
Cash equivalents and short-term
investments: The carrying amount approximates
fair value because of the short maturity of these instruments.
|
|
|
|
Notes payable: The fair value of the
Companys notes payable are estimated based on the current
rates offered to the Company for similar instruments with the
same remaining maturities and similar collateral requirements.
At March 31, 2006 and 2005, the fair value of the
Companys notes payable approximated their carrying value.
|
Cash and Cash Equivalents. The Company
considers highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. The Company maintains its cash in bank accounts,
which, at times, exceed federally insured limits. The Company
has not experienced any losses in such accounts.
F-8
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Short-term Investments. Short-term investments
consist of certificates of deposit that mature within the next
twelve months. Based on the short-term nature of these
investments their cost approximates their fair market value.
Accounts Receivable. Accounts receivable are
carried at the original invoice amount less an estimate made for
doubtful receivables based on a periodic review of all
outstanding amounts. The Company determines the allowance for
doubtful accounts based on customer financial condition, and
both historical and expected credit loss experience. Accounts
receivable are written off when deemed uncollectible. Recoveries
of accounts receivable previously written off are recorded when
received. The allowance for doubtful accounts was $42,000 and
$218,000 at March 31, 2006 and 2005, respectively.
Income Taxes. Deferred tax assets and
liabilities are recognized for future tax consequences
attributable to differences between the financial carrying
amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be applied to taxable income
in the years in which those temporary differences are expected
to be recovered or settled. During fiscal 2006 and 2005 the
Companys Dutch subsidiaries recorded income tax expense
(benefit) of $(46,873) and $91,503 respectively, as they have
fully utilized their net operating loss carryforwards. The
U.S. net operating loss carryforwards cannot be used to
offset taxable income in foreign jurisdictions.
Product Warranty. The Company warrants its new
products to be free from defects in material and workmanship
under normal use and service for a period of twelve months after
date of sale. Under the terms of these warranties, the Company
is obligated to repair or replace the products it deems to be
defective due to material or workmanship. The Company does not
have an accrual for warranty costs, as warranty claims are
infrequent and immaterial.
Inventories. Inventories are stated at the
lower of cost
(first-in,
first-out method) or market (net realizable value) and consist
of the following at March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
340,268
|
|
|
$
|
193,980
|
|
Work-in-process
|
|
|
26,183
|
|
|
|
75,337
|
|
Finished goods
|
|
|
390,611
|
|
|
|
278,159
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
757,062
|
|
|
$
|
547,476
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment. Property,
plant, and equipment are carried at cost and consist of the
following at March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
148,402
|
|
|
$
|
158,861
|
|
Building
|
|
|
662,882
|
|
|
|
692,646
|
|
Equipment
|
|
|
1,531,926
|
|
|
|
1,391,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,343,210
|
|
|
|
2,243,023
|
|
Less accumulated depreciation
|
|
|
(1,263,772
|
)
|
|
|
(1,202,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,079,438
|
|
|
$
|
1,040,253
|
|
|
|
|
|
|
|
|
|
|
Depreciation is provided using the straight-line method over
useful lives of three to seven years for equipment and
40 years for the building. Maintenance and repairs are
charged to expense as incurred. Renewals and improvements are
capitalized and depreciated over the shorter of their estimated
useful service lives or the remaining lease term.
F-9
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Intangible Assets. Intangible assets are
comprised of patents, trademarks and licensed technology which
are amortized on a straight-line basis over their estimated
useful lives or contractual terms, whichever is less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
Estimated Lives
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net value
|
|
|
Licensed technology
|
|
|
5
|
|
|
$
|
501,290
|
|
|
$
|
111,183
|
|
|
$
|
390,107
|
|
Patents and inventions
|
|
|
6
|
|
|
|
237,900
|
|
|
|
216,403
|
|
|
|
21,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
739,190
|
|
|
$
|
327,586
|
|
|
$
|
411,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005
|
|
|
Licensed technology
|
|
|
5
|
|
|
$
|
26,290
|
|
|
$
|
19,718
|
|
|
$
|
6,572
|
|
Patents and inventions
|
|
|
6
|
|
|
|
237,900
|
|
|
|
205,372
|
|
|
|
32,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
264,190
|
|
|
$
|
225,090
|
|
|
$
|
39,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated annual amortization for these assets for the years
ending March 31, are as follows:
|
|
|
|
|
2007
|
|
$
|
99,000
|
|
2008
|
|
|
97,000
|
|
2009
|
|
|
96,000
|
|
2010
|
|
|
94,000
|
|
2011
|
|
|
26,000
|
|
|
|
|
|
|
|
|
$
|
412,000
|
|
|
|
|
|
|
Impairment of Long-Lived Assets. Long-lived
assets at March 31, 2006 consist of property, plant and
equipment and intangible assets. The Company reviews its
long-lived assets for impairment whenever events or business
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Foreign Currency Translation. All assets and
liabilities are translated using period-end exchange rates and
statements of operations items are translated using average
exchange rates for the period. The resulting translation
adjustment is recorded within accumulated other comprehensive
loss, a separate component of shareholders equity. Foreign
currency transaction gains and losses are recognized currently
in the consolidated statement of operations, including
unrealized gains and losses on short-term inter-company
obligations using period-end exchange rates. Unrealized gains
and losses on long-term inter-company obligations are recognized
within accumulated other comprehensive loss, a separate
component of shareholders equity.
Exchange gains and losses are recognized primarily as a result
of fluctuations in currency rates between the U.S. dollar
(the functional reporting currency) and the euro and British
pound (currencies of the Companys subsidiaries), as well
as their effect on the dollar denominated intercompany
obligations between the Company and its foreign subsidiaries.
The Company recognized net foreign currency losses of $31,195
and $15,744 for the years ended March 31, 2006 and 2005,
respectively.
Stock-Based Compensation. The Company applies
the intrinsic-value method under APB Opinion No. 25
(APB 25) to account for employee stock-based
compensation. As such, compensation expense, if any,
F-10
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
is determined on the date of grant if the current market price
of the underlying stock exceeds the exercise price.
The Company accounts for stock-based instruments granted to
non-employees under the fair value method of Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) and
Emerging Issues Task Force (EITF) 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services. Under SFAS No. 123, options are recorded
at their fair value on the measurement date, which is typically
the vesting date.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under
SFAS No. 123, the Companys net loss would have
changed to the pro forma amounts shown below:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net loss As reported
|
|
$
|
(4,542,713
|
)
|
|
$
|
(1,734,765
|
)
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all awards
|
|
|
(3,062,324
|
)
|
|
|
(2,321,745
|
)
|
|
|
|
|
|
|
|
|
|
Net loss Pro forma
|
|
$
|
(7,605,037
|
)
|
|
$
|
(4,056,510
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common
share As reported:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.67
|
)
|
|
$
|
(0.37
|
)
|
Net loss per common
share Pro forma:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.13
|
)
|
|
$
|
(0.87
|
)
|
In February 2006, the Companys Board of Directors approved
a plan to accelerate the vesting of
out-of-the-money,
unvested stock options previously granted to the Companys
employees, officers and directors. An option was considered
out-of-the-money
if the stated exercise price exceeded $2.85, the then closing
price of the Companys common stock. Pursuant to this
action, options to purchase approximately 0.4 million
shares of the Companys common stock with a weighted
average exercise price of $4.49 per share became
exercisable immediately.
The Company accelerated the vesting of options to minimize the
amount of compensation expense it would otherwise recognize upon
adoption of SFAS No. 123(R) on April 1, 2006.
None of these options had intrinsic value at the acceleration
date under APB 25. The Company estimates that acceleration
of the vesting of these options reduced the pre-tax stock option
expense by approximately $1.4 million, in the aggregate,
calculated using the Black-Scholes option valuation model, that
it would have otherwise recognized over the next three fiscal
years, upon adoption of SFAS No. 123(R). This amount
is reflected in the 2006 proforma computation above.
The per share weighted-average fair value of stock options
granted during 2006 and 2005 was $2.74 and $4.63, respectively,
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
4.39
|
%
|
|
|
3.40
|
%
|
Expected volatility
|
|
|
116
|
%
|
|
|
117
|
%
|
Expected life, in years
|
|
|
6.52
|
|
|
|
7.40
|
|
Basic and Diluted Net Loss per Common
Share. Basic per common share amounts are
calculated by dividing net loss by the weighted-average common
shares outstanding. Diluted per common share amounts are
F-11
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
computed similar to basic per common share amounts except that
the weighted-average shares outstanding are increased to include
additional shares for the assumed exercise of stock options and
warrants, if dilutive. Because the Company had a loss in fiscal
2006 and 2005, diluted shares were the same as basic shares
since the effect options and warrants would have been
anti-dilutive. The following options and warrants outstanding at
March 31, 2006 and 2005 to purchase shares of common stock
were excluded from diluted loss per share as their impact would
be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Range of
|
|
|
|
Options/Warrants
|
|
|
Exercise Prices
|
|
|
Years ended:
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
3,875,473
|
|
|
$
|
0.90-10.50
|
|
March 31, 2005
|
|
|
1,820,859
|
|
|
$
|
0.90-10.50
|
|
New
Accounting Pronouncements.
Statement
of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections.
In May 2005, the Financial Accounting Standard Board, or FASB,
issued Statement of Financial Accounting Standards, or SFAS,
No. 154, Accounting Changes and Error Corrections.
This new standard replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial
Statements. Among other changes, Statement 154 requires
that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is
impracticable to do so. Statement 154 also provides that
(1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in
estimate (prospectively) that was effected by a change in
accounting principle, and (2) correction of errors in
previously issued financial statements should be termed a
restatement. The new standard is effective for
accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of
errors made in fiscal years beginning after June 1, 2005.
The Company does not believe the adoption of FASB
Statement 154 will have a material effect on its financial
position or results of operations.
Statement
of Financial Accounting Standards No. 151, Inventory
Costs
In November 2004, the FASB issued SFAS 151, Inventory
Costs, An Amendment of Accounting Research
Bulletin No. 43, Chapter 4, which adopts
wording from the International Accounting Standards
Boards, or IASB, IAS 2 Inventories in an effort to
improve the comparability of cross-border financial reporting.
The new standard requires the Company to treat abnormal freight,
handling costs and wasted materials (spoilage) as current period
charges rather than as a portion of inventory cost.
Additionally, the standard clarifies that we should allocate
fixed production overhead based on the normal capacity of a
production facility. The statement is effective for the Company
beginning in fiscal 2007. The Company does not expect adoption
to have a material impact on its consolidated financial
statements.
Statement
of Financial Accounting Standards No. 123(R), Share-Based
Payment,
In December 2004, FASB published Statement No. 123 (revised
2004), Share-Based Payment
(FAS 123(R) or the Statement).
FAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee
stock options, be recognized in financial statements. That cost
will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) covers a wide
range of share-based compensation arrangements including stock
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
FAS 123(R) is a replacement of Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes
APB 25, and its related interpretive guidance.
F-12
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
This Statement will require entities to measure the cost of
employee services received in exchange for stock options based
on the grant-date fair value of the award, and to recognize the
cost over the period the employee is required to provide
services for the award. FAS 123(R) permits entities to use
any option-pricing model that meets the fair value objective in
the Statement. We will be required to apply FAS 123(R)
beginning in the first quarter of fiscal year 2007.
FAS 123(R) allows two methods for determining the effects
of the transition: the modified prospective transition method
and the modified retrospective method of transition. We have
adopted the modified prospective transition method beginning
April 1, 2006. The pro forma compensation costs presented
previously and in our prior filings have been calculated using a
Black-Scholes option pricing model and may not be indicative of
amounts which should be expected in future years.
In February 2006, the Companys Board of Directors approved
a plan to accelerate the vesting of
out-of-the-money,
unvested stock options previously granted to its employees,
officers and directors. The Company accelerated the vesting of
options to minimize the amount of compensation expense it would
otherwise recognize upon adoption of SFAS No. 123(R).
None of these options had intrinsic value on at the acceleration
date under APB 25. The Company does not expect the
remaining outstanding options to result in a significant charge
to compensation expense upon adoption of SFAS 123(R) under
the modified prospective application method. However, certain
outstanding options, that permit cashless exercise of the
options, and certain options classified as liabilities, could
result in a significant charge to compensation expense in future
periods, as those options will need to be marked to fair value
at each reporting period until settlement. Also, additional
options as granted to attract or retain new employees could
result in significant charge to compensation expense.
Notes payable consist of the following at March 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Mortgage note, monthly payments of
$2,938 plus interest through November 2017, 5 year fixed
rate interest at 4.7% from May 2006 until April 2011 (rate at
March 31, 2005 4.3%)
|
|
$
|
415,422
|
|
|
$
|
482,467
|
|
Note payable, monthly payments of
$534 plus fixed rate interest through August 2008 (rate until
August 2008 4.4%)
|
|
|
15,477
|
|
|
|
23,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,899
|
|
|
|
505,871
|
|
Less current maturities
|
|
|
41,658
|
|
|
|
44,606
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
389,241
|
|
|
$
|
461,265
|
|
|
|
|
|
|
|
|
|
|
Future approximate payments of long-term debt for the years
ended March 31, are as follows:
|
|
|
|
|
2007
|
|
$
|
42,000
|
|
2008
|
|
|
42,000
|
|
2009
|
|
|
38,000
|
|
2010
|
|
|
35,000
|
|
2011
|
|
|
35,000
|
|
Thereafter
|
|
|
239,000
|
|
|
|
|
|
|
|
|
$
|
431,000
|
|
|
|
|
|
|
In March 2005, the Company entered into a business loan
agreement with Venture Bank, pursuant to which it may borrow up
to $500,000 on a revolving basis. All amounts which the bank
advances to the Company are due in March 2006, unless the bank
renews the agreement. Amounts advanced to the Company
F-13
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
accrue interest at a variable rate of 1% in excess of the
published prime rate in the Wall Street Journal, with a minimum
rate of 6% per annum. The Company is obligated to pay
interest monthly on the outstanding principal balance. Advances
under this agreement are secured by substantially all of the
Companys assets. At March 31, 2006 and 2005, the
Company had no outstanding balances under the agreement.
Stock Options. The Company has outstanding an
aggregate of 1,888,327 options to purchase shares of common
stock granted to employees, directors, consultants, and
independent contractors under its various stock option plans.
The Company has outstanding 964,993 options to purchase shares
of common stock granted under the 1995, 1997 and 2002 option
plans. Options granted under these plans generally expire five
years from date of grant and vest at varying rates ranging up to
five years. There were no additional options granted under these
plans subsequent to March 31, 2006. The Company terminated
these plans, and no new options may be granted from these plans,
upon adoption on May 3, 2006 of the 2006 Stock and
Incentive Plan at a special meeting of the shareholders.
The Company has outstanding 923,334 options to purchase shares
of common stock granted from outside of the 1995, 1997 and 2002
plans, that expire up to ten years from date of grant and vest
at varying rates ranging up to five years.
The Company grants options at the discretion of the directors.
Options are exercisable at a price equal to or greater than the
fair market value of the Companys common stock at date of
grant. The plans generally provide for the exercise of options
during a limited period following termination of employment,
death or disability.
Stock option activity under these plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Balance at March 31, 2004
|
|
|
854,353
|
|
|
$
|
2.80
|
|
Granted
|
|
|
1,047,400
|
|
|
|
5.24
|
|
Exercised
|
|
|
(38,300
|
)
|
|
|
1.78
|
|
Cancelled
|
|
|
(142,594
|
)
|
|
|
7.16
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
1,720,859
|
|
|
|
3.96
|
|
Granted
|
|
|
330,000
|
|
|
|
3.20
|
|
Exercised
|
|
|
(33,666
|
)
|
|
|
1.36
|
|
Cancelled
|
|
|
(128,866
|
)
|
|
|
4.94
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
1,888,327
|
|
|
$
|
3.80
|
|
|
|
|
|
|
|
|
|
|
F-14
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information concerning currently
outstanding and exercisable options by price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
|
|
|
|
of Shares
|
|
|
Life in
|
|
|
Number
|
|
Price
|
|
Outstanding
|
|
|
Years
|
|
|
Exercisable
|
|
|
$
|
0.90
|
|
|
1,200
|
|
|
|
1.60
|
|
|
|
800
|
|
|
1.10
|
|
|
350,200
|
|
|
|
1.30
|
|
|
|
288,500
|
|
|
2.25
|
|
|
30,000
|
|
|
|
7.05
|
|
|
|
18,000
|
|
|
2.40
|
|
|
147,526
|
|
|
|
0.84
|
|
|
|
140,026
|
|
|
2.70
|
|
|
10,000
|
|
|
|
4.95
|
|
|
|
2,500
|
|
|
2.80
|
|
|
60,000
|
|
|
|
2.41
|
|
|
|
53,334
|
|
|
2.85
|
|
|
70,000
|
|
|
|
4.85
|
|
|
|
23,332
|
|
|
2.90
|
|
|
40,000
|
|
|
|
4.76
|
|
|
|
40,000
|
|
|
3.00
|
|
|
100,000
|
|
|
|
4.50
|
|
|
|
100,000
|
|
|
3.50
|
|
|
10,000
|
|
|
|
2.51
|
|
|
|
10,000
|
|
|
3.75
|
|
|
5,000
|
|
|
|
3.29
|
|
|
|
5,000
|
|
|
3.80
|
|
|
23,334
|
|
|
|
3.88
|
|
|
|
23,334
|
|
|
4.10
|
|
|
500
|
|
|
|
3.86
|
|
|
|
500
|
|
|
4.20
|
|
|
50,000
|
|
|
|
4.07
|
|
|
|
50,000
|
|
|
5.19
|
|
|
500,000
|
|
|
|
8.76
|
|
|
|
500,000
|
|
|
5.30
|
|
|
488,900
|
|
|
|
3.62
|
|
|
|
488,900
|
|
|
10.50
|
|
|
1,667
|
|
|
|
0.17
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,888,327
|
|
|
|
|
|
|
|
1,745,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March, 2006, the Company granted a one year extension to
certain option held by the former Chairman of the Board. As a
result of this modification of terms, the fair value of the
underlying options was remeasured using the Black-Scholes
option-pricing model and additional compensation expense of
approximately $105,000 was recorded.
Warrants. As a result of the Companys
suspension of the exercise of the 706,218 warrants originally
issued in July 2002, in April 2005, the Company granted a like
number of new common stock purchase warrants to the holders of
the expired warrants. The new warrants will be exercisable at
$2.00 per share for 90 days after the effective date
of this registration statement covering the shares underlying
these warrants. As of March 31, 2006, the Securities and
Exchange Commission had not declared this registration statement
effective. In April 2005, the Company recognized a liability and
a charge to equity of approximately $1.4 million associated
with the grant of these new warrants. The Company determined the
fair value of these warrants using the Black-Scholes
option-pricing model. The Company has since reduced the reported
liability by approximately $707,000 due to the decrease in the
fair value of these warrants from their date of issuance through
March 31, 2006, which is reflected as warrant benefit in
the 2006 statement of operations. The Company will continue
to remeasure the value of this liability in relation to its fair
value and adjust accordingly until such time as the warrants are
exercised or expire.
In connection with the Companys April 2005 private
placement, as of May 31, 2006, the Company issued 1,180,928
warrants to purchase shares of common stock and registered the
public resale of the underlying shares for the security holders.
The warrants are exercisable for five years at an exercise price
of $4.75.
F-15
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As part of a consulting agreement with CCRI Corporation, the
Company issued a warrant to purchase 50,000 shares of
common stock at a price of $3.00 per share on April 1,
2003, and an additional warrant to purchase 50,000 shares
at a price of $5.00 on November 2, 2003. At March 31,
2006, all of these warrants were outstanding and expire five
years from date of issue.
Other Comprehensive Loss. Other comprehensive
loss consists of accumulated translation adjustment, and
accumulated additional pension liability as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
Translation
|
|
|
Additional Pension
|
|
|
|
|
|
|
Adjustment
|
|
|
Liability
|
|
|
Total
|
|
|
Balance at March 31, 2004
|
|
$
|
(215,078
|
)
|
|
$
|
(100,495
|
)
|
|
$
|
(315,573
|
)
|
Translation adjustment
|
|
|
150,505
|
|
|
|
|
|
|
|
150,505
|
|
Additional pension liability
|
|
|
|
|
|
|
34,711
|
|
|
|
34,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
$
|
(64,573
|
)
|
|
$
|
(65,784
|
)
|
|
$
|
(130,357
|
)
|
Translation adjustment
|
|
|
(206,356
|
)
|
|
|
|
|
|
|
(206,356
|
)
|
Additional pension liability
|
|
|
|
|
|
|
(123,302
|
)
|
|
|
(123,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
$
|
(270,929
|
)
|
|
$
|
(189,086
|
)
|
|
$
|
(460,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Commitments
and Contingencies
|
Royalties. The Company has received an
absolute assignment of a patent relating to the Macroplastique
Implantation System from a British surgeon, in return for a
royalty for each unit sold during the life of the patent. The
aggregate amount of royalty expense recognized by the Company
pursuant to such royalty agreement during the fiscal years ended
March 31, 2006 and 2005 was $14,091 and $18,042,
respectively.
Under the terms of an agreement with former officers and
directors of the Company, the Company pays royalties equal to
between three percent and five percent of the net sales of
certain products, subject to a specified monthly minimum of
$4,500. The royalties payable under this agreement will continue
until the patent referenced in the agreement expires in 2010.
Total expense recognized under the agreement was $154,287 and
$181,598 for the fiscal years ended March 31, 2006 and
2005, respectively.
In 1992, the Company agreed to settle alleged patent
infringement claims by Collagen Corporation (now Inamed
Corporation). Under the settlement agreement, the Company pays
Collagen a royalty of 5% of net sales in the U.S. of
Macroplastique products with a minimum of $50,000 per year.
The agreement is through May 1, 2006.
In April 2005, the Company entered into an exclusive
manufacturing and distribution agreement with CystoMedix for the
Urgent PC product. The Company paid CystoMedix an initial
royalty payment of $225,000 and paid an additional $250,000 in
12 monthly installments of $20,833 through April 2006. The
Company will also pay CystoMedix a 7% royalty on product sales.
However, the 7% royalty is first offset against the monthly
royalty installments.
Option for Asset Acquisition. CystoMedix has
granted the Company an exclusive option to acquire
CystoMedixs assets. The option price is $3,485,000,
reduced by up to $50,000 of liabilities assumed by the Company.
However, the $3,485,000 amount used to compute the option price
will increase at a rate of 10% per year after April 2007.
The option price is payable in shares of the Companys
common stock valued at the average of the closing bid price of
the Companys shares for the 20 trading days prior to its
exercise of the option. The Company may exercise the option
between January 2006 and June 2008. If the Company exercises the
option, the Company will also assume up to $1.4 million of
bridge loan advances made to CystoMedix by its Chairman. The
Company would repay up to $1.1 million of the bridge loan
advances at closing and would issue its common stock for the
balance of the bridge loan based on the above option price. The
Company also
F-16
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
has certain rights of first refusal to acquire CystoMedixs
assets in the event CystoMedix receives a third party offer in
advance of any exercise of the Companys option.
Purchase Requirements. The Company has agreed
to purchase its entire requirement of I-Stop products from CL
Medical. Under the agreements, the Company is required to
purchase a minimum of $630,000 of units in the first
12-month
period following January 1, 2006, increasing to
$2.6 million of units in the fifth year of the agreement
for an aggregate commitment of approximately $6.7 million
of units over the five-year period, subject to periodic
adjustment based on the value of the euro.
Operating Lease Commitments. The Company
leases office, warehouse, and production space under three
operating leases and leases various automobiles for its European
employees. At March 31, 2006, approximate minimum lease
payments under noncancelable operating leases with an initial
term in excess of one year for the ensuing years ending
March 31 are as follows:
|
|
|
|
|
2007
|
|
$
|
328,000
|
|
2008
|
|
|
217,000
|
|
2009
|
|
|
178,000
|
|
2010
|
|
|
144,000
|
|
2011
|
|
|
142,000
|
|
Thereafter
|
|
|
437,000
|
|
|
|
|
|
|
|
|
$
|
1,446,000
|
|
|
|
|
|
|
Total rent expense paid for operating leases was $355,340 and
$386,614 in fiscal 2006 and 2005, respectively.
Employment Agreements. The Company has entered
into employment agreements with certain officers, the terms of
which, among other things, specify a base salary subject to
annual adjustment by mutual agreement of the parties, and a
severance payment to the employee upon employment termination
without cause. The Company provides for various severance
amounts payable under the agreements after employment
termination. Contemporaneously with the execution of their
employment agreement, some of the officers executed an Employee
Confidentiality, Inventions, Non-Solicitation, and Non-Compete
Agreement. This agreement prohibits the employee from disclosing
confidential information, requires the employee to assign to the
Company without charge all intellectual property relating to the
Companys business which is created or conceived during the
term of employment, prohibits the employee from encouraging
employees to leave the employment of the Company for any reason
and prohibits competition with the Company during the term of
employment and for a specified term thereafter.
Product Liability. The medical device industry
is subject to substantial litigation. As a manufacturer of a
long-term implantable device, we face an inherent risk of
liability for claims alleging adverse effects to the patient. We
currently carry $2 million of worldwide product liability
insurance, plus another policy specific to the United Kingdom
only. There can be no assurance, however, that our existing
insurance coverage limits are adequate to protect us from any
liabilities we might incur.
The Company sponsors various plans for eligible employees in the
United States, the United Kingdom (UK), and The Netherlands. The
Companys retirement savings plan in the United States
conforms to Section 401(k) of the Internal Revenue Code and
participation is available to substantially all employees. The
Company may also make discretionary contributions ratably to all
eligible employees. The Companys contributions in fiscal
2006 and 2005 in the United States were made in the form of
Company common stock and became fully vested when made. The
total contribution expense associated with these plans in the
United States was $44,407 and $32,481 for the fiscal years ended
March 31, 2006 and 2005, respectively.
F-17
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys international subsidiaries have defined
benefit retirement plans for eligible employees. These plans
provide benefits based on the employees years of service
and compensation during the years immediately preceding
retirement, termination, disability, or death, as defined in the
plans. The UK subsidiarys defined benefit plan was frozen
on December 31, 2004. On March 10, 2005, the UK
subsidiary established a defined contribution plan. The Dutch
defined benefit retirement plan was closed for new participants
as of April 1, 2005. On April 1, 2005, the Dutch
subsidiary established a defined contribution plan for new
employees. The total contribution expense associated with the
defined contribution plans in the The Netherlands and the United
Kingdom was $46,079 for the fiscal year ended March 31,
2006.
The cost for the Companys defined benefit retirement plans
in The Netherlands and United Kingdom include the following
components for the years ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Gross service cost, net of
employee contribution
|
|
$
|
170,319
|
|
|
$
|
141,745
|
|
Interest cost
|
|
|
99,773
|
|
|
|
89,031
|
|
Management cost
|
|
|
23,112
|
|
|
|
|
|
Expected return on assets
|
|
|
(57,730
|
)
|
|
|
(56,001
|
)
|
Amortization
|
|
|
34,698
|
|
|
|
56,394
|
|
|
|
|
|
|
|
|
|
|
Net periodic retirement cost
|
|
$
|
270,172
|
|
|
$
|
231,169
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the change in benefit obligation and
the change in plan assets for the years ended March 31,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Projected benefit obligation,
beginning of year
|
|
$
|
2,062,036
|
|
|
$
|
1,503,534
|
|
Service cost
|
|
|
170,319
|
|
|
|
141,745
|
|
Interest cost
|
|
|
99,773
|
|
|
|
89,031
|
|
Other
|
|
|
11,486
|
|
|
|
(11,759
|
)
|
Actuarial result
|
|
|
278,123
|
|
|
|
254,618
|
|
Foreign currency translation
|
|
|
(145,785
|
)
|
|
|
84,867
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end
of year
|
|
$
|
2,475,952
|
|
|
$
|
2,062,036
|
|
|
|
|
|
|
|
|
|
|
Plan assets, beginning of year
|
|
$
|
1,246,402
|
|
|
$
|
998,620
|
|
Contributions to plan
|
|
|
201,184
|
|
|
|
210,124
|
|
Benefits paid
|
|
|
|
|
|
|
(9,415
|
)
|
Management cost
|
|
|
(23,112
|
)
|
|
|
|
|
Actual return on assets
|
|
|
70,681
|
|
|
|
(3,588
|
)
|
Foreign currency translation
|
|
|
(88,838
|
)
|
|
|
50,661
|
|
|
|
|
|
|
|
|
|
|
Plan assets, end of year
|
|
$
|
1,406,317
|
|
|
$
|
1,246,402
|
|
|
|
|
|
|
|
|
|
|
F-18
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The funded status of the Companys pension retirement plans
at March 31, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Funded status
|
|
$
|
(1,069,635
|
)
|
|
$
|
(815,634
|
)
|
Unrecognized net loss
|
|
|
824,876
|
|
|
|
638,579
|
|
Minimum pension liability
|
|
|
(228,406
|
)
|
|
|
(126,726
|
)
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$
|
(473,165
|
)
|
|
$
|
(303,781
|
)
|
|
|
|
|
|
|
|
|
|
Major assumptions used in the above calculations include:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
4.25-5.00%
|
|
|
|
4.50-5.50%
|
|
Expected return on assets
|
|
|
4.00-5.00%
|
|
|
|
4.00-5.00%
|
|
Expected rate of increase in
future compensation
general
|
|
|
3%
|
|
|
|
3%
|
|
individual
|
|
|
0%-3%
|
|
|
|
0%-3%
|
|
The components of income tax expense (benefit) for the years
ended March 31, 2006 and 2005, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Income tax provision:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
U.S. and state
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
(36,744
|
)
|
|
|
79,585
|
|
Deferred:
|
|
|
|
|
|
|
|
|
U.S. and state
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(10,129
|
)
|
|
|
11,918
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(46,873
|
)
|
|
$
|
91,503
|
|
|
|
|
|
|
|
|
|
|
Effective tax expense (benefit) differs from statutory federal
income tax expense (benefit) for the year ended March 31,
2006 and 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Statutory federal income tax
benefit
|
|
$
|
(1,560,459
|
)
|
|
$
|
(589,820
|
)
|
State tax benefit
|
|
|
26,822
|
|
|
|
|
|
Valuation allowance increase
|
|
|
1,437,790
|
|
|
|
792,685
|
|
UK temporary differences not
previously tax effected
|
|
|
|
|
|
|
(109,983
|
)
|
Other
|
|
|
48,974
|
|
|
|
(1,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(46,873
|
)
|
|
$
|
91,503
|
|
|
|
|
|
|
|
|
|
|
F-19
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred taxes as of March 31, 2006 and 2005 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension liability
|
|
$
|
93,368
|
|
|
$
|
110,405
|
|
Other reserves and accruals
|
|
|
39,201
|
|
|
|
70,619
|
|
Deferred profit on intercompany
sales
|
|
|
99,350
|
|
|
|
186,166
|
|
Net operating loss carryforwards
|
|
|
5,599,391
|
|
|
|
4,018,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,831,310
|
|
|
|
4,385,234
|
|
Less valuation allowance
|
|
|
(5,719,949
|
)
|
|
|
(4,282,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,361
|
|
|
$
|
103,075
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006, the Company had U.S. net operating
loss carryforwards (NOL) of approximately $15,423,000 for
U.S. income tax purposes, which expire in 2013 through
2024, and NOLs in the U.K. of $212,000, which can be
carried forward indefinitely. U.S. net operating loss
carryforwards cannot be used to offset taxable income in foreign
jurisdictions. In addition, U.S. tax rules impose
limitations on the use of net operating losses following certain
changes in ownership. Such a change in ownership may limit the
amount of these benefits that would be available to offset
future taxable income each year, starting with the year of
ownership change.
A valuation allowance is provided when it is more likely than
not a portion of the deferred tax assets will not be realized.
The Company has established a valuation allowance for U.S. and
certain foreign deferred tax assets due to the uncertainty that
enough income will be generated in those taxing jurisdictions to
utilize the assets. Therefore, the Company has not reflected any
benefit of such net operating loss carryforwards in the
accompanying financial statements. The deferred tax asset
increased by $1,447,000 and $770,000, respectively in fiscal
2006 and 2005. The related valuation allowance increased by
$1,438,000 and $791,000, respectively, in fiscal 2006 and 2005.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the Act). The Act creates a
temporary incentive for the company to repatriate earnings
accumulated outside the U.S. by allowing the company to
reduce its taxable income by 85 percent of certain eligible
dividends received from
non-U.S. subsidiaries
by the end of the companys fiscal year ended
March 31, 2006. In order to benefit from this incentive,
the company must reinvest the qualifying dividends in the
U.S. under a domestic reinvestment plan approved by the
chief executive officer and board of directors. During the year,
the company repatriated approximately $926,000 from its foreign
subsidiaries pursuant to the Act.
|
|
6.
|
Business
Segment Information
|
The Company sells proprietary products for the treatment of
voiding dysfunctions. Its current primary product is
Macroplastique®,
a soft tissue bulking material used for the treatment of urinary
incontinence and vesicoureteral reflux. In addition, the Company
markets its soft tissue bulking material for additional
indications, including the treatment of vocal cord
rehabilitation, fecal incontinence and soft tissue facial
augmentation. At this time, all sales for the tissue bulking
agent products are outside the United States. The Macroplastique
product line accounted for 67% and 76%, respectively, of total
net sales during fiscal 2006 and 2005.
The U.S. Food and Drug Administration (FDA) 510(k)
premarket clearance of the Companys
I-Stoptm
polypropylene, tension-free, mid-urethral sling for the
treatment of female urinary incontinence was received in August
2005. The Company distributes this product in the United States
and the United Kingdom. In October 2005, the Company received
U.S. FDA 510(k) premarket clearance of its
Urgent®
PC
F-20
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Neuromodulation System, a minimally invasive nerve stimulation
device designed for office-based treatment of overactive bladder
symptoms of urge incontinence, urinary urgency and urinary
frequency. The Company started selling the Urgent PC device in
November 2005 in the United States, and in December 2005 in
Europe and Canada. The Urgent PC is also indicated for the
treatment of fecal incontinence outside the United States. In
addition, the Company is a distributor of specialized wound care
products in The Netherlands and United Kingdom. Sales for these
product lines represented, in the aggregate, 14% and 18%,
respectively, of the total net sales in fiscal 2006 and 2005.
Based upon the above, the Company operates in only one
reportable segment consisting of medical products primarily for
the urology market.
Information regarding operations in different geographies for
the years ended March 31, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
United
|
|
|
The
|
|
|
United
|
|
|
and
|
|
|
|
|
|
|
States
|
|
|
Netherlands
|
|
|
Kingdom
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to customers
|
|
$
|
94,755
|
|
|
$
|
4,830,203
|
|
|
$
|
1,711,586
|
|
|
$
|
(493,932
|
)
|
|
$
|
6,142,612
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(46,873
|
)
|
|
|
|
|
|
|
|
|
|
|
(46,873
|
)
|
Net income (loss)
|
|
|
(4,572,337
|
)
|
|
|
(99,012
|
)
|
|
|
(107,828
|
)
|
|
|
236,464
|
|
|
|
(4,542,713
|
)
|
Long-lived assets at
March 31, 2006
|
|
|
767,984
|
|
|
|
717,692
|
|
|
|
5,366
|
|
|
|
|
|
|
|
1,491,042
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to customers
|
|
$
|
|
|
|
$
|
5,612,250
|
|
|
$
|
1,703,365
|
|
|
$
|
(657,889
|
)
|
|
$
|
6,657,726
|
|
Income tax expense
|
|
|
|
|
|
|
91,503
|
|
|
|
|
|
|
|
|
|
|
|
91,503
|
|
Net income (loss)
|
|
|
(1,855,416
|
)
|
|
|
153,977
|
|
|
|
21,990
|
|
|
|
(55,316
|
)
|
|
|
(1,734,765
|
)
|
Long-lived assets at
March 31, 2005
|
|
|
277,780
|
|
|
|
791,121
|
|
|
|
10,452
|
|
|
|
|
|
|
|
1,079,353
|
|
The Companys future liquidity and capital requirements
will depend on numerous factors, including among other things,
the timing and cost of obtaining FDA approval for Macroplastique
and expanding the sales, marketing and distribution capabilities
in the U.S. market. The Company will need to raise
additional debt or equity financing to continue funding for
product development and continued expansion of its sales and
marketing activities, and ultimately, will need to achieve
profitability and generate positive cash flows from operations.
As such, the Company is exploring opportunities to raise
additional capital in fiscal 2007, but there can be no guarantee
that it will be successful. Aside from the recently established
credit lines indicated below, the Company currently has no
committed resources of, or other arrangements with respect to,
additional financing. In the event that such required financing
is not immediately available, management is prepared to curtail
planned product development activities and other expenditures to
ensure adequate working capital is available throughout fiscal
2007.
In May 2006 the Company entered into a business loan agreement
with Venture Bank. The agreement provides for a credit line of
up to $1 million secured by the assets of the Company. The
Company may borrow up 50% of the value of the inventory on hand
in the U.S. and 75% of the U.S. accounts receivable value;
provided however, no amount can be borrowed if the consolidated
equity declines below $0.5 million. The
F-21
UROPLASTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
maximum $1 million can only be borrowed if the consolidated
equity is not less than $1 million. For consolidated equity
in excess of $0.5 million but less than $1 million,
the maximum that can be borrowed is $250,000. Interest on the
loan is charged at the rate of 1 percentage point over the
prime rate; provided however the minimum interest rate charged
may not be less than 7% per annum.
In June 2006, the Company also entered into a $100,000
3-year, term
loan agreement with Venture Bank, at an interest rate of
8.25% per annum. In addition, Uroplasty BV, one of the
Companys subsidiaries, entered into an arrangement with
Rabobank of The Netherlands for a 200,000 (approximately
$258,500) credit line.
F-22
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
March 31, 2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,394,306
|
|
|
$
|
1,563,433
|
|
Short-term investments
|
|
|
|
|
|
|
1,137,647
|
|
Accounts receivable, net
|
|
|
936,816
|
|
|
|
716,587
|
|
Income tax receivable
|
|
|
170,290
|
|
|
|
270,934
|
|
Inventories
|
|
|
731,663
|
|
|
|
757,062
|
|
Other
|
|
|
415,107
|
|
|
|
353,178
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,648,182
|
|
|
|
4,798,841
|
|
Property, plant, and equipment, net
|
|
|
1,445,778
|
|
|
|
1,079,438
|
|
Intangible assets, net
|
|
|
385,067
|
|
|
|
411,604
|
|
Deferred tax assets
|
|
|
139,505
|
|
|
|
111,361
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,618,532
|
|
|
$
|
6,401,244
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
F-23
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities
long-term debt
|
|
$
|
43,998
|
|
|
$
|
41,658
|
|
Current maturities
deferred rent
|
|
|
35,000
|
|
|
|
|
|
Notes payable
|
|
|
185,426
|
|
|
|
|
|
Accounts payable
|
|
|
552,704
|
|
|
|
506,793
|
|
Accrued liabilities
|
|
|
632,197
|
|
|
|
917,981
|
|
Warrant liability
|
|
|
337,624
|
|
|
|
665,356
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,786,949
|
|
|
|
2,131,788
|
|
Long-term debt less
current maturities
|
|
|
400,101
|
|
|
|
389,241
|
|
Deferred rent less
current maturities
|
|
|
239,433
|
|
|
|
|
|
Accrued pension liability
|
|
|
573,267
|
|
|
|
473,165
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,999,750
|
|
|
|
2,994,194
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock $.01 par value;
20,000,000 shares authorized, 6,965,206 and
6,937,786 shares issued and outstanding at June 30 and
March 31, 2006, respectively
|
|
|
69,652
|
|
|
|
69,378
|
|
Additional paid-in capital
|
|
|
15,199,298
|
|
|
|
14,831,787
|
|
Accumulated deficit
|
|
|
(12,275,339
|
)
|
|
|
(11,034,100
|
)
|
Accumulated other comprehensive
loss
|
|
|
(374,829
|
)
|
|
|
(460,015
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,618,782
|
|
|
|
3,407,050
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
5,618,532
|
|
|
$
|
6,401,244
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
F-24
UROPLASTY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
1,764,210
|
|
|
$
|
1,645,653
|
|
Cost of goods sold
|
|
|
555,516
|
|
|
|
420,828
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,208,694
|
|
|
|
1,224,825
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
General and administrative
|
|
|
884,109
|
|
|
|
690,564
|
|
Research and development
|
|
|
674,954
|
|
|
|
630,598
|
|
Selling and marketing
|
|
|
1,232,587
|
|
|
|
664,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,791,650
|
|
|
|
1,985,195
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,582,956
|
)
|
|
|
(760,370
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
Interest income
|
|
|
19,507
|
|
|
|
27,380
|
|
Interest expense
|
|
|
(5,982
|
)
|
|
|
(4,809
|
)
|
Warrant benefit (expense)
|
|
|
327,732
|
|
|
|
(686,295
|
)
|
Foreign currency exchange gain
(loss)
|
|
|
26,411
|
|
|
|
(1,199
|
)
|
Other
|
|
|
4,800
|
|
|
|
|
|
|
|
|
372,468
|
|
|
|
(664,923
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,210,488
|
)
|
|
|
(1,425,293
|
)
|
Income tax expense
|
|
|
30,751
|
|
|
|
37,020
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,241,239
|
)
|
|
$
|
(1,462,313
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
6,952,167
|
|
|
|
6,351,245
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
F-25