Attached files
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As filed with the Securities and Exchange Commission on January 31, 2011
File No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAMBRIDGE HEART, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 3845 | 13-3679946 | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
| 100 Ames Pond Drive Tewksbury, Massachusetts 01786 (978) 654-7600 |
Ali Haghighi-Mood President and Chief Executive Officer 100 Ames Pond Drive Tewksbury, Massachusetts 01786 (978) 654-7600 | |
| (Address, including zip code and telephone number, including area code, of registrant’s principal executive offices) |
(Name, address, including zip code and telephone number, including area code, of agent for service) |
Copies to:
Michelle L. Basil, Esq.
Nutter McClennen & Fish, LLP
155 Seaport Boulevard
Boston, MA 02210
(617) 439-2000
Approximate date of commencement of proposed sale to public: From time to time after the effective date of this registration statement.
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: ¨
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to be Registered |
Amount to be Registered(1) |
Proposed Maximum Offering Price Per Share(2) |
Proposed Maximum Aggregate Offering Price(2)(3) |
Amount of Registration Fee(3) | ||||
| Common Stock, $0.001 par value per share |
14,500,000 | $0.26 | $3,770,000 | $437.70 | ||||
| Common Stock, $0.001 par value per share underlying warrants |
15,660,000 | $0.26 | $4,071,600 | $472.71 | ||||
| Total |
30,160,000 | $7,841,600 | $910.41 | |||||
| (1) | In the event of a stock split, reverse stock split, stock dividend or similar transaction involving our common stock, the number of shares registered shall automatically be adjusted to cover the additional shares of stock issuable pursuant to Rule 416 under the Securities Act. |
| (2) | Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act and based upon the average of the high and low prices as reported on the OTC Bulletin Board on January 26, 2011, which was $0.26. |
| (3) | Calculated pursuant to Rule 457(c) based on an estimate of the proposed maximum aggregate offering price. |
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 Commission acting pursuant to said Section 8(a) may determine.
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The information in this prospectus is not complete and may be changed. The selling stockholders named in this prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders named in this prospectus are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to completion, dated January 31, 2011
CAMBRIDGE HEART, INC.
30,160,000 SHARES OF COMMON STOCK
This prospectus relates to resale by the selling stockholders named herein of up to 30,160,000 shares of our common stock, consisting of (i) 14,500,000 shares of our currently outstanding common stock that were issued in a private placement that we completed in December 2010, (ii) 14,500,000 shares of our common stock currently issuable upon the exercise of warrants that were issued in the December 2010 private placement, and (iii) 1,160,000 shares of our common stock currently issuable upon the exercise of warrants that were issued to the selling agent in connection with the December 2010 private placement. We are not selling any shares of common stock in this offering and, therefore, will not receive any proceeds from this offering. We will, however, receive the exercise price of the warrants if and when these warrants are exercised by the selling stockholders. We will bear all of the expenses and fees incurred in registering the shares offered by this prospectus.
Our common stock is traded on the OTC Bulletin Board under the symbol “CAMH.” The last reported sale price for our common stock on the OTC Bulletin Board on January 26, 2011 was $0.25 per share. You are urged to obtain current market quotations for our common stock.
The shares included in this prospectus may be sold by the selling stockholders from time to time, in the open market, in privately negotiated transactions, in an underwritten offering, or a combination of methods, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The selling stockholders may engage brokers or dealers who may receive commissions or discounts from the selling stockholders. Any broker-dealer acquiring the common stock from the selling stockholders may sell these securities in normal market making activities, through other brokers on a principal or agency basis, in negotiated transactions, to its customers or through a combination of methods. See “Plan of Distribution” beginning on page 64.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 3 for a discussion of the risks associated with our business.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2011.
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Our executive offices are located at 100 Ames Pond Road, Tewksbury, Massachusetts, 01876, our telephone number is (978) 654-7600 and our Internet address is www.cambridgeheart.com. The information on our Internet website is not incorporated by reference in this prospectus. Unless the context otherwise requires references in this prospectus to “Cambridge Heart,” “we,” “us,” and “our” refer to Cambridge Heart, Inc.
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.
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The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and the notes to the financial statements included in this prospectus.
Overview
We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing a key problem in cardiac diagnosis—the identification of those at risk of sudden cardiac arrest. Our products incorporate our proprietary technology for the measurement of Microvolt T-Wave Alternans, which we refer to as MTWA, and were the first diagnostic tools cleared by the U.S. Food and Drug Administration to non-invasively measure Microvolt levels of T-Wave Alternans in order to predict the risk of sudden cardiac arrest. MTWA is an extremely subtle beat-to-beat fluctuation in the t-wave segment of a patient’s electrocardiogram. Our technology can detect these variations down to one millionth of a volt. Our MTWA Test is conducted by elevating the patient’s heart rate through exercise, pharmacologic agents, or pacing with electrical pulses. Our proprietary product in conjunction with our proprietary sensors, when placed on the patient’s chest, can acquire and analyze the patient’s electrocardiogram for MTWA.
Published clinical data in a broad range of patients with heart disease has shown that patients with symptoms of, or at risk of, life threatening arrhythmias who test positive for MTWA are at an increased risk for subsequent sudden cardiac events including sudden death, while those who test negative are at minimal risk. Sudden cardiac arrest accounts for approximately one-third of all cardiac deaths, or 300,000 to 400,000 deaths, in the U.S. each year, and is the leading cause of death in people over the age of 45.
All of our products, including our first generation HearTwave System and second generation HearTwave II Systems, CH 2000 Cardiac Stress Test System, Micro-V Alternans Sensors and our MTWA OEM (Original Equipment Manufacturer) Module, have received 510(k) clearance from the U.S. Food and Drug Administration for sale in the U.S. They have also received the CE mark for sale in Europe, which certifies that a product has met European Union consumer, health and environmental requirements. Our first generation HearTwave System, CH 2000 Cardiac Stress Test System and the HearTwave II System have been approved for sale by the Japanese Ministry of Health Labor and Welfare. Our 510(k) clearance allows our MTWA Test to be used to test anyone with known, suspected, or at risk of ventricular tachyarrhythmia and/or sudden cardiac arrest, and allows the claim that our MTWA Test is predictive of those events.
In March 2006, the Centers for Medicare and Medicaid Services issued a National Coverage Determination that allows for reimbursement to healthcare providers for MTWA testing of patients at risk of sudden cardiac death only when a MTWA Test is done using the Analytic Spectral Method, which is our patented and proprietary method of analysis. In July 2010, the National Correct Coding Initiative changed the edits associated with MTWA testing, allowing our MTWA Test to be performed on the same day as several stress procedures. As a result, effective July 1, 2010, CMS allows full reimbursement for both an MTWA Test and a stress test when both tests are performed during the same patient visit. The CMS update removes a previous restriction that substantially limited the reimbursement amount when a patient underwent a MTWA Test on the same day as the patient underwent a standard cardiac stress test, echocardiography stress test, nuclear cardiac stress test, or pulmonary stress test.
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We were incorporated in Delaware in 1990. Our executive offices are located at 100 Ames Pond Road, Tewksbury, Massachusetts, 01876, our telephone number is (978) 654-7600. We maintain a website with the address www.cambridgeheart.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this prospectus.
The Offering
This offering involves 30,160,000 shares of our common stock issued or issuable to the selling stockholders, consisting of the following:
| • | 14,500,000 shares of our common stock and 14,500,000 shares of our common stock issuable upon exercise of warrants to purchase shares of our common stock that we issued in a private placement in December 2010 to 49 investors. |
| • | 1,160,000 shares of our common stock issuable upon exercise of warrants to purchase shares of our common stock that we issued to Dawson James Securities, Inc., which served as placement agent in connection with our December 2010 private placement. |
| Shares of common stock offered by the selling stockholders: |
30,160,000 shares | |
| Shares of common stock to be outstanding after this offering: |
124,260,153* | |
| Use of proceeds |
Cambridge Heart will not receive any proceeds from the sale of shares in this offering. | |
| OTC Bulletin Board Symbol |
CAMH | |
| Risk Factors |
See page 3 for a discussion of the risks and uncertainties facing our business. | |
| * | The number of shares of our common stock to be outstanding after this offering (1) is based on the number of shares outstanding as of January 15, 2011, (2) assumes the conversion of all outstanding shares of preferred stock as of such date, which are convertible into an aggregate of 26,765,968 shares of common stock, (3) excludes the 15,660,000 shares issuable upon exercise of the warrants to purchase common stock issued to investors in connection with the Company’s December 2010 private placement, and (4) excludes 9,919,545 shares issuable upon the exercise of outstanding options. |
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An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be an all-inclusive list of all of the potential risks relating to an investment in our securities. If any of the following or other risks actually occur, our business, financial condition or operating results and the trading price or value of our securities could be materially adversely affected. These factors include, without limitation, those set forth below and elsewhere in this prospectus.
Risks Related to our Operations
We likely will need additional financing to fund our operations and may not be able to raise additional funds on terms acceptable to us, if at all.
We have incurred substantial operating losses through September 30, 2010 and may never generate substantial revenue or achieve profitability on a quarterly or annual basis. We have financed our operating losses through the public and private sale of shares of our common stock and preferred stock. We do not expect to generate sufficient cash from our business to fund our operations without having to raise additional capital through the sale of debt or equity securities.
We believe that our existing resources and currently projected financial results are sufficient to fund our operations through December 31, 2011. If we encounter material deviations from our plans including, but not limited to, any delays in marketing our MTWA Module under our Development, Supply and Distribution Agreement with Cardiac Science Corporation, any lower than expected level of sales to Cardiac Science, or if we continue to experience lower than expected sales of our HearTwave II Systems, our ability to fund our operations will be negatively impacted. While the proceeds of our December 2010 private placement provided the Company with additional financing to fund the Company’s operations, the Company anticipates that it will need to raise additional capital in 2011.
In the current economic environment, financing for technology and medical device companies has become increasingly difficult to obtain. Any additional financing may not be available in the amount we need or on terms favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of the Company owned by our stockholders would be diluted. In addition, we may have to issue equity or debt securities that have rights, preferences and privileges senior to our existing securities, including our common stock.
If we cannot increase revenue significantly or obtain additional capital through equity or debt financings, we may not be able to continue as a going concern.
For the year ended December 31, 2009, our auditors included an explanatory paragraph in their audit opinion expressing uncertainty about the Company’s ability to continue as a going concern because of our recurring losses, inability to generate cash flows from operations, and liquidity uncertainty. If we are unable to generate adequate cash flow or obtain sufficient additional funding when needed, we may have to sell some or all of our assets, license potentially valuable technologies to third parties and/or cease some or all of our operations. This would have a material adverse effect on our operations and the market price of our common stock.
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In order to raise additional capital, we will be required to obtain stockholder approval to increase the number of shares authorized for issuance under our Certificate of Incorporation.
On an as-converted basis, the Company has 124,260,153 shares of common stock issued and outstanding, including 97,494,185 shares of common stock issued, 4,180,602 shares issuable upon conversion of the Series C-1 Convertible Preferred Stock and 22,585,366 shares issuable upon conversion of the Series D Convertible Preferred Stock. Additionally, the Company has reserved 15,660,000 shares of common stock for issuance upon exercise of outstanding warrants issued to investors in connection with our sale of common stock in December 2010 and has stock options outstanding to purchase up to an aggregate of 9,919,545 shares of common stock. Under the Company’s Certificate of Incorporation there are only 150,000,000 shares of common stock authorized. Consequently, the Company will be limited in its ability to issue additional common stock or debt or equity convertible into common stock without amending the Certificate of Incorporation, which would require the approval of the holders of 75% of the voting power of all shares of the Company’s capital stock, voting together as a class. If the stockholders do not approve such an amendment, we would not be able to raise capital through the sale of equity securities, which would have a material adverse effect on the Company’s ability to continue as a going concern.
We depend on our MTWA technology for a majority of our revenue, and if it does not achieve broad market acceptance, our ability to execute our business plan and achieve meaningful revenue will be limited.
We believe that our ability to succeed in the future will depend, in large part, upon the successful market acceptance of our MTWA technology. Market acceptance will depend upon our ability to demonstrate the diagnostic advantages and cost-effectiveness of this technology. The failure of our MTWA technology to achieve broad market acceptance, the failure of the market for our products to grow or to grow at the rate we anticipate, or a decline in the price of our products due to competitive pressures or a decline in the availability of reimbursement, would reduce our revenues and further limit our ability to succeed. This could have a material adverse effect on the market price of our common stock. We can give no assurance that we or any current or future strategic partner(s) will be able to successfully commercialize or achieve market acceptance of our MTWA technology or that our competitors will not develop competing technologies that are perceived to be superior to our technology.
The economic and financial market downturn and tightening of the credit markets has had and may continue to have an adverse impact on our business.
The deterioration of the economic conditions has had an adverse impact on our existing and target customers. These conditions, in turn, have a significant influence on customers’ buying decisions. Given that a significant part of our revenue comes from sales of capital equipment to small to medium sized cardiology practices with limited financial resources, the tightening of credit has and may continue to negatively affect our sales. If the economy continues to decline and credit continues to be difficult to obtain, customers may continue to delay or refrain from purchasing our equipment.
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A critical component of our strategy is to broaden our distribution channels through strategic alliances. If we are unable to establish sufficient distribution partnerships or if the timing is slower than expected, our business plan will be adversely impacted.
Our strategy is to broaden our distribution channels by establishing alliances with medical device partners and distributors with synergistic attributes. The widespread adoption of our technology may be dependent on establishing and maintaining these strategic relationships. Successfully establishing and managing such relationships may be difficult given the current environment. Furthermore, the financial terms of the relationships will have a direct impact on our operating results. Moreover, when, or if, such partnerships are established, we may have to contend with competing interests of our potential partners and/or distributors. In June 2009, we partnered with Cardiac Science to develop and market the MTWA Module, which will allow our MTWA Test using our proprietary Micro-V Alternans Sensors to be performed on Cardiac Science’s Q-Stress test platform. Cardiac Science will market the MTWA Module as an upgrade to its existing installed base of Q-Stress Systems and as an optional feature to new stress customers. However, there can be no assurance that the relationship with Cardiac Science will succeed in increasing sales or market acceptance of our MTWA Module. Furthermore, we cannot predict whether additional relationships are attainable at all, and, if so, whether they would be on terms favorable or acceptable to us.
Our ability to generate revenue from the sales of our MTWA Module is dependent upon the sales and marketing efforts of third party stress test manufacturers.
Under our agreement with Cardiac Science, we sell and deliver to Cardiac Science the MTWA Module and our Micro-V Alternans Sensors. Cardiac Science is reselling these products for use with their Q-Stress test platform through its direct sales force and through its network of distributors and sub-distributors. If Cardiac Science is unable to sell the MTWA Module and our Micro-V Alternans Sensors effectively or limits the amount of time and resources that it devotes to marketing these products, it could materially and adversely affect the results of our operations. Furthermore, if our distribution arrangement with Cardiac Science is unsuccessful, we may have to reconsider our sales and marketing strategy, which may also materially and adversely affect the sale of our products and our financial condition. In addition, we are unsure what effect, if any, the sales of our MTWA Module through Cardiac Science will have on our current direct selling efforts.
We face substantial competition in the market for cardiac diagnostic devices from substantially larger and better financed competition, which may result in others discovering, developing or commercializing competing products more successfully than we do.
Competition from competitors’ medical devices that diagnose cardiac disease is intense and likely to increase. Our success will depend on our ability to develop product enhancements and applications for technologies, as well as our ability to establish and maintain a market for our products. We compete with manufacturers of electrocardiogram stress tests, the conventional method of diagnosing ischemic heart disease, as well as with manufacturers of other invasive and non-invasive tests, including EP testing, electrocardiograms, Holter monitors, ultrasound tests and systems of measuring cardiac late potentials. GE Medical Systems has introduced an analysis system to measure t-wave alternans. GE Medical Systems has received concurrence from the FDA of its 510(k) allowing it to distribute the product in the United States. We believe if GE can secure the reimbursement for its MTWA methodology with Medicare it will pose a significant risk to the success of our business. See further detail under Competition in “Business”.
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In addition, many of our current as well as prospective competitors have substantially greater capital resources, name recognition, research and development, regulatory, manufacturing and marketing capabilities. Many of these competitors offer broad, well-established product lines and ancillary services not offered by us. Some of our competitors also enjoy long-term or preferential supply arrangements with physicians and hospitals which may act as a barrier to market entry.
Our quarterly revenue, operating results and profitability will vary from quarter to quarter, which may result in volatility in our stock price.
Our quarterly revenue and operating results have varied in the past and may continue to vary significantly from quarter to quarter. This may lead to volatility in our stock price. These fluctuations may be due to several factors relating to the sale of our products, including:
| • | the timing of our sales transactions of our MTWA products; |
| • | unpredictable sales cycles; |
| • | the timing of introduction and market acceptance of products or product enhancements by us or our competitors; |
| • | changes in our operating expenses; |
| • | product quality problems; and |
| • | personnel changes and fluctuations in economic and financial market conditions. |
We believe that period-to-period comparisons of our results of operations are not necessarily meaningful. There can be no assurance that future revenue and results of operations will not vary substantially. It is also possible that in future quarters our results of operations will be below the expectations of investors, analysts or our announced guidance, if any. In any such case, the price of our common stock could materially be affected adversely.
The results of future clinical studies may not support the usefulness of our technology.
We participate in clinical studies relating to our MTWA technology in order to more firmly establish the predictive value of such technologies. Any clinical study or trial which fails to demonstrate that the measurement of MTWA is at least comparable in accuracy to alternative diagnostic tests, or which otherwise calls into question the cost-effectiveness, efficacy or safety of our technology, would have a material adverse effect on our business, financial condition and results of operations.
We obtain critical components and sub-assemblies for the manufacture of our products from a limited group of suppliers, and if our suppliers fail to meet our requirements we may be unable to meet customer demand and our customer relationships would suffer.
We do not have long-term contracts with our suppliers. Our dependence on a single supplier or limited group of smaller suppliers for critical components and sub-assemblies exposes us to several risks, including:
| • | a potential for interruption, or inconsistency in the supply of components or sub-assemblies, leading to backorders and product shortages; |
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| • | a potential for inconsistent quality of components or sub-assemblies supplied, leading to reduced customer satisfaction or increased product costs and delays in shipments of our products to customers and distributors; and |
| • | inconsistent pricing. |
We can give no assurance that we would be able to identify and qualify additional suppliers of critical components and sub-assemblies in a timely manner. Further, a significant increase in the price of one or more key components or sub-assemblies included in our products could seriously harm our results of operations.
We may have difficulty responding to changing technology.
The medical device market is characterized by rapidly advancing technology. Our future success will depend, in large part, upon our ability to anticipate and keep pace with advancing technology and competitive innovations. However, we may not be successful in identifying, developing and marketing new products or enhancing our existing products. In addition, we can give no assurance that new products or alternative diagnostic techniques that will render our current or planned products obsolete or inferior will not be developed. Rapid technological development by competitors may result in our products becoming obsolete before we recover a significant portion of the research, development and commercialization expenses incurred with respect to such products.
We depend exclusively on third parties to support the commercialization of our products internationally.
We market our products internationally through independent distributors. These distributors also distribute competing products under certain circumstances. The loss of a significant international distributor could have a material adverse effect on our business if a new distributor, sales representative or other suitable sales organization cannot be found on a timely basis in the relevant geographic market. Because we rely on distributors for international sales, any revenues we receive in those territories will depend upon the efforts of our distributors. Furthermore, we cannot be sure that a distributor will market our products successfully or that the terms of any future distribution arrangements will be acceptable to us.
If economic conditions or slow market adoption of our MTWA technology cause us to reduce the selling price of our products, our gross margin and operating results will likely worsen.
The average selling prices of our products are subject to market conditions. Market conditions that may impact our selling prices include:
| • | changes in reimbursement policies of government and third-party payers; |
| • | physician practices and hospital budgetary constraints; |
| • | the introduction of competing products; |
| • | tightening of credit for customers seeking financing for their purchase of our equipment; and |
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| • | delays in purchasing decisions. |
If such external factors cause us to offer our products at lower prices and we are unable to mitigate the lower selling prices with lower cost of goods, our gross margins and operating results will likely decline.
Risks Related to the Market for Cardiac Diagnostic Equipment
If we are not able to both obtain and maintain adequate levels of third-party reimbursement for our products, it would have a material adverse affect on our business.
Our ability to successfully commercialize our products depends on our first obtaining, and then maintaining, adequate levels of third-party reimbursement for use of these products by our customers. The amount of reimbursement in the U.S. that is available for clinical use of the MTWA Test varies. In the U.S., the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payers will seek to deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payer, or is experimental, unnecessary or inappropriate.
Reimbursement rates for services covered by Medicare are determined by reference to the Medicare Physician Fee Schedule, and are calculated based on multiple components, including relative value units, conversion factor and geographical adjustment. The Medicare Physician Fee Schedule rates are updated annually and have resulted in negative updates since 2002. In November 2009, the Centers for Medicare and Medicaid Services, which we refer to as CMS, issued its final ruling on the Medicare Physician Fee Schedule effective January 1, 2010. This ruling set forth a reduction in relative value unit for nearly all cardiovascular services to be phased in over a four-year period. The final rule also included an additional 21% reduction in the conversion factor component of the reimbursement calculations. However, CMS temporarily maintained the conversion factor at the 2009 level until June 1, 2010. In July 2010, CMS issued a revised Medicare Physician Fee Schedule reflecting, among other things, a change in the conversion factor as a result of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which was signed into law on June 25, 2010. This legislation provided for a 2.2% increase to the 2010 Medicare Physician Fee Schedule, effective for dates of service June 1, 2010 through November 30, 2010, which sets the national average Medicare payment amount for a MTWA Test at $205.31. In November 2010, CMS published their final reimbursement rules for 2011, effective January 1, 2011, which would have resulted in a decrease in reimbursement rates by as much as 30%. However, in December 2010, Congress enacted legislation to sustain reimbursement at the 2010 level through December 2011. Effective January 1, 2011 through December 31, 2011, the national average Medicare payment amount for a MTWA Test is $200.
Any reduction in reimbursement, material change in indication or reversal of private payer coverage for our MTWA Test may affect the demand for, price of, or utilization of our HearTwave II System, MTWA Module or Micro-V Alternans Sensors, which may in turn have a material adverse effect on our business.
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We could be exposed to significant liability claims if we are unable to obtain insurance at acceptable costs and adequate levels or otherwise protect ourselves against potential product liability claims.
The testing, manufacture, marketing and sale of medical devices entail the inherent risk of liability claims or product recalls. Although we maintain product liability insurance in the U.S. and in other countries in which we conduct business, including clinical trials and product marketing and sales, such coverage may not be adequate. Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or product recall could inhibit or prevent the successful commercialization of our products, cause a significant financial burden on Cambridge Heart, or both, which in either case could have a material adverse effect on our business and financial condition.
Our ability to build a successful business depends on our ability to first obtain, and then maintain, patent protection for our products and technologies.
Our success will depend, in large part, on our ability to obtain patent protection for our products both in the U.S. and in other countries and then enforce these patents. However, the patent positions of medical device companies, including ours, are generally uncertain and involve complex legal and factual questions. We can give no assurance that patents will issue as a result of any patent applications we own or license or that, if patents do issue, the claims allowed will be sufficiently broad to protect our proprietary technologies. In addition, any issued patents we own or license may be challenged, invalidated or circumvented, and the rights granted under issued patents may not provide us with competitive advantages. We also rely on unpatented trade secrets to protect our proprietary technologies, and we can give no assurance that others will not independently develop or otherwise acquire substantially equivalent techniques, or otherwise gain access to our proprietary technologies, or disclose such technology or that we can ultimately protect meaningful rights to such unpatented proprietary technologies.
Any claim by others that we infringe their intellectual property rights, whether intentionally or otherwise, could materially and adversely affect our business.
Our success will depend, in part, on our ability to avoid infringing the intellectual property rights of others and/or breaching the licenses upon which our products and technologies are based. We have licensed significant technology and patents from third parties, including patents and technology relating to MTWA licensed from the Massachusetts Institute of Technology. Our licenses of patents and patent applications impose various commercialization, sublicensing, insurance, royalty and other obligations on our part. If we fail to comply with these requirements, licenses could convert from being exclusive to non-exclusive in nature or could terminate, either of which would adversely affect our business.
Any future litigation over intellectual property rights would likely involve significant expense on our part as well as distract our management from day-to-day business operations.
The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Litigation, which would likely result in substantial cost to us, may be necessary to enforce any patents issued or licensed to us and/or to determine the scope and validity of others’ proprietary rights. In particular, our competitors and other third parties hold issued patents and are assumed to hold pending patent applications, which may result in claims of infringement against us or other patent litigation. We also may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions, which could result in substantial cost.
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Risks Related to our Common Stock
Our outstanding preferred stock has rights, preference and privileges senior to our common stock.
At January 31, 2011, there are 5,000 shares of our Series C-1 Convertible Preferred Stock and 1,852 shares of our Series D Convertible Preferred Stock outstanding. The Series C-1 Convertible Preferred Stock and the Series D Convertible Preferred Stock have rights, preferences and privileges senior to our common stock. The holders of our Series C-1 Convertible Preferred Stock are entitled to receive, prior and in preference to the holders of common stock, the proceeds from any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. The holders of Series D Convertible Preferred Stock are entitled to receive, prior and in preference to the holders of common stock and the holders of any other series of preferred stock, the proceeds from any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. Additionally, the holders of the Series C-1 Convertible Preferred Stock are entitled to receive a cash dividend of $2.76 million (which is the total dividends deemed to be accrued as of December 23, 2009 when the Series C Convertible Preferred Stock was exchanged for shares of Series C-1 Convertible Preferred Stock) plus cumulative cash dividends at the rate of 8% of the Deemed Series C-1 Original Issue Price (which is $2,500 per share), when and if declared by the Board of Directors. See “Description of Capital Stock” for a more detailed discussion of these rights, preferences and privileges.
Our securities are quoted on the OTC Bulletin Board, which may limit the liquidity and price of our securities more than if our securities were quoted or listed on a national securities exchange.
Our securities are currently quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not listed on a national securities exchange. Quotation of our securities on the OTC Bulletin Board may limit the liquidity and price of our securities more than if our securities were quoted or listed on a national securities exchange. Some investors may perceive our securities to be less attractive because they are traded in the over-the-counter market. In addition, as an OTC Bulletin Board listed company, we do not attract the extensive analyst coverage that accompanies companies listed on a national securities exchange. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded in the over-the-counter market. These factors may have an adverse impact on the trading and price of our securities.
Our stock may be traded infrequently and in low volumes, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.
The shares of our common stock may trade infrequently and in low volumes on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares. As a result, investors could lose all or part of their investment.
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You may have difficulty selling our shares because they are deemed “penny stocks.”
Since our common stock is not listed on a national securities exchange, if the trading price of our common stock remains below $5.00 per share, trading in our common stock will be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended, that which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-national securities exchange equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares.
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This prospectus includes and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly under the heading “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements.
We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor the sale of common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these securities in any circumstances under which the offer or solicitation is unlawful.
We will not receive any proceeds from the sale of the common stock by the selling stockholders pursuant to this prospectus. All proceeds from the sale of the shares will be for the account of the selling stockholders.
We will, however, receive the proceeds from the exercise of the warrants held by the selling stockholders for the 15,660,000 shares underlying such warrants which are covered by this prospectus. If all of the warrants to purchase the 15,660,000 shares are exercised for cash, the total amount of proceeds that we would receive is approximately $3,915,000. We would expect to use the proceeds from the exercise of warrants, if any, for general working capital purposes. We will pay the expenses of registration of these shares, including legal and accounting fees.
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Company Overview
We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing a key problem in cardiac diagnosis—the identification of those at risk of sudden cardiac arrest (“SCA”). Our products incorporate our proprietary technology for the measurement of Microvolt T-Wave Alternans (“MTWA”), and were the first diagnostic tools cleared by the U.S. Food and Drug Administration (“FDA”) to non-invasively measure Microvolt levels of T-Wave Alternans in order to predict the risk of SCA. MTWA is an extremely subtle beat-to-beat fluctuation in the t-wave segment of a patient’s electrocardiogram. Our technology can detect these variations down to one millionth of a volt. The MTWA Test is conducted by elevating the patient’s heart rate through exercise, pharmacologic agents, or pacing with electrical pulses. Our proprietary product in conjunction with our proprietary sensors, when placed on the patient’s chest, can acquire and analyze the patient’s electrocardiogram for MTWA.
Published clinical data in a broad range of patients with heart disease has shown that patients with symptoms of, or at risk of, life threatening arrhythmias who test positive for MTWA are at an increased risk for subsequent sudden cardiac events including sudden death, while those who test negative are at minimal risk. Sudden cardiac arrest accounts for approximately one-third of all cardiac deaths, or between 300,000 and 400,000 deaths, in the U.S. each year, and is the leading cause of death in people over the age of 45.
All of our products, including our first generation HearTwave System and second generation HearTwave II System, CH 2000 Cardiac Stress Test System, Micro-V Alternans Sensors and MTWA OEM (Original Equipment Manufacturer) Module (“MTWA Module”), have received 510(k) clearance from the FDA for sale in the U.S. Our products have also received the CE mark for sale in Europe, which certifies that a product has met European Union consumer, health and environmental requirements. Our first generation HearTwave System and CH 2000 Cardiac Stress Test System and the HearTwave II System have been approved for sale by the Japanese Ministry of Health Labor and Welfare. Our 510(k) clearance allows our MTWA Test to be used to test anyone with known, suspected, or at risk of ventricular tachyarrhythmia and/or sudden cardiac arrest, and allows the claim that our MTWA Test is predictive of those events.
In March 2006, the Centers for Medicare and Medicaid Services (“CMS”) issued a National Coverage Determination (“NCD”) that allows for reimbursement to healthcare providers for MTWA testing of patients at risk of sudden cardiac death (“SCD”) only when a MTWA Test is done using the Analytic Spectral Method, which is our patented and proprietary method of analysis. In July 2010, the NCCI changed the edits associated with MTWA testing, allowing our MTWA Test to be performed on the same day as several other stress procedures. As a result, effective July 1, 2010, CMS allows full reimbursement for both an MTWA Test and a stress test when both tests are performed during the same patient visit. The CMS update removes a previous restriction that substantially limited the reimbursement amount when a patient underwent a MTWA Test on the same day as the patient underwent a standard cardiac stress test, echocardiography stress test, nuclear cardiac stress test, or pulmonary stress test.
Cambridge Heart was incorporated in Delaware in 1990. Our executive offices are located at 100 Ames Pond Drive, Tewksbury, Massachusetts 01876. We maintain a website with the address www.cambridgeheart.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this prospectus. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.
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Strategy
Our mission is to have our MTWA Test become a standard of care in the non-invasive diagnostic monitoring regime used to identify and manage the risk of cardiac disease. We estimate that there are approximately 10 to 12 million heart attack and heart failure patients in the U.S. who are at risk for SCA and can benefit from annual MTWA testing. In the past, the Company’s marketing strategy was focused on providing MTWA testing to those patients at highest risk for SCA and who were likely candidates to receive an implantable defibrillation device (“ICD”). Although MTWA testing has clearly been demonstrated to be useful in identifying those individuals who could benefit from ICD therapy, clinical experience and a growing body of data suggests that MTWA technology can and should be used in a much broader population of cardiac patients.
We intend to achieve this mission by making our technology readily available, in multiple product embodiments, in cardiology and internal medicine physician practices and in hospitals that provide healthcare services to a broad group of at-risk cardiac patients who routinely undergo cardiac evaluations, including stress testing. Our strategy calls for the Company to partner with manufacturers of cardiac stress testing equipment to integrate our MTWA technology into their systems. In addition to being sold to the manufacturers’ new customers, we expect that our MTWA technology will be marketed as an upgrade to the manufacturers’ existing installed base of users. We believe that this strategy will result in our technology being marketed to a much larger number of cardiologists and internal medicine practitioners. We also believe that the access to a larger and more established distribution network will allow us to place more strategic focus on increasing clinical utilization of our Alternans technology and increasing sales of our proprietary Micro-V Alternans Sensors.
In September 2010, we launched our MTWA Module in connection with our Development, Supply and Distribution Agreement (the “Cardiac Science Agreement”) with Cardiac Science Corporation (“Cardiac Science”). The Cardiac Science Agreement involved the development of the MTWA Module that will allow our MTWA Test, using our proprietary Micro-V Alternans Sensors, to be performed on Cardiac Science’s Q-Stress test platform. We also intend to continue to leverage our direct sales and marketing efforts in support of our overall strategy.
Principal Products and Applications
Microvolt T-wave Alternans Module
In April 2010, we received clearance from the FDA to begin marketing the MTWA Module. The MTWA Module is designed to work with existing cardiac stress test platforms distributed by other manufacturers as an add-on to enable MTWA testing to be performed using our Micro-V Alternans Sensors. The FDA 510(k) clearance allows us to market the MTWA Module integrated with the Q-Stress line of stress systems manufactured by Cardiac Science. In September 2010, the MTWA Module for Q-Stress began to be marketed by Cardiac Science.
The HearTwave II System
Our HearTwave II System, which has replaced our original HearTwave System, is used to perform a MTWA Test. A MTWA Test requires an elevated heart rate to provide an accurate result. The required heart rate is typically achieved utilizing exercise as performed on a treadmill similar to a standard stress test. The heart rate can also be elevated through the use of pharmaceuticals or by pacing during an electrophysiology study or using a pace maker.
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In April 2005, we received clearance from the FDA to market our HearTwave II System. Unlike our original HearTwave System, the HearTwave II System eliminates the need for a host stress system. The MTWA Test is typically performed as a stand alone diagnostic procedure. The electrocardiographic signals are captured by the Micro-V Alternans Sensors placed at designated locations on the patient’s chest and analyzed by the HearTwave II System using our proprietary Analytic Spectral Method for measuring the microvolt levels of T-Wave Alternans.
In addition to MTWA measurement, our HearTwave II System is a cardiac diagnostic system designed to support a broad range of standard and physician-customized protocols for the conduct of cardiac exercise stress testing. Our HearTwave II System is capable of controlling most medical grade treadmills and bicycle ergometers and is well suited for standard, nuclear or echocardiograph stress testing.
Micro-V Alternans Sensors
Our Micro-V Alternans Sensors are single patient use, multi-segment electrodes. They are necessary to obtain accurate results from our MTWA Test as they work to reduce background noise and artifact, allowing the processor to properly and accurately analyze the heart’s electrical signal.
The CH2000 Cardiac Stress Test System
Our CH2000 is a cardiac diagnostic system designed to support a broad range of standard and physician-customized protocols for the conduct and measurement of cardiac exercise stress testing. When properly upgraded, it is also able to perform a MTWA Test. It is capable of controlling most medical grade treadmills and bicycle ergometers and is well suited for standard, nuclear or echocardiograph stress tests. The CH2000 is compatible with standard electrodes for routine stress testing and our Micro-V Alternans Sensors for MTWA testing.
Clinical Studies
Over the years, various studies have shown that our MTWA Test is an effective diagnostic tool for the identification of patients at increased risk of SCA and life-threatening ventricular arrhythmias. Additionally, a negative result from a MTWA Test has been demonstrated to be a strong indication that the patient is at very low risk of ventricular tachyarrhythmia or SCA, both of which we sometimes refer to as a sudden cardiac event. Clinical studies conducted on several thousand patients in high risk cardiac populations have shown that a positive or indeterminate MTWA Test result is at least as accurate a predictor of a future cardiac event as an invasive electrophysiology study. These studies have also shown that patients testing negative for MTWA are at very low risk of dying suddenly from a cardiac event. These studies have been published in peer reviewed journals including the New England Journal of Medicine, Circulation, Journal of Cardiovascular Electrophysiology, Journal of the American College of Cardiology, and The Lancet.
In October 2004, the journal Circulation published the results of a National Institutes of Health sponsored prospective, multi-center study conducted by Dr. Daniel M. Bloomfield of Columbia University College of Physicians and Surgeons. The study of 177 patients with a previous heart attack and poor pumping function (left ventricular ejection fraction of 30% or less), which are called MADIT II type patients (a subset within a 549 patient heart failure study), compared the efficacy of our Microvolt T-Wave Alternans Test to QRS duration, a time measurement of a portion of the cardiac cycle, in predicting all cause mortality. The results of the study revealed that patients were 4.8 times more likely to die if they tested not-negative (positive or indeterminate) for Microvolt T-Wave Alternans than if they had a negative result. This result showed statistical significance (p=0.020) while the use of QRS duration did not achieve any statistical significance in risk stratifying this group of patients. Dr. Bloomfield concluded that among MADIT II type patients, Microvolt T-Wave Alternans is better than QRS duration at identifying a high risk group and also better at identifying a low risk group unlikely to benefit from ICD therapy.
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In November 2004, Dr. Otto Costantini, Assistant Professor of Medicine, Case Western Reserve University and Director, Arrhythmia Prevention Center, MetroHealth Medical Center, presented data at the American Heart Association Annual Meeting in New Orleans demonstrating the efficacy of Microvolt T-Wave Alternans testing in 282 non-ischemic cardiomyopathy patients with an ejection fraction of less than 40%. These patients represent a different subset of the same 549 patient study previously mentioned that was conducted by Dr. Daniel Bloomfield. Of the 282 non-ischemic patients, 34% had a normal (negative) Microvolt T-Wave Alternans Test result, while 66% tested abnormal (positive or indeterminate). Among the patients with a normal MTWA Test result, none experienced the study’s primary endpoint of death or sustained arrhythmia, while 11.8% of the patients with an abnormal test result experienced the primary endpoint. Dr. Costantini concluded that a normal Microvolt T-Wave Alternans Test result predicts a negligible risk of death or sustained ventricular tachycardia among patients with non-ischemic cardiomyopathy and that Microvolt T-Wave Alternans performs better than QRS duration and ejection fraction in predicting death or sustained ventricular arrhythmia. Of significance, according to Dr. Costantini, is that MTWA has a high negative predictive accuracy in both ischemic and non-ischemic patients and that the use of ICD prophylaxis in patients with a normal MTWA test and an ejection fraction of 30% or less may not be necessary.
In October 2005, Armoundas, et al, published a meta-analysis of MTWA studies in the journal Nature Clinical Practice, entitled “Can Microvolt T-Wave Alternans Testing Reduce Unnecessary Defibrillator Implantation.” This meta-analysis of studies was performed in patient populations that were similar to populations reported on in primary prevention studies for implantable defibrillators. In evaluating 9 studies with 1,811 patients, the annual tachyarrhythmic event rate was 1.2% in individuals testing MTWA negative. Across the 9 studies, individuals were 7 times more likely to have a cardiac event if they were MTWA positive than if they were MTWA negative.
In December 2005, the online version of the Journal of the American College of Cardiology published an expedited review of a 549 patient multi-center heart failure trial, led by Dr. Daniel Bloomfield and partially funded by the National Institutes of Health . The study, which enrolled patients with a left ventricular ejection fraction of 40% or less and NY Heart Association Class 1-III heart failure, utilized MTWA testing and followed the patients for about two years. Those patients who had a MTWA abnormal test were 6.5 times more likely to have a cardiac event than those with a MTWA normal (negative) test. The results were highly statistically significant with a p value <0.001. The author’s conclusions were, “Among patients with heart disease and LVEF £ 40%, MTWA can identify not only a high-risk group, but also a low-risk group unlikely to benefit from ICD prophylaxis.” This clinical study was republished in the January 17, 2006 issue of Journal of the American College of Cardiology.
In March 2006, Dr. Paul Chan from the VA Center for Practice Management and Outcomes Research, and the University of Michigan, Ann Arbor gave a presentation at The American College of Cardiology regarding the cost effectiveness of ICD therapy. The objective of the study was to evaluate the cost effectiveness of ICD therapy in MADIT II eligible patients with and without risk stratification using our MTWA Test. The study resulted in an Incremental Cost Effectiveness Ratio of $88,700 per Quality Adjusted Life Year in the ICDs for all strategies as compared to the use of MTWA risk stratification. The use of MTWA in risk stratifying the population resulted in a $48,800 Incremental Cost Effectiveness Ratio as compared to medical management. This study was published in The Journal of the American College of Cardiology in June 2006.
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In May 2006, the Journal of the American College of Cardiology published a new clinical study titled, “Prognostic Utility of Microvolt T-Wave Alternans in Risk Stratification of Patients with Ischemic Cardiomyopathy.” Dr. Theodore Chow from the Lindner Center was the Principal Investigator of the study. The study enrolled 768 consecutive patients with ischemic cardiomyopathy and an ejection fraction less than or equal to 35%. The authors studied MTWA to discern if MTWA was an independent predictor of mortality and could, therefore, identify which of the individuals would be at the highest risk of death and most likely to benefit from ICD therapy. After a mean follow-up period of 18 months, the MTWA non-negative, or abnormal, group of patients was associated with a significantly higher risk for all cause and arrhythmic mortality. In the group of patients that were not treated with implantable defibrillator therapy, the arrhythmic death rate for MTWA negative patients was approximately 2% per year while the MTWA non-negative patients’ death rate was more than three times higher.
In August 2006, the “Guideline for Management of Patients with Ventricular Arrhythmias and the Prevention of Sudden Cardiac Death” was jointly released by the American College of Cardiology (“ACC”), The American Heart Association (“AHA”) and the European Society of Cardiology (“ESC”). In this new guideline, collaborated on with the Heart Rhythm Society (“HRS”) and the European Heart Rhythm Association, MTWA received a Class IIa guideline under the section, “Electrocardiographic Techniques and Measurements.” The consensus guideline stated, “It is reasonable to use T-Wave Alternans for improving the diagnosis and risk stratification of patients with ventricular arrhythmias or who are at risk for developing life-threatening ventricular arrhythmias. (Level of Evidence: A).”
In November 2006, the clinical results from the Alternans Before Cardioverter Defibrillator (“ABCD’) trial were presented at the American Heart Association’s 2006 Scientific Sessions conference. The Primary Investigators of the study, Dr. Otto Costantini, M.D. and David S. Rosenbaum, M.D., presented the results. The study, sponsored by St. Jude Medical, Inc. (“St. Jude Medical”), found that the predictive value of our non-invasive MTWA test was comparable to the invasive electrophysiology tests in patients with a history of ischemic heart disease at high risk for SCD. The study was published in the fall in the Journal of American College of Cardiology in February 2009.
In March 2007, Dr. Gaetano M. De Ferrari, Head of the Intensive Care Unit in the department of cardiology at San Matteo Hospital in Pavia, Italy and a member of the ALPHA Steering Committee, presented the results of a multi-center, prospective study during the Late-Breaking Clinical Trials session of the American College of Cardiology Scientific meeting assessing the utility, using the CH2000 or HearTwave System, in predicting risk of sudden death among patients with non-ischemic cardiomyopathy. The ALPHA study (Prognostic Value of T-Wave Alternans in Patients with Heart Failure Due to Non-ischemic Cardiomyopathy) enrolled 446 consecutive patients with NYHA Class II or III non-ischemic cardiomyopathy and left ventricular ejection fraction (“LVEF”) less than or equal to 40%. On the primary endpoint (cardiac death and life-threatening arrhythmias), an abnormal MTWA Test had a Hazard Ratio of 4.01 (p=0.002), or four times the risk of a normal MTWA test. The 12-month negative predictive value of the test was reported to be 98.7%, indicating that patients with a negative test result are at very low risk of SCD. For patients with LVEF less than 35%, the Hazard Ratio and negative predictive value were 4.28 (p=0.004) and 99%, respectively. The study was published in full in the Journal of the American College of Cardiology in November 2007.
In November 2007, the results of the MASTER I (Microvolt T-Wave Alternans Testing for Risk Stratification of Post MI Patients) clinical trial, sponsored by Medtronic, Inc., were presented in a Late Breaking Clinical Trial session at the American Heart Association Scientific Session. The purpose of this 654 patient, multi-center clinical trial study was to show that MADIT II type patients with a normal MTWA Test result are at very low risk of dying suddenly versus those that test abnormal and, therefore, may not require ICD therapy. Each of the 654 patients met MADIT II criteria, meaning that they had all experienced a heart attack and had an ejection fraction of 30% or less. All of the patients received a currently available Medtronic ICD as prophylactic therapy.
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The results of the MASTER I study showed that while the incidence of the primary endpoint (life-threatening ventricular tachyarrhythmic events) was lower in patients with MTWA negative results than patients in the non-negative group (10% vs. 13%), this difference was not adequate to achieve statistical significance. MTWA was, however, found to be a statistically significant predictor of total mortality (HR = 2.04, p=0.02). The majority of end point events in the MASTER I trial were appropriate ICD shocks. In addition, the event rate in the study was relatively low. Lastly, approximately 20% of patients in the MASTER I trial received a Cardiac Resynchronization Therapy and Defibrillator device. The study was published in the fall in the Journal of American College of Cardiology. An additional 1,200 patients with slightly better pumping function (ejection fraction of 30% to 40%) were planned to be evaluated in a related registry according to the study protocol. The results for 303 patients enrolled in the MASTER II trial was presented as a poster presentation at American College of Cardiology meeting in March 2008. Results show that 7 events occurred in patients with a positive MTWA test, while 4 occurred in MTWA negative patients. The authors concluded that the ability to detect a statistical difference may have been affected by the low event rate. The company understands that the enrollment for MASTER II trial was terminated prematurely due to low event rates.
In May 2008, a meta-analysis, conducted by a group led by Stefan Hohnloser, MD, FHRS, of the JW Goethe University Division of Cardiology in Frankfurt, Germany, assessed 13 MTWA clinical studies involving approximately 6,000 cardiac patients. This analysis was then published in a supplement to the March 2009 issue of the Heart Rhythm journal. One of the key conclusions from this work was that in clinical trials, appropriate ICD shocks are an unreliable surrogate endpoint for SCA and can skew results of risk stratification studies.
In November 2009, the results of the PREVENT-SCD trial were presented at the American Heart Association Scientific Sessions in Orlando, Florida. PREVENT-SCD (Prospective Evaluation of Ventricular Tachyarrhythmic Events and Sudden Cardiac Death in Patients with Left Ventricular Dysfunction) was a prospective multi-center study of patients with cardiomyopathy and ejection fraction of 40% or lower that enrolled a total of 453 patients from 38 institutions in Japan. Two hundred eighty (280) patients underwent non-invasive MTWA testing using the analytic spectral method and were followed for up to three years. At a median follow-up time of 36 months, patients with an abnormal MTWA test were 4.4 times more likely to experience a life-threatening arrhythmia or SCD than those with a normal test. The three-year negative predictive value was reported to be 97.0%, indicating that patients with a normal or negative MTWA test were at low risk for experiencing sudden death.
In February 2010, the results of a clinical study were presented at the 29th Annual Scientific Meeting of the Belgian Society of Cardiology in Brussels, Belgium. The study, conducted at Jolimont Hospital in Haine Saint Paul, Belgium, prospectively evaluated MTWA in 73 consecutive patients who met criteria for implantable cardioverter defibrillator implantation for primary prevention of SCD. At a mean follow-up time of 39 months, the incidence of arrhythmic events in patients with an abnormal MTWA test was 7.6 times that for patients who tested negative. Sudden cardiac death was 4.8 times more common in those with an abnormal MTWA result.
In July 2010, the first patients were enrolled in our MTWA-CAD study (Evaluation of Microvolt T-Wave Alternans Testing for the Detection of Active Ischemia in Patients with Known or Suspected Coronary Artery Disease). MTWA-CAD is a feasibility study, sponsored by the Company, designed to evaluate MTWA testing for the purpose of detecting active ischemia in patients with known or suspected coronary artery disease (“CAD”). Ischemia is defined as inadequate blood supply to the coronary arteries, which can lead to myocardial infarction or what is commonly referred to as a “heart attack.” Ischemia, a common trigger for arrhythmias, is a well-documented cause of repolarization
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alternans. Human studies have shown that active ischemia can be associated with visible as well as microvolt-level T-wave alternans. While MTWA testing is traditionally used to evaluate arrhythmic risk, this known association with ischemia may allow MTWA testing to be used as a diagnostic tool to detect underlying CAD. An estimated 40 million cardiac stress tests in various modalities are performed annually in the United States. We filed a patent application related to ischemia in December of 2009. The MTWA-CAD study will assess the feasibility of this concept by measuring MTWA during routine nuclear stress testing or stress echocardiography with treadmill exercise. This is a feasibility study designed to verify preliminary observations under controlled environments and to generate hypotheses, endpoints, and sample sizes for future investigations. The MTWA-CAD trial is expected to enroll up to 200 patients. We estimate that the enrollments will be completed by mid-2011.
Reimbursement
In December 2005, CMS released a draft of its NCD, which became final on March 21, 2006. This broad coverage policy allows for payment to physicians for MTWA testing of patients at risk of SCA only when a MTWA test is performed using the Analytic Spectral Method, which is our patented and proprietary method of analysis. Reimbursement to healthcare providers by Medicare/ Medicaid and third party insurers is critical to the long-term success of our efforts to make the MTWA Test a standard of care for patients at risk of ventricular tachyarrhythmia or sudden cardiac arrest. We estimate that at least one-half of the U.S. patient population that we believe are most likely to benefit from our MTWA Test are at least 65 years old and, therefore, eligible for reimbursement via Medicare. We believe the remaining approximate 50% are covered by private insurers.
Reimbursement rates for services covered by Medicare are determined by reference to the Medicare Physician Fee Schedule (“MPFS”), and are calculated based on multiple components, including relative value units, conversion factor and geographical adjustment. The MPFS rates are updated annually and have resulted in negative updates since 2002. In November 2009, CMS issued its final ruling on the MPFS effective January 1, 2010. This ruling set forth a reduction in relative value unit for nearly all cardiovascular services to be phased in over a four-year period. The final rule also included an additional 21% reduction in the conversion factor component of the reimbursement calculations. However, CMS temporarily maintained the conversion factor at the 2009 level until June 1, 2010. In July 2010, CMS issued a revised MPFS reflecting, among other things, a change in the conversion factor as a result of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which was signed into law on June 25, 2010. This legislation provided for a 2.2% increase to the 2010 MPFS, effective for dates of service June 1, 2010 through November 30, 2010, which sets the national average Medicare payment amount for a MTWA Test at $205.31. In November 2010, CMS published their final reimbursement rules for 2011, effective January 1, 2011, which would have resulted in a decrease in reimbursement rates by as much as 30%. However, in December 2010, Congress enacted legislation to sustain reimbursement at the 2010 level through December 2011. Effective January 1, 2011 through December 31, 2011, the national average Medicare payment amount for a MTWA Test is $200.
In July 2010, the NCCI changed the edits associated with MTWA testing, allowing our MTWA Tests to be performed on the same day as several stress procedures. As a result, effective July 1, 2010, CMS allows full reimbursement for both an MTWA Test and a stress test when both tests are performed during the same patient visit. The CMS update removes a previous restriction that substantially limited reimbursement when a patient underwent a MTWA Test on the same day as the patient underwent a standard cardiac stress test, echocardiography stress test, nuclear cardiac stress test, or pulmonary stress test.
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In 2005, we received positive reimbursement decisions from Horizon Blue Cross/Blue Shield units in New Jersey, and had payment policies from Blue Cross/Blue Shield in New York, Iowa, Maryland, Washington DC, Delaware, Michigan and South Dakota. In 2006, we received favorable reimbursement decisions from Aetna and Humana, which included the use of our patented algorithm. Additionally, in 2006, we received positive reimbursement decisions from other large private payers including CIGNA Healthcare, Healthcare Service Corporation and WellPoint. In 2008, Premera Blue Cross and Blue Cross Blue Shield of Arizona revised their policies to make Microvolt T-Wave Alternans Testing a covered benefit. In February 2009, Harvard Pilgrim Health Care initiated reimbursement for the MTWA Test. In April 2009, WellPoint revised its coverage policy on MTWA testing from a covered service to a non-covered service. We estimate that approximately 6 million high-risk cardiac patients are currently covered for MTWA testing by either Medicare or other commercial health plans in the United States. Typically, private reimbursement coverage for our MTWA Test is available only to those patients who are otherwise indicated for ICD therapy.
Any reduction in reimbursement, material change in indication or reversal of private payer coverage for our MTWA Test may affect the demand for, price of, or utilization of our HearTwave II System the MTWA Module, or Micro-V Alternans Sensors, any of which may in turn have a material adverse effect on our business.
Marketing and Sales
Our technology and products are directed towards identifying individuals at risk of SCA, thus providing the physician with additional information on which to base a therapy decision. Typically our target patient populations include those individuals with underlying cardiac disease. In the U.S., those populations include more than 7 million patients who have suffered a myocardial infarction (heart attack), 5 million patients suffering from congestive heart failure (poor pumping function), and more than one million other patients suffering from conditions including syncope (fainting and dizziness) and non-ischemic dilated cardiomyopathy (damaged and enlarged heart). Therefore, we believe that the aggregate at-risk patient population in the U.S. that could benefit from our MTWA Test exceeds 10-12 million. MADIT II and Sudden Cardiac Death-Heart Failure Trial (SCD-HeFT) type patients are relatively small, but highly visible and important subsets of this at-risk patient population.
The main target customer for our HearTwave II System, MTWA Module and Micro-V Alternans Sensors is the clinical cardiologist. Clinical cardiologists see the vast majority of patients with existing cardiac conditions. They also prescribe and administer most diagnostic tests either in their office or as an outpatient procedure at the hospital. Our MTWA Test is a non-invasive tool that can be used to identify which of their patients are at risk of sudden cardiac arrest and, therefore, should be considered for more extensive testing and therapy. Conversely, our MTWA Test identifies patients at low risk who may be treated more conservatively, typically through drug therapy.
At December 31, 2010, we employed four direct sales representatives in the U.S. and employed eight clinical application specialists who provide clinical support to our direct sales force, install systems, train customers and enhance sensor utilization. We utilize country specific independent distributors for the sales of our products outside the U.S.
In June 2009, we entered into the Cardiac Science Agreement as part of our strategy to increase the sales and use of our proprietary MTWA technology. Pursuant to the Cardiac Science Agreement, we developed the MTWA Module that allows our MTWA Test, using our proprietary Micro-V Alternans Sensors, to be performed on Cardiac Science’s Q-Stress line of stress test system via customized software and patient interface. In April 2010, we received clearance from the FDA to begin marketing the MTWA Module integrated with the Q-Stress test platform. In late September 2010, the MTWA Module was launched by Cardiac Science.
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Cardiac Science markets the MTWA Module as an upgrade to its existing installed base of Q-Stress Systems and as an optional feature to new stress customers. Under the Cardiac Science Agreement, we sell and deliver to Cardiac Science the MTWA Module and our Micro-V Alternans Sensors (together, the “Products”) under purchase orders submitted by Cardiac Science. Cardiac Science resells the Products for use with their Q-Stress test platform through its direct sales force and through its network of distributors and sub-distributors. Cardiac Science’s right to resell the Products is non-exclusive. We may continue to sell, distribute and license our MTWA Test and sensors to other distributors and customers in both generic and customized versions. Cardiac Science has primary responsibility for preparing sales and marketing materials and for training its sales and service personnel regarding the Products. We provide clinical and technical training and support to Cardiac Science. In addition, we provide installation training service to each purchaser of a MTWA Module for use on Cardiac Science’s Q-Stress test platform. We also have customary warranty obligations with respect to the Products sold under the Cardiac Science Agreement.
The initial term of the Cardiac Science Agreement expires on June 22, 2014. The term of the Cardiac Science Agreement automatically renews for a one year period unless either party notifies the other of its intention to terminate at least 90 days prior to the expiration of the initial or renewal term. The Cardiac Science Agreement may be terminated by either party in the event that the other party has committed a material breach of its obligations under the Cardiac Science Agreement that has not been cured within 60 days’ written notice from the terminating party, upon the bankruptcy of either party, and upon 12 months prior written notice to the other party.
We market the HearTwave II System, the CH2000 Cardiac Stress Test System and our Micro-V Alternans Sensors internationally through independent distributors. In April 2010, the Japanese regulatory authorities cleared our HearTwave II System to be marketed in Japan on a non-exclusive basis by Fukuda Denshi Co LTD. Previously, our distribution arrangement with Fukuda Denshi was limited to our CH2000 Cardiac Stress Test System and our first generation HearTwave System. Effective August 2010, we appointed Mayerick S.A. de S.V. as the exclusive distributor of our HearTwave II System in Mexico. Sales of our HearTwave II System in Mexico will not commence unless and until the necessary regulatory approvals have been received from the Mexican regulatory authorities. The initial term of our distribution arrangement with Mayerick expires on July 31, 2012. We may terminate the distribution arrangement with Mayerick early if Mayerick fails to introduce the HearTwave II System in Mexico for purchase generally by end-users by July 1, 2011 due to reasons within Mayerick’s control or by January 1, 2012 due to any other reason.
Manufacturing
The in-house manufacturing process for our HearTwave II System, MTWA Module and CH 2000 consists primarily of incoming inspection and final assembly of purchased components. Additionally, our operations group tests, inspects, packages and ships the products. Components and sub-assemblies are purchased according to our specifications and are subject to inspection and testing. We rely on outside vendors to manufacture major components, a number of which are currently supplied by sole source vendors. We purchase components through purchase orders rather than long-term supply agreements. We purchase our Micro-V Alternans Sensors fully assembled and packaged from a third-party supplier.
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The in-house manufacturing process for our products takes place in our facility in Tewksbury, Massachusetts. We believe that our facility will be adequate to meet our production requirements through the foreseeable future.
We are required to meet and adhere to the requirements of U.S. and international regulatory agencies, including Good Manufacturing Practices and Quality System Regulation requirements. Our manufacturing facilities are subject to periodic inspection by both U.S. and international regulatory agencies.
We last underwent a Quality System Regulation audit, conducted by the FDA, in March 2009. We passed the inspection with no observations. We are ISO 13485 certified allowing us to apply the CE Mark to all of our products. We are subject to annual audits by our designated notified body, British Standards Institution, to maintain our ISO 13485 certification.
Research and Development
A substantial portion of our research and development investment is focused on our continuing efforts to develop functionality enhancements to our MTWA products, and on supporting clinical research work. During 2010, we focused our development efforts on our HearTwave II System, developing additional features intended to make our MTWA Test easier to perform and more beneficial for our customers, as well as the completion of the MTWA Module and obtaining regulatory approval for the MTWA Module.
As of December 31, 2010, we had 2 full-time employees and 1 temporary resource engaged in research and development activities along with several independent research and engineering consultants whose services are utilized as necessary.
Patents, Trade Secrets and Proprietary Rights
Some of the initial methods that we used in the measurement of MTWA were covered by a U.S. patent issued to The Massachusetts Institute of Technology (“MIT”). This patent was acquired through an exclusive license agreement with MIT that expired in the U.S. in 2006. We have been issued an additional 17 U.S. patents that include claims covering substantial changes and modifications to the initial methods covered by the original MIT patent. The Analytic Spectral Method, our core intellectual property, is the subject of domestic and international patents issued in 2004. The expiration dates of remaining patents range from 2013 to 2021.
We continue to maintain our license agreement with MIT outside the U.S., since the patent rights have not expired outside the U.S. This license agreement imposes various commercialization, sublicensing, insurance, royalty, product liability indemnification and other obligations on us. Our failure to comply with these requirements could result in a conversion of the licenses from exclusive to non-exclusive in nature or, in some cases, termination of the license. We believe that we are in compliance with all of these obligations.
In June 2008, we entered into a license agreement with MIT pursuant to which we acquired an exclusive license to United States Patent 7,336,995 “Method and Apparatus for Tachycardia Detection and Treatment.” This broad patent covers the use of implantable devices such as pacemakers and defibrillators to measure T-Wave Alternans from intra-cardiac signals and to initiate subsequent therapy in order to prevent the development of arrhythmias which may lead to sudden cardiac arrest. Implantable defibrillators currently treat such arrhythmias only after they have been initiated, typically with a high-energy shock. A strategy to predict such rhythms before they occur could allow for preventive strategies, potentially avoiding imminent symptomatic episodes with the delivery of painless therapies.
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In December 2009, we filed three patent applications with the U.S. Patent Office to further enhance our intellectual property portfolio. These applications cover our intellectual properties in the areas of measuring Alternans from ambulatory electrocardiographic devices, Alternans and cardiac ischemia, and Alternans and pharmalogical agents.
We believe that our intellectual property and the expertise developed by us constitute an important competitive barrier. We continue to evaluate the markets and products that are most appropriate to exploit this expertise. In addition, we maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by us is appropriately protected and, where necessary, to assure that there is no infringement of our proprietary technology by competitive technologies.
Competition
We have competition from other risk stratification testing modalities such as electrocardiogram stress tests, invasive electrophysiology testing, Holter monitors, ultrasound tests and the potential for implanting ICDs in broad patient populations without the need for risk stratifying tests such as our MTWA Test.
GE Medical Systems gained FDA 510(k) concurrence during 2003 for their T-Wave Alternans Algorithm for use with their Case 8000 Stress Exercise System and other analysis modalities. In August 2007, based on a publication by Nieminen et al in European Heart Journal, GE Medical filed a formal request for reconsideration of the NCD for Microvolt T-Wave Alternans to include GE’s Modified Moving Average (“MMA”) methodology.
In February 2008, CMS released a Proposed Decision Memorandum stating that there is insufficient evidence to conclude that the MMA method of determining MTWA is reasonable and necessary for the evaluation of Medicare beneficiaries at risk for SCD under section 1862(a)(1)(A) of the Social Security Act, and, therefore, CMS proposed to continue national non-coverage for the MMA method of determining MTWA. After careful examination, CMS found that the evidence base supporting the MMA method of measuring MTWA is limited, and though suggestive of benefit, is not yet convincing.
CMS requested public comments on the proposed determination pursuant to Section 1862(1) of the Social Security Act. In particular, CMS was interested in comments that include new evidence that they had not reviewed in past considerations of the NCD. CMS requested public comment on the reported findings of the MASTER I trial, specifically with regard to whether CMS should continue to cover MTWA in general, regardless of the method used. In May 2008, CMS issued a Final Decision Memorandum reaffirming coverage of MTWA using the spectral analysis method and found insufficient evidence for coverage of MTWA using any other method. Following the full publication of the MASTER I trial results in November 2008, the Company submitted an analysis of the results along with other recent publications supporting the use of MTWA in identifying patients at risk of SCD.
Government Regulation
Our HearTwave Systems, MTWA Module, CH 2000, and Micro-V Alternans Sensors have received 510(k) clearance from the FDA for sale in the U.S. The 510(k) clearance for the HearTwave Systems, MTWA Module and the CH 2000 includes the claim that they can measure MTWA and the presence of MTWA in patients with known, suspected, or at risk of ventricular tachyarrhythmia predicts increased risk of ventricular tachyarrhythmia and sudden death.
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Any products manufactured or distributed by us are subject to comprehensive and continuing regulation by the FDA, including record keeping requirements, reporting of adverse experience with the use of the device, post-market surveillance, post-market registry and other actions deemed necessary by the FDA. The most recent FDA inspection of our record keeping, reporting and quality documentation system was concluded in March 2009. We passed the inspection with no observations.
We are also subject to regulation in each of the foreign countries in which we sell our products. Many of the regulations applicable to our products in these countries are similar to those of the FDA. We have obtained the requisite foreign regulatory approvals for sale of our HearTwave Systems, MTWA Module, CH 2000 and Micro-V Alternans Sensors in many foreign countries, including most of Western Europe. We believe that foreign regulations relating to the manufacture and sale of medical devices are becoming more stringent. The European Union adopted regulations requiring that medical devices such as our HearTwave System, MTWA Module, CH 2000 and Micro-V Alternans Sensors comply with the Medical Device Directives, which establish the requirements for CE marking of all products prior to their importation and sale. In 2001, we received ISO-9001 and CE certification for our HearTwave, CH 2000 and Micro-V Alternans Sensors. In 2006, we received ISO-13485-2003 for HearTwave II, CH 2000 and HearTwave I Systems. The Japanese Ministry of Health, Labor and Welfare has also approved our original HearTwave System and HearTwave II System for sale. Furthermore, in connection with our distribution agreement with Mayerick S.A. de S.V., regulatory approval from the Mexican authorities for the sale of HearTwave II Systems in Mexico is in process. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
Employees
As of December 31, 2010, we had 23 full-time and seven part-time employees. None of our employees are represented by a collective bargaining agreement, and we have not experienced work stoppages. We believe that our relations with our employees are good.
Properties
Our facilities consist of 17,639 usable square feet of office, research and manufacturing space located at 100 Ames Pond Drive, Tewksbury, Massachusetts. This facility is under a five-year lease expiring on April 30, 2013 with the option to extend for one additional period of five years.
Legal Proceedings
We are not party to any material legal proceedings.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
Overview
We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing a key problem in cardiac diagnosis—the identification of those at risk of sudden cardiac arrest. Our proprietary technology and products are the first diagnostic tools cleared by the FDA to non-invasively measure Microvolt levels of T-Wave Alternans or MTWA, an extremely subtle beat-to-beat fluctuation in the T-Wave portion of a patient’s electrocardiogram. Our MTWA Test is performed using our HearTwave II System in conjunction with our single patient use Micro-V Alternans Sensors.
In March 2007, we entered into a Co-Marketing Agreement with St. Jude Medical granting St. Jude Medical the exclusive right to market and sell our HearTwave II System and other MTWA products to cardiologists and electrophysiologists in North America. In June 2007, the Co-Marketing Agreement was amended, effective March 21, 2007, to enable St. Jude Medical to also market our HearTwave II System and other MTWA products to North American primary care and internal medicine physicians and to enable Cambridge Heart’s sales team to support St. Jude Medical’s field sales force in all physician markets in North America.
In July 2008, we entered into a Restated Co-Marketing Agreement with St. Jude Medical which, effective May 5, 2008, replaced the previous Co-Marketing Agreement. The amendment granted St. Jude Medical the non-exclusive right to market and sell our HearTwave II System and other MTWA products to physicians in North America. Pursuant to the Restated Agreement, we retained full sales responsibility and could approach and deal directly with any account. We agreed to collaborate in the development and implementation of co-marketing programs with respect to marketing our products that may involve co-branding marketing materials, co-sponsoring of educational events and joint presence at industry conventions and trade shows. The Restated Agreement ended on November 5, 2008.
In order to position the Company to operate more efficiently, focus its resources to take advantage of strategic opportunities and reduce cash expenditures, at the end of the first quarter of 2009 we implemented an expense reduction initiative. This initiative included a 33% reduction in headcount. The reduction in headcount, which impacted all of the Company’s operational areas, included a restructuring of the direct sales organization to improve cost effectiveness.
In June 2009, we announced a new strategy aimed at increasing the sales and use of our proprietary MTWA technology. The strategy calls for the Company to partner with manufacturers of cardiac stress testing equipment to develop an MTWA module that would be integrated into their systems and marketed to a much larger number of cardiologists and internal medicine practitioners. Historically, our marketing strategy was focused on providing MTWA testing to those patients at highest risk for SCA and who were likely candidates to receive implantable defibrillation devices (“ICDs”). Although MTWA testing has clearly been demonstrated to be useful in identifying those individuals who could benefit from ICD therapy, clinical experience and a growing body of data suggests that MTWA technology can and should be used to identify and manage the risk of SCA in a much broader population of cardiac patients. We estimate that there are approximately 10 to 12 million heart attack and heart failure patients in the U.S., who can benefit from annual MTWA testing. Furthermore, this new strategy makes our technology more readily accessible, economically attractive and logistically simpler to integrate into the practice of those physicians who are already providing cardiac stress or other non-invasive testing. The MTWA Module would allow an integrated stress and MTWA Test, using the Company’s proprietary sensors, to be performed on a partners’ stress testing platform via customized software and patient interface. The manufacturer would market the MTWA module as an upgrade to their existing installed base of stress test systems, and as an optional feature to new stress customers.
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As the first step in the execution of this new strategy, the Company signed a non-exclusive development and distribution agreement with Cardiac Science, a global leader in automated external defibrillator (AED) and diagnostic cardiac monitoring devices, to develop the MTWA Module, which was launched in September 2010. Under the Cardiac Science Agreement, we sell and deliver to Cardiac Science the MTWA Module and our Micro-V Alternans Sensors (together, the “Products”) under purchase orders submitted by Cardiac Science. Cardiac Science is reselling the Products for use with their Q-Stress test platform through its direct sales force and through its network of distributors and sub-distributors. Cardiac Science’s right to resell the Products is non-exclusive. We may continue to sell, distribute and license our MTWA Test and Micro-V Alternans Sensors to other distributors and customers in both generic and customized versions. Cardiac Science has primary responsibility for preparing sales and marketing materials and for training its sales and service personnel regarding the Products. We provide clinical and technical training and support to Cardiac Science. In addition, we provide installation training service to each purchaser of a MTWA Module for use on Cardiac Science’s Q-Stress test platform. We also have customary warranty obligations with respect to the Products sold under the Cardiac Science Agreement.
The initial term of the Cardiac Science Agreement expires on June 22, 2014. The term of the Cardiac Science Agreement will automatically renew for a one year period unless either party notifies the other of its intention to terminate at least 90 days prior to the expiration of the initial or renewal term. The Cardiac Science Agreement may be terminated by either party in the event that the other party has committed a material breach of its obligations under the Cardiac Science Agreement that has not been cured within 60 days’ written notice from the terminating party, upon the bankruptcy of either party, and upon 12 months prior written notice to the other party.
In November of 2009, we completed the prototype development of our MTWA Module and later, in February 2010, we completed the product development phase of the MTWA Module. Also in February 2010, we submitted a 510(k) application for regulatory approval of the MTWA Module with the U.S. Food and Drug Administration. In April 2010, we received clearance from the U.S. Food and Drug Administration to begin marketing the MTWA OEM Module integrated with the Q-Stress line of stress systems manufactured by Cardiac Science. In late September 2010, the MTWA Module was launched by Cardiac Science.
In December 2009, we filed three patent applications with the U.S. Patent Office to further enhance our intellectual property portfolio. These applications cover our intellectual property in the areas of measuring Alternans from ambulatory electrocardiographic devices (i.e. Holter monitoring equipment), Alternans and cardiac ischemia, and Alternans and pharmalogical agents.
On December 23, 2009, we completed a private placement of Series D Convertible Preferred Stock (“Series D Preferred”), raising proceeds of approximately $1.8 million, net of issuance costs. Under the terms of the financing, the Company issued and sold 1,852 shares of Series D Preferred, which have a senior liquidation preference, at a purchase price of $1,000 per share. Each share of Series D Preferred is convertible into shares of the Company’s common stock at a conversion price of $0.082 per common share, representing a 15% premium to the 20-day trailing average of the Company’s closing common stock price as of December 21, 2009 (the “Closing Price”). The total number of shares of common stock initially issuable upon conversion of the Series D Preferred issued in the financing is 22,585,366. In addition to the Series D Preferred, the Company issued a short-term warrant and a long-term warrant to each investor. The short-term warrant entitled the investor, for a period of one year, to purchase a number of shares of common stock equal to 50 percent of the number of shares of common stock into which the Series D Preferred purchased by each investor is convertible. The exercise price of the short-term warrant was $0.107 per share, or a 50% premium to the Closing Price. The short-term warrants expired on December 23, 2010. Short-Term Warrants to purchase an aggregate of 11,292,686 shares of
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common stock were exercised on or before December 23, 2010 at an exercise price of $0.107 per share, resulting in aggregate proceeds to the Company of $1,208,317 and the issuance of 11,292,686 shares of common stock. The long-term warrants entitled the investor, for a period of up to five years, to purchase a number of shares of common stock equal to 30 percent of the number of shares of common stock into which the Series D Preferred purchased by each investor is convertible. The exercise price of the long-term warrant was $0.142 per share, or a 100% premium to the Closing Price. In May 2010, the Company elected to exercise its right to call all outstanding long-term warrants. On or before June 4, 2010, all long-term warrants to purchase an aggregate of 6,775,611 shares were exercised for aggregate proceeds to the Company of $962,138. The Series D Preferred financing was provided by institutional and individual investors, including existing stockholders. Three members of our Board of Directors also participated in the financing and provided approximately 20% of the total capital raised.
In December 2009, we reduced the size of our Board of Directors from seven members to five in order to reduce expenses and streamline our decision making process. As part of the reduction, Kenneth Hachikian, Reed Malleck and Dr. Richard Cohen resigned as directors of the Company effective December 30, 2009. Dr. Cohen continues to work with the Company as a consultant and as Chairman of the Company’s Scientific Advisory Board, in which capacities he will interact with the Board of Directors on a regular basis. On December 30, 2009, Paul McCormick, Executive Chairman of Cardiogenesis, Inc., a member of the board of directors of Endologix, Inc. and Cianna Medical, Inc. and former President and Chief Executive Officer of Endologix, Inc., joined our Board of Directors.
In February 2010, an institutional investor in the Series D Financing exercised their Short-Term Warrants and Long-Term Warrants to purchase 609,756 and 365,854 shares, respectively, of the Company’s common stock, resulting in aggregate proceeds of $117,195.
In April 2010, Jeffrey Wiggins, a director of the Company who participated in the Series D Financing, exercised his Short-Term Warrants and Long-Term Warrants to purchase 1,829,269 and 1,097,561 shares, respectively, of the Company’s common stock, resulting in aggregate proceeds of $351,585.
In May 2010, the Company elected to exercise its right to call all outstanding Long-Term Warrants to purchase the Company’s common stock issued in connection with the Series D Financing. Pursuant to the terms of the Long-Term Warrants the Company was entitled to call the warrants if the closing price of the Company’s common stock was at least $0.284 for a period of 20 consecutive trading days. On or before June 4, 2010, investors in the December 2009 Series D Convertible Preferred Stock financing exercised all of the outstanding Long-Term Warrants. The exercise of the remaining Long-Term Warrants, which were called on May 5, 2010, generated a total of $754,331 in proceeds, and resulted in the issuance of 5,312,196 shares of common stock. In addition, certain of these investors also exercised their Short-Term Warrants, generating an additional $195,731 in capital, and resulting in the issuance of an additional 1,829,269 shares of common stock.
In July 2010, the first patients were enrolled in our MTWA-CAD study (Evaluation of Microvolt T-Wave Alternans Testing for the Detection of Active Ischemia in Patients with Known or Suspected Coronary Artery Disease). MTWA-CAD is a feasibility study, sponsored by the Company, designed to evaluate MTWA testing for the purpose of detecting active ischemia in patients with known or suspected coronary artery disease (“CAD”). Ischemia is defined as inadequate blood supply to the coronary arteries, which can lead to myocardial infarction or what is commonly referred to as a “heart attack.” Ischemia, a common trigger for arrhythmias, is a well-documented cause of repolarization alternans. Human studies have shown that active ischemia can be associated with visible as well as microvolt-level T-wave alternans. While MTWA testing is traditionally used to evaluate arrhythmic risk, this known association with ischemia may allow MTWA testing to be used as a diagnostic tool to detect underlying CAD. An estimated 40 million cardiac stress tests in various modalities are performed
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annually in the United States. We filed a patent application related to ischemia in December of 2009. The MTWA-CAD study will assess the feasibility of this concept by measuring MTWA during routine nuclear stress testing or stress echocardiography with treadmill exercise. This is a feasibility study designed to verify preliminary observations under controlled environments and to generate hypotheses, endpoints, and sample sizes for future investigations. The MTWA-CAD trial is expected to enroll up to 200 patients. We estimate that the enrollments will be completed by mid-2011.
In July 2010, the NCCI changed the edits associated with MTWA testing, allowing our MTWA Tests to be performed on the same day as several stress procedures. As a result, effective July 1, 2010, CMS allows full reimbursement for both an MTWA Test and a stress test when both tests are performed during the same patient visit. The CMS update removes a previous restriction that substantially limited reimbursement when a patient underwent a MTWA Test on the same day as the patient underwent a standard cardiac stress test, echocardiography stress test, nuclear cardiac stress test, or pulmonary stress test.
Reimbursement rates for services covered by Medicare are determined by reference to the MPFS and are calculated based on multiple components, including relative value units, conversion factor and geographical adjustment. The MPFS rates are updated annually and have resulted in negative updates since 2002. In November 2009, CMS issued its final ruling on the MPFS effective January 1, 2010. This ruling set forth a reduction in relative value unit for nearly all cardiovascular services to be phased in over a four-year period. The final rule also included an additional 21% reduction in the conversion factor component of the reimbursement calculations. However, CMS temporarily maintained the conversion factor at the 2009 level until June 1, 2010. In July 2010, CMS issued a revised MPFS reflecting, among other things, a change in the conversion factor as a result of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which was signed into law on June 25, 2010. This legislation provided for a 2.2% increase to the 2010 MPFS, effective for dates of service June 1, 2010 through November 30, 2010, which sets the national average Medicare payment amount for a MTWA Test at $205.31. In November 2010, CMS published their final reimbursement rules for 2011, effective January 1, 2011, which would have resulted in a decrease in reimbursement rates by as much as 30%. However, in December 2010, Congress enacted legislation to sustain reimbursement at the 2010 level through December 2011. Effective January 1, 2011 through December 31, 2011, the national average Medicare payment amount for a MTWA Test is $200.
In December 2010, all remaining investors in the Series D Financing elected to exercise the outstanding Short-Term Warrants. The exercise of the remaining Short-Term Warrants generated a total of $751,610 in proceeds, and resulted in the issuance of 7,024,392 shares of common stock. The shares of common stock issued by the Company as a result of the exercise of warrants are subject to customary restrictions on the transfer of securities issued in a private placement under the federal securities laws.
In December 2010, the Company completed a private placement to accredited investors. The transaction raised gross proceeds of $2.9 million and consisted of units (“Units”) that were comprised of one share of common stock and a warrant to purchase one share of common stock. The Company sold 14,500,000 Units at a price of $0.20 per Unit. Each warrant included in the Unit entitles the holder to purchase one share of common stock for $0.25 for a period of five years from the date of issuance. Exercise of the warrants would provide an additional $3.6 million in capital. Dawson James Securities, Inc. acted as selling agent in the Offering. The Company is filing this Registration Statement to cover the resale of the common stock and the shares of common stock issuable upon the exercise of the warrants in connection with the Offering.
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We intend to continue to broaden our distribution channels through strategic alliances with medical device companies that offer synergistic opportunities and offer large established distribution networks, as well as explore opportunities for new applications of our technology. This will enable us to focus our resources on enhancing utilization of our MTWA Test and increasing awareness of our technology in the medical community through marketing initiatives and education programs. We also will continue to seek additional third party payer reimbursement from other third party insurers that currently do not cover MTWA testing.
At December 31, 2010, we had 23 full time and seven part time employees, of which 14 full time and two part time employees were engaged in sales, marketing and clinical support activities, three full time and one part time employee involved in manufacturing and operations, two full time employees engaged in research and development, and four full time and four part time employees dedicated to administrative support.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of the financial condition and results of operations is based upon the financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the fair value of preferred stock and warrants, revenue recognition, incentive compensation, product warranties, bad debt allowances and inventory valuation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies and estimates affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Revenue from the sale of product to all of the Company’s customers is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of the Company’s obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of product to all of our third-party distributors is subject to the same recognition criteria. These distributors provide all direct repair and support services to their customers. The Company also sells maintenance agreements with the HearTwave System. Revenue from maintenance contracts is recognized separately based on amounts charged when sold on a stand-alone basis and is recorded over the term of the underlying agreement. Payments of $302,573 at December 31, 2009 ($362,938 at December 31, 2008) and $276,284 at September 30, 2010 ($308,706 at September 30, 2009) received in advance of services being performed is recorded as deferred revenue and included in current liabilities in the accompanying balance sheet. The Company offers usage agreements under its Technology Placement Program (“TPP”) whereby customers have use of the HearTwave System and a pre-set level of Micro-V Alternans Sensors for a 90-day period. Under the TPP, the Company retains title to the HearTwave System. The revenue from the TPP is recognized over the term of the usage agreement, which is generally three months.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the non-payment of outstanding amounts due to us from our customers. We determine the amount of the allowance by evaluating the customer’s credit history, current financial condition and payment history. We make a judgment as to the likelihood we will experience a loss of all or some portion of the outstanding balance.
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As of September 30, 2010, our allowance for doubtful accounts was $137,590. We believe we have an adequate allowance; however, additional write-offs could occur if future results significantly differ from our expectations.
Inventory Valuation
We regularly assess the value of our inventory for estimated obsolescence or unmarketable inventory. If necessary, we write-down our inventory value to the estimated fair market value based upon assumptions about future demand and market conditions. We had a reserve of $1,091,624 at September 30, 2010, mostly related to the inventory that was built up in order to satisfy our contractual obligations to St. Jude Medical. The reserve is due to the uncertainty of realizing the value of excess inventory. We do not believe that the inventory is exposed to obsolescence risk. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required from time to time that could adversely affect our operating results for the fiscal period in which such write-downs are affected.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statement of operations over the requisite service period.
The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including the expected volatility of the Company’s common stock over the estimated term of the options granted, estimates of the expected time period that employees will retain their vested stock options prior to exercising them, and the number of shares that are expected to be forfeited before the options are vested. The use of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and, as a result, provide significantly different amounts recognized in the Company’s statement of operations.
Product Warranty
The Company warrants all of its non-disposable products as to compliance with their specifications and that the products are free from defects in material and workmanship for a period of 13 months from the date of delivery. The Company maintains a reserve for the estimated cost of potential future repair of its products during this warranty period. The amount of the reserve is based on the Company’s actual return and repair cost experience. If the rate and cost of future warranty activities materially differs from the Company’s historical experience, additional costs would have to be reserved that could materially affect the Company’s operating results.
Preferred Stock and Warrants
The Company initially accounts for convertible preferred stock and associated warrants by allocating the proceeds received net of transaction costs based on the relative fair value of the convertible preferred stock and the warrants issued to the investors, and then to any beneficial conversion features contained in the convertible preferred securities. The Company determined the initial value of the convertible preferred stock and warrants using valuation models the Company considered to be appropriate.
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Results of Operations
The following tables present, for the periods indicated, our revenue by product line and geographic region. This information has been derived from our statement of operations included elsewhere in this prospectus. You should not draw any conclusions about our future results from our revenue for any period.
| Fiscal Year ended December 31, 2008 |
% of Total |
Fiscal Year ended December 31, 2009 |
% of Total |
% Inc/(Dec) 2009 vs 2008 |
||||||||||||||||
| Alternans Products: |
||||||||||||||||||||
| U.S. |
$ | 2,847,509 | 67 | % | $ | 1,988,416 | 62 | % | -30 | % | ||||||||||
| Rest of World |
287,865 | 7 | % | 293,041 | 9 | % | 2 | % | ||||||||||||
| Total |
3,135,274 | 74 | % | 2,281,457 | 71 | % | -27 | % | ||||||||||||
| Non-Alternans Products: |
||||||||||||||||||||
| U.S. |
721,319 | 17 | % | 781,737 | 24 | % | 8 | % | ||||||||||||
| Rest of World |
382,050 | 9 | % | 168,715 | 5 | % | -56 | % | ||||||||||||
| Total |
1,103,369 | 26 | % | 950,452 | 29 | % | -14 | % | ||||||||||||
| Total Revenues |
$ | 4,238,743 | 100 | % | $ | 3,231,909 | 100 | % | -24 | % | ||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||
| 2009 | % of Total |
2010 | % of Total |
% Change |
2009 | % of Total |
2010 | % of Total |
% Change |
|||||||||||||||||||||||||||||||
| Alternans Products: |
||||||||||||||||||||||||||||||||||||||||
| U.S. |
$ | 450,070 | 56 | % | $ | 434,924 | 55 | % | -3 | % | $ | 1,502,578 | 62 | % | $ | 1,124,321 | 53 | % | -25 | % | ||||||||||||||||||||
| Rest of World |
71,252 | 9 | % | 45,721 | 6 | % | -36 | % | 171,582 | 7 | % | 247,098 | 12 | % | 44 | % | ||||||||||||||||||||||||
| Total |
521,322 | 65 | % | 480,645 | 61 | % | -8 | % | 1,674,160 | 69 | % | 1,371,419 | 65 | % | -18 | % | ||||||||||||||||||||||||
| Stress and Other Products: |
||||||||||||||||||||||||||||||||||||||||
| U.S |
232,683 | 29 | % | 234,025 | 30 | % | 1 | % | 625,978 | 26 | % | 580,459 | 28 | % | -7 | % | ||||||||||||||||||||||||
| Rest of World |
44,340 | 6 | % | 78,064 | 10 | % | 76 | % | 126,819 | 5 | % | 152,745 | 7 | % | 20 | % | ||||||||||||||||||||||||
| Total |
277,023 | 35 | % | 312,089 | 39 | % | 13 | % | 752,797 | 31 | % | 733,204 | 35 | % | -3 | % | ||||||||||||||||||||||||
| Total Revenues |
$ | 798,345 | 100 | % | $ | 792,734 | 100 | % | -1 | % | 2,426,957 | 100 | % | $ | 2,104,623 | 100 | % | -13 | % | |||||||||||||||||||||
REVENUE
Fiscal Years 2009 and 2008
Total revenue for 2009 and 2008 was $3,231,909 and $4,238,743, respectively, a decrease of 24%. Revenue from the sale of our MTWA product line, which we call our Alternans Products, was $2,281,457 during 2009 compared to $3,135,374 during 2008, a decrease of 27%. Alternans Products accounted for 71% and 74% of total revenue for 2009 and 2008, respectively. System placements in 2009 were 51 compared to 70 in 2008. In 2009, we sold fewer HearTwave II Systems compared to 2008, due to a number of factors including weak economic conditions and uncertainty in healthcare and reimbursement, which had a significant adverse impact on medical capital equipment sales in 2009 as a whole.
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In addition to the general economic weakness in the medical capital equipment market, we continued to face a number of other challenges including the historical marketing strategy of the technology, practice integration issues and a lack of a distribution network. We believe that our new strategy will help us overcome these obstacles. By making our technology available in multiple product embodiments and by partnering with manufacturers of cardiac testing equipment, we can reach a much larger number of cardiologists and internal medicine practitioners that provide healthcare services to a broad group of at-risk cardiac patients who routinely undergo cardiac evaluations. This new strategy makes our technology more readily accessible, economically attractive and logistically simpler to integrate into the practice of those physicians who are already providing cardiac stress or other non-invasive testing. We also believe that the access to a larger and more established distribution network will allow us to place more strategic focus on increasing clinical utilization of our Alternans technology and increasing sales of our proprietary Micro-V Alternans Sensors.
Three and Nine Month Periods Ended September 30, 2009 and 2010
Total revenue for the three months ended September 30, 2009 and 2010 was $798,345 and $792,734, respectively. Revenue from the sale of our Microvolt T-Wave Alternans products, which we call our Alternans products, was $521,322 during the three months ended September 30, 2009 compared to $480,645 during the same period of 2010, a decrease of 8%. Our Alternans products accounted for 65% and 61% of total revenue for the three month periods ended September 30, 2009 and 2010, respectively. Revenue from the sale of our stress and other products for the three months ended September 30, 2009 and 2010 was $277,023 and $312,089, respectively. Revenue for the three months ended September 30, 2010 includes the sale of 10 MTWA Modules sold to Cardiac Science, which was launched on September 21, 2010.
Total revenue for the nine months ended September 30, 2009 and 2010 was $2,426,957 and $2,104,623, respectively, a decrease of 13%. Revenue from the sale of our Alternans products was $1,674,160 during the nine months ended September 30, 2009 compared to $1,371,419 during the same period of 2010, a decrease of 18%. Our Alternans products accounted for 69% and 65% of total revenue for the nine month periods ended September 30, 2009 and 2010, respectively. Revenue from the sale of our stress and other products for the nine months ended September 30, 2009 and 2010 was $752,797 and $733,204, respectively.
The decrease in revenue for the 2010 period was primarily a result of the ongoing weakness in the sales of medical equipment in general, our limited scope of distribution, and the continued uncertainty around reimbursement. Finalization of the reimbursement calculation for 2010 was postponed multiple times during the period. Temporary fixes were instituted to maintain the conversion factor of the reimbursement calculation at the 2009 level. During the 2010 periods, uncertainty around the amount of reimbursement and the related cash flow impact on physician practices was a major factor in the revenue decline during the first half of 2010. In July 2010, CMS issued a revised MPFS reflecting, among other things, a change in the conversion factor as a result of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which was signed into law on June 25, 2010. This legislation provides for a 2.2 percent increase to the 2010 MPFS, effective for dates of service June 1, 2010 through November 30, 2010. This measure helped ease some of the uncertainty around the reimbursement rate during the third quarter of 2010. In November 2010, CMS published their final rules for 2011, effective January 1, 2011, which would have resulted in a decrease in reimbursement rates. However, in December 2010, Congress enacted legislation to sustain reimbursement at the 2010 level through December 2011. Furthermore, in July 2010, the NCCI changed the edits associated with MTWA testing, allowing our MTWA Test to be performed on the same day as several stress procedures. As a result, effective July 1, 2010, CMS allows full reimbursement for both a MTWA Test and a stress test when both tests are performed during the same patient visit. The CMS update removes a previous restriction that substantially limited reimbursement when a patient underwent a MTWA Test on the same day as the patient underwent a standard cardiac stress test, echocardiography stress test, nuclear cardiac stress test, or pulmonary stress test.
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GROSS PROFIT
Fiscal Years 2009 and 2008
Gross profit was 43% of total revenue in 2009 compared to 25% of total revenue in 2008. This increase in gross margin is primarily due to the $920,787 provision, recorded in 2008, reducing the excess inventory purchased to fulfill expected sales and satisfy our contractual obligations under the arrangement with St. Jude Medical. The provision is based on the uncertainty of realizing the value of the excess inventory. We do not believe that the inventory is exposed to obsolescence risk.
Three and Nine Month Periods Ended September 30, 2009 and 2010
Gross profit, as a percent of revenue, for the three months ended September 30, 2009 and 2010, was 43% and 32%, respectively. Gross profit, as a percent of revenue, for the nine months ended September 30, 2009 and 2010, was 42% and 30%, respectively. The decrease in gross profit as a percentage of revenue in 2010 was primarily attributable to the $124,476 inventory provision, recorded in the first nine months of 2010 in connection with the excess inventory which was purchased to fulfill expected sales and satisfy our contractual obligation under the arrangement with St. Jude Medical. The provision is based on the uncertainty of realizing the value of the excess inventory. We do not believe that the inventory is exposed to obsolescence risk. In addition, we incurred start-up manufacturing costs in connection with the MTWA Module and an above average number of HearTwave II Systems sold during the period included no-charge treadmills.
OPERATING EXPENSES
The following tables present, for the periods indicated, our operating expenses. This information has been derived from our statements of operations included elsewhere in this prospectus. Our operating expenses for any period are not necessarily indicative of future trends.
| Fiscal Year ended December 31, 2008 |
% of Total Revenue |
Fiscal Year ended December 31, 2009 |
% of Total Revenue |
% Inc/(Dec) 2009 vs 2008 |
||||||||||||||||
| Operating Expenses: |
||||||||||||||||||||
| Research and development |
$ | 542,102 | 13 | % | $ | 380,840 | 12 | % | -30 | % | ||||||||||
| Selling, general and administrative |
10,861,678 | 256 | % | 8,380,199 | 259 | % | -23 | % | ||||||||||||
| Total |
$ | 11,403,780 | 269 | % | $ | 8,761,039 | 271 | % | -23 | % | ||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||
| 2009 | % of Total Revenue |
2010 | % of Total Revenue |
% Inc/(Dec) 2009 vs 2010 |
2009 | % of Total Revenue |
2010 | % of Total Revenue |
% Inc/(Dec) 2009 vs 2010 |
|||||||||||||||||||||||||||||||
| Operating Expenses: |
||||||||||||||||||||||||||||||||||||||||
| Research and development |
$ | 91,561 | 11 | % | $ | 119,924 | 15 | % | 31 | % | $ | 258,248 | 11 | % | $ | 423,141 | 20 | % | 64 | % | ||||||||||||||||||||
| Selling, general and administrative |
1,931,878 | 242 | % | 1,258,559 | 159 | % | -35 | % | 6,382,657 | 263 | % | 4,144,215 | 197 | % | -35 | % | ||||||||||||||||||||||||
| Total |
$ | 2,023,439 | 253 | % | $ | 1,378,483 | 174 | % | -32 | % | $ | 6,640,905 | 274 | % | $ | 4,567,356 | 217 | % | -31 | % | ||||||||||||||||||||
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RESEARCH AND DEVELOPMENT
Fiscal Years 2009 and 2008
Research and development (R&D) expenses were $380,840 in 2009 compared to $542,102 in 2008, a decrease of 30%. The decrease is primarily attributable to one-time patent related costs incurred in 2008, as well as recruiting fees.
Three and Nine Month Periods Ended September 30, 2009 and 2010
Research and development expense for the three months ended September 30, 2009 and 2010 was $91,561 and $119,924, respectively, an increase of 31%. Research and development expense for the nine months ended September 30, 2009 and 2010 was $258,248 and $423,141, respectively, an increase of 64%. The increase in research and development expense for the 2010 periods was due to costs related to research work and recent patents, as well as developmental costs related to the MTWA Module.
SELLING, GENERAL AND ADMINISTRATIVE
Fiscal Years 2009 and 2008
Selling, general and administrative (“SG&A”) expenses were $8,380,199 in 2009 compared to $10,861,678 in 2008, a decrease of 23%. Selling and marketing costs, which accounted for 42% of total SG&A in 2009, decreased 32% from 2008. The decrease in selling expense from 2008 was driven by the reduction in headcount in March 2009 and lower variable selling expenses as a result of lower sales of commissionable products in the U.S. Refer to the Employee section under “Business” for further details regarding headcount. Administrative costs accounted for 58% of total SG&A compared to 52% in 2008. SG&A costs for 2009 included $1,990,834 in non-cash stock-based compensation expense, compared to $2,418,122 in 2008.
Three and Nine Month Periods Ended September 30, 2009 and 2010
SG&A expenses for the three and nine month periods ended September 30, 2009 and 2010 was $1,931,878 and $1,258,559, and $6,382,657 and $4,144,215, respectively, a decrease of 35% and 35%, respectively. The decrease in selling expense from the 2009 periods was primarily due to lower variable selling expenses as a result of lower sales of commissionable products in the U.S. General and administrative expenses were lower due to lower overall consultative and advisory costs and lower non-cash compensation due to the full vesting of certain previously issued stock option awards and restricted stock awards, and some reduction in headcount in 2010. SG&A expense for the 2009 and 2010 three and nine month periods included $494,685 and $190,465, and $1,474,071 and $780,439 in non-cash, stock-based compensation expense, respectively.
INTEREST INCOME/INTEREST EXPENSE
Fiscal Years 2009 and 2008
Interest income was $29,556 in 2009 compared to $356,941 in 2008, a decrease of 92%. The decrease is primarily the result of lower amounts of invested cash and declining short-term interest rates. Interest expense was $6,926 in 2009 compared to $43,144 in fiscal year 2008, a decrease of 84%, due to costs associated with our line of credit from Citigroup, which was paid off completely in the fourth quarter of 2008.
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Three and Nine Month Periods Ended September 30, 2009 and 2010
Interest income for the three and nine month periods ended September 30, 2009 and 2010 was $1,217 and $459, and $14,913 and $606, respectively, a decrease of 62% and 96%, respectively. The decrease in interest income is primarily the result of lower amounts of invested cash and declines in short-term interest rates. Interest expense for the three and nine month periods ended September 30, 2009 and 2010 was $1,596, $2,640, $5,197, and $7,752, respectively, an increase of 65% and 49% predominantly due to interest associated with a new capital lease.
NET LOSS
As a result of the factors described above, the net loss attributable to common stockholders for the three and nine months ended September 30, 2010 was $1,123,065 and $3,945,553 compared to $1,681,441 and $5,615,701 in the same periods in 2009, and was $7,455,768 for fiscal year 2009 as compared to $10,030,089 in 2008.
Liquidity and Capital Resources
Cash and cash equivalents were $1,515,960 at September 30, 2010, compared to $3,159,468 at December 31, 2009 and $6,207,074 at December 31, 2008. In addition, we held restricted cash in a standby letter of credit in favor of the landlord as security for the obligations under the facility lease. The amount of the letter of credit is $500,000 for the first and second lease years and reduces by $100,000 at the end of each of the second, third and fourth lease years. At September 30, 2010 and at December 31, 2009 and 2008, cash and cash equivalents included cash held in an operating bank account and cash invested in money market funds. The money market funds are readily convertible into known amounts of cash and therefore, are classified as cash equivalents. At September 30, 2010 and at December 31, 2009 and 2008 restricted cash was held in money market funds.
The overall decrease in the Company’s cash and cash equivalents is primarily attributable to cash used by operations. Our financial statements have been prepared on a “going concern basis,” which assumes we will realize our assets and discharge our liabilities in the normal course of business. We have experienced recurring losses from operations. For the three and nine months ended September 30, 2010, loss from operations was $1,120,884 and $3,938,407, respectively. For the three and nine months ended September 30, 2010, the net loss we incurred included non-cash stock-based compensation expense of $194,769 and $791,960, respectively. For the years ended December 31, 2009 and 2008, loss from operations was $7,371,056 and $10,343,886, respectively. In 2009, the net loss we incurred included non-cash stock-based compensation expense of $2,026,058.
The main changes in operating assets and liabilities in 2009 were a decrease in accounts receivable, net of allowance for doubtful accounts, of $307,992, or 40%, as a result of cash collection efforts and lower sales volume, and a decrease in inventory, net of reserve, of $302,710, or 21%, attributable to the sale of our products during 2009. Due to inventory built up in order to satisfy our contractual obligations to St. Jude Medical, we did not need to make significant inventory purchases related to our HearTwave II System. However, due to the uncertainty of realizing the value of any excess inventory, we maintain an inventory reserve, which was increased as of December 31, 2009 to $967,148 from $940,165 at December 31, 2008. We do not believe that the inventory is exposed to obsolescence risk. Prepaid expenses and other current assets at December 31, 2009 decreased $4,768 compared to December 31, 2008. Fixed assets at December 31, 2009 decreased $118,464 compared to December 31, 2008, primarily due to depreciation related to capitalized costs associated with our current facility as well as the sale of HearTwave II Systems sold through our Technology Placement Program where we retained title to the equipment originally, but upon sale, title was transferred to customers. Accounts payable and accrued expenses at December 31, 2009 decreased $250,269 compared to December 31, 2008 as our inventory purchases subsided. As a result of the aforementioned, we have incurred negative cash flow from operations of $4,831,626 and $5,684,806, for the years ended December 31, 2009 and 2008, respectively. In addition, we had an accumulated deficit at December 31, 2009 of $95,992,519.
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The main changes in operating assets and liabilities in the nine-month period ended September 30, 2010 were an increase in accounts receivable, net of allowance for doubtful accounts, of $145,399, attributable to the timing of sales occurring at the end of the third quarter, and a decrease in inventory, net of reserve, of $369,117 attributable to the sale of our products during 2010, and the $124,476 inventory reserve provision. Due to inventory built up in order to satisfy our contractual obligations to St. Jude Medical, we did not need to make significant inventory purchases related to our HearTwave II System. However, due to the uncertainty of realizing the value of any excess inventory, we maintain an inventory reserve, which was increased as of September 30, 2010 to $1,091,624 from $967,148 at December 31, 2009. We do not believe that the inventory is exposed to obsolescence risk. Prepaid expenses and other assets at September 30, 2010 decreased $31,117 compared to December 31, 2009 due to fewer deposits and prepayments made to vendors as well as a decrease in other receivables. Accounts payable and accrued expenses at September 30, 2010 decreased $307,903 compared to December 31, 2009, primarily as our inventory purchases subsided and we made payments on liabilities related to 2009 year-end expenses. As a result of the factors described above, we have incurred negative cash flow from operations of $3,071,918 for the nine-month period ended September 30, 2010. In addition, we had an accumulated deficit at September 30, 2010 of $99,938,072.
In order to position the Company to operate more efficiently in light of continued challenging economic conditions and to focus resources to take advantage of strategic opportunities, in March 2009, we implemented an expense reduction initiative. The initiative, in conjunction with previous measures, which included a 33% reduction in headcount, amounted to cash savings of approximately $500,000 per quarter. The reduction in headcount, which impacted all of our operational areas, included a restructuring of the direct sales organization to improve cost effectiveness. During 2009, we managed to support the Company’s operations with the down-sized organizational structure and continued to do so in 2010.
In December 2009, we collected $1,852,000 of aggregate proceeds from the Series D Financing. The Company used the proceeds of the Series D Financing to fund its ongoing operations. See Note 9 of the Notes to the Financial Statements for fiscal years 2008 and 2009.
In December 2009, we reduced the size of our Board of Directors from seven members to five, in order to reduce costs and streamline the Company’s decision making process. In addition, we replaced 10% of senior management’s salaries and 100% of senior management’s 2009 earned bonuses with stock options to purchase shares of common stock of the Company; we eliminated per meeting director fees and reduced the annual retainer paid to directors. In recognition of this reduction in fees, we awarded each director stock options to purchase shares of common stock of the Company. We also scaled back the level of services incurred across all functions of the Company, and we renegotiated certain consultative and advisory rates for 2010.
In the third quarter of 2010, we commenced sales of our MTWA Modules and Micro-V Alternans Sensors to Cardiac Science. Under the Cardiac Science Agreement, we may continue to sell, distribute and license our MTWA Test and Micro-V Alternans Sensors to other distributors and customers in both generic and customized versions. Given that Cardiac Science is more active in larger-sized private practices, hospitals and other institutions, in which we historically have had minimal presence, and given that our HearTwave II System is a state-of-the art stress test system, we have reason to believe that the introduction of the MTWA Module may not materially cannibalize sales of our HearTwave II System going forward.
In December 2010, the Company completed a private placement to accredited investors. The transaction raised net proceeds of $2.6 million and consisted of Units that were comprised of one share of common stock and a warrant to purchase one share of common stock. The Company sold 14,500,000 Units at a price of $0.20 per Unit. Each warrant included in the Unit entitles the holder to purchase one share of common stock for $0.25 for a period of five years from the date of issuance. Exercise of the warrants would provide an additional $3.6 million in capital.
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In December 2010, all investors in the Series D Financing that had not previously exercised their Short-Term Warrants elected to exercise the outstanding Short-Term Warrants. The exercise of the Short-Term Warrants generated a total of $752,000 in proceeds, and resulted in the issuance of 7,024,392 shares of common stock. The shares of common stock issued by the Company as a result of the exercise of warrants are subject to customary restrictions on the transfer of securities issued in a private placement under the federal securities laws.
Based on our projections and currently forecasted financial results, we believe that our existing resources are sufficient to fund our operations through December 31, 2011. To the extent that sales of our MTWA Module and Micro-V Alternans Sensors exceed our projected base-line levels, the Company may have sufficient resources to fund its operations beyond the end of 2011. Conversely, if we encounter material deviations from our plan including, but not limited to, lower than expected level of sales to Cardiac Science, or if we experience lower than expected sales of our HearTwave II Systems and Micro-V Alternans Sensors, our ability to fund our operations will be negatively impacted. While the proceeds from the private placement offering and the warrant exercise in December 2010 will provide the Company with additional financing to fund the Company’s operations, the Company anticipates that it will need to raise additional capital in 2011. However, there can be no assurance that such capital would be available at all, or if available, that the terms of such financing would not be dilutive to other stockholders.
If we are unable to generate adequate cash flows or obtain sufficient additional funding when needed, we may have to significantly cut back our operations, sell some or all of our assets, license potentially valuable technologies to third parties, and/or cease some or all of our operations.
Contractual Obligations
Our contractual obligations as of September 31, 2010 are included in the table below.
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations |
Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years |
|||||||||||||||
| Capital Lease Obligations |
$ | 34,754 | $ | 4,660 | $ | 14,530 | $ | 15,564 | $ | — | ||||||||||
| Operating Lease Obligations |
$ | 1,007,128 | $ | 382,249 | $ | 624,879 | $ | — | $ | — | ||||||||||
| Purchase Obligations |
$ | 30,0000 | $ | 10,000 | $ | 20,000 | $ | — | $ | — | ||||||||||
| Total |
$ | 1,071,882 | $ | 396,909 | $ | 659,409 | $ | 15,564 | $ | — | ||||||||||
In November 2007, we entered into a definitive agreement with Farley White Management Company, LLC to lease 17,639 usable square feet of office space located at 100-200 Ames Pond Drive, Tewksbury, Massachusetts, which is our current executive and operating facility. The initial lease term is for 62 months with an option to extend the lease for one extension period of five years. The term of the lease commenced in February 2008 following the completion of the construction of the interior of the space that we occupy. We were not required to pay rent for the first two months of the initial lease term. Thereafter, the annual base rent for the first, second, third, fourth and fifth years of the initial lease term is $262,500, $367,776, $377,992, $388,208 and $398,424, respectively, plus our pro-rata share of real estate taxes and property maintenance, in each case over a base year. During the term of our lease, we are required to maintain a standby letter of credit in favor of the landlord as security for the obligations under the lease. The amount of the letter of credit is $500,000 for the first and second lease
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years and reduces by $100,000 at the end of each of the second, third and fourth lease years. We occupied the space in February 2008 and therefore the reduction began in 2010. The landlord for the property is responsible for paying for the costs of construction for the interior of the space to be occupied by us. We are generally responsible for paying our interior furnishings, telephones, data cabling and equipment. Based on these terms, we account for this agreement as an operating lease.
In addition, under the terms of our license and consulting and technology agreements, we are required to pay royalties on sales of our Alternans products. Minimum license maintenance fees under the MIT license agreement, which is creditable against royalties otherwise payable for each year, is $10,000 per year through 2013. In addition, monthly royalty under the Company’s consulting and technology agreement is $10,789.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
Effective January 1, 2009 the Company adopted new fair value guidance with respect to non-financial assets and liabilities measured on a non-recurring basis. The adoption of this guidance did not affect our financial position or results of operations.
In December 2007, the FASB established principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. It also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This guidance became effective for the Company beginning January 1, 2009. The adoption of these requirements did not affect our financial position or results of operations, and will not unless the Company consummates an acquisition.
In December 2007, the FASB established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The FASB also established disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance became effective for the Company beginning January 1, 2009 and did not have an impact on the Company financial position or results of operations.
In March 2008, the FASB issued a pronouncement that enhanced the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This guidance became effective for us beginning January 1, 2009 and did not have an impact on the Company’s financial position or results of operations.
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In June 2008, the FASB Emerging Task Force issued guidance clarifying accounting assessing whether an equity-linked financial instrument is indexed to an entity’s own stock for purposes of determining whether it should be accounted for in equity accounts or subject to derivative accounting. The guidance became effective for the Company on January 1, 2009. Management performed an analysis of the Company’s existing instruments and determined that it has no impact on the Company’s results of operations and financial condition.
In April 2009, the FASB issued guidance to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This became effective for our second fiscal quarter ended June 30, 2009 and had no impact on the Company’s results of operations, financial condition or financial statements.
In April 2009, the FASB issued guidance to provide guidelines for making fair value measurements more consistent with the principles presented by the FASB. It is applicable to all assets and liabilities (i.e. financial and nonfinancial) and provides additional authoritative guidance to determine whether a market is active or inactive or whether a transaction is distressed. This guidance became effective for our second fiscal quarter ended June 30, 2009 and had no impact on the Company’s results of operations, financial condition or financial statements.
In June 2009, the Company adopted the provisions of FASB which require disclosures about the fair value of financial instruments in interim as well as in annual financial statements. The adoption of this standard increased disclosure requirements related to the Company’s interim financial statements but did not impact our financial position, results of operations or cash flows.
In June 2009, the FASB issued guidance establishing the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. The Company has updated references to GAAP in its financial statements issued for periods that end on or after September 30, 2009. The adoption increased disclosure requirements related to the Company’s interim financial statements but did not impact our financial position, results of operations or cash flows.
In June 2009, the Company adopted the FASB provisions establishing general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance did not have an impact on our financial position, results of operations, or cash flows. See Subsequent Events at Note 17 to the financial statements for fiscal years 2008 and 2009.
In September 2009, the Emerging Issues Task Force issued new rules pertaining to the accounting for revenue arrangements with multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes the prior multiple element revenue arrangement accounting rules that are currently used by the company. This guidance is effective for the Company January 1, 2011 and is not expected to be material to our consolidated financial position or results of operations.
In September 2009, the Emerging Issues Task Force issued new rules which changed the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. This guidance is effective for us January 1, 2011 and is not expected to be material to our consolidated financial position or results of operations.
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In January 2010, the FASB issued an Accounting Standards Update which improves disclosures about fair value measurements. More specifically, the update requires the disclosure of transfers in and out of levels 1 and 2 and the reason for the transfers. Additionally, it requires separate reporting of purchases, sales, issuances and settlements for level 3. This update is effective for periods beginning after December 15, 2009. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.
Quantitative and Qualitative Disclosures about Market Risk
We own financial instruments that are sensitive to market risk as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is used to fund operations. None of these market-risk sensitive instruments are held for trading purposes.
In 2008, investments consisted of money market funds and marketable securities. The money market funds were readily convertible into known amounts of cash, and, therefore, were classified as cash equivalents. The marketable securities consisted of municipal bonds with long-term nominal maturities that are triple “A” credit rated debt instruments collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”) up to 98%. The interest rates on these municipal bonds reset through an auction process every 28 – 30 days and, therefore, are referred to as auction rate securities (“ARS”). We generally had the opportunity to sell these investments during such periodic auctions subject to the availability of buyers. In November 2008, we sold all of our investments in marketable securities at par value.
During 2009 and the nine-month period ended September 30, 2010, we invested our cash in money market funds. Although we have implemented policies regarding the amount and credit ratings of investments, the valuation and liquidity of these investments are exposed to some level of risk due to market conditions. Given the relative security and liquidity associated with money market funds, we do not believe that a change in market rates would have a material negative impact on the value of our investment portfolio. Declines in interests rates over time will, however, reduce our interest income from our investments. We have not had any material exposure to factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. At September 30, 2010 and at December 31, 2008 and 2009, our investments consisted of only money market funds.
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The following table sets forth the name, age and position of our executive officers and directors as of the date of this prospectus. Each executive officer holds his office until he resigns, is removed by the Board of Directors or his successor is elected and qualified. Directors are elected annual by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer.
Our directors and executive officers and their ages as of January 15, 2011 are as follows:
| Name |
Age | Position |
Director Since |
|||||||
| Roderick de Greef |
50 | Chairman of the Board, Director | 2008 | |||||||
| Ali Haghighi-Mood, Ph.D. |
51 | President and Chief Executive Officer, Director | 2007 | |||||||
| Paul McCormick |
58 | Director | 2009 | |||||||
| John F. McGuire |
64 | Director | 2007 | |||||||
| Jeffrey Wiggins |
55 | Director | 2008 | |||||||
| Vincenzo LiCausi |
37 | Chief Financial Officer and Vice President of Finance and Administration | N/A | |||||||
Background
The following is a brief summary of the background of each director and executive officer of the Company. With respect to the directors, the summaries include a brief statement of the specific experience, qualifications, attributes and skills that contributed to the decision of the Board of Directors to nominate him for election as a director at the time of such nomination.
Roderick de Greef has been Chairman of the Board of the Company since November 2008. During the same period, Mr. de Greef has been employed by the Company to work with the Company’s Chief Executive Officer and the Board of Directors to formulate the strategic plan of the Company and to oversee the execution of corporate strategy. In addition to serving as the Company’s Chairman of the Board, Mr. de Greef provides corporate advisory services to several other companies. Mr. de Greef served as the Company’s Chief Financial Officer from October 2005 to July 2007 and as the Company’s Vice President of Finance and Administration from June 2006 to July 2007. From February 2001 to September 2005, Mr. de Greef was Executive Vice President and Chief Financial Officer of Cardiac Science, Inc., which merged with Quinton Cardiology, Inc. From 1995 to 2001, Mr. de Greef provided independent corporate advisory services to a number of early-stage companies. From 1986 to 1995, Mr. de Greef served as Chief Financial Officer of several publicly held, development stage medical technology companies. Mr. de Greef is a member of the board of directors of Endologix, Inc. and Bio Life Solutions Inc., both of which are in the life sciences field, and Elephant Talk Communications, Inc. Mr. de Greef has a B.A. in Economics and International Relations from California State University at San Francisco and earned his M.B.A. from the University of Oregon. Mr. de Greef’s extensive business, managerial, executive and leadership experience in the medical device industry, including service on the boards of directors and as an executive officer of other public companies, as well as his position as Chairman of the Board and right to be nominated to the Board under the terms of his employment agreement, were among the factors considered by the Board of Directors in determining that Mr. de Greef should be nominated for election as a director.
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Ali Haghighi-Mood has been the President and Chief Executive Officer of the Company since December 2007. From December 2006 to December 2007, Dr. Haghighi-Mood served as the Company’s Executive Vice President, Chief Operating Officer and Chief Technology Officer. From July 2003 to December 2006, Dr. Haghighi-Mood served as the Company’s Vice President, Operations, Research and Development. From January 2002 to July 2003, he served as the Company’s Director of Research and has worked in the Company’s research and development department since January 1997. Dr. Haghighi-Mood holds B.S. and M.S. degrees in Electrical Engineering from the University of Tehran and a Ph.D. degree in Biomedical Engineering from the University of Sussex. Dr. Haghighi-Mood’s long history with and extensive knowledge of the technology and operations of the Company, as well as his position as President and Chief Executive Officer and right to be nominated to the Board under the terms of his employment agreement, were among the factors considered by the Board of Directors in determining that Dr. Haghighi-Mood should be nominated for election as a director.
Paul McCormick currently serves as the Executive Chairman of Cardiogenesis, Inc. From April 2007 until July 2009, Mr. McCormick served as Chairman of the Board of Cardiogenesis, Inc. Mr. McCormick was a member of the executive management team of Endologix, Inc. from 1998 until 2008, most recently serving as President and Chief Executive Officer from January 2003 until May 2008. He served as a director of Endologix from February 2002 until May 2010. Mr. McCormick also serves as a director of Cianna Medical, Inc. Mr. McCormick holds a B.A. in Economics from Northwestern University and an Executive Sales and Marketing certification from Columbia University. Mr. McCormick’s extensive executive, sales and marketing experience in the medical device industry were among the factors considered by the Board of Directors in determining that Mr. McCormick should be nominated for election as a director.
John F. McGuire is retired. From 2004 to 2007, he was President and Chief Executive Officer of the American Red Cross. Between 2003 and 2004, Mr. McGuire served as an Executive Vice President at the American Red Cross. Prior to joining the American Red Cross, Mr. McGuire was President of Whatman North America, an international leader in separations technology and provider of materials and devices to laboratory and healthcare markets. Previously, he served as President, Chief Executive Officer and a director of HemaSure, Inc., a publicly-traded blood filtration company. In addition, Mr. McGuire has held prominent positions for over 22 years in the field of biomedical technology. Mr. McGuire holds an MBA from Harvard University. Mr. McGuire’s substantial experience as an executive officer at numerous public companies, his prior leadership of the American Red Cross Blood Program, and his qualification as an audit committee financial expert were among the factors considered by the Board of Directors in determining that Mr. McGuire should be nominated for election as a director.
Jeffrey Wiggins is a former Principal of Dresdner RCM Capital Management, where he was responsible for in excess of $4 billion dollars in health care related investments. Mr. Wiggins joined Dresdner RCM in 1993 and became a Principal in 1997. While there, he started and managed several portfolios, advised other managers in their health care holdings, and initiated two public mutual funds. Prior to that time, Mr. Wiggins managed a derivative-based hedge fund portfolio investing in biotechnology, medical technology, pharmaceuticals, and health care services at O’Connor & Associates. Mr. Wiggins holds a B.A. from Hope College, with majors in Biology and Chemistry, Masters degrees from Northwestern University in Music and Management, and an M.F.A. from Vermont College. Mr. Wiggins’ business and investment experience in biotechnology, life sciences and other industries, as well as his qualification as an audit committee financial expert, were among the factors considered by the Board of Directors in determining that Mr. Wiggins should be nominated for election as a director.
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Vincenzo LiCausi has been our Chief Financial Officer and Vice President of Finance and Administration since July 2007. From October 2006 to July 2007, Mr. LiCausi was our Controller. Prior to joining Cambridge Heart, from 2004 to 2006, Mr. LiCausi was employed by Bard Electrophysiology, a division of C.R. Bard, serving in various positions including General Accounting Manager. From 2001 to 2004, Mr. LiCausi was Senior Financial Analyst of Planning & Analysis with Tropicana Products, a division of PepsiCo. From 1997 to 2001, Mr. LiCausi was a Senior Auditor for Deloitte & Touche. Mr. LiCausi is a CPA and has a B.S. in Accountancy from Bentley University in Waltham, Massachusetts.
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The following table sets forth information for the fiscal years ended December 31, 2008 and 2009 concerning the compensation paid to each person serving as the Company’s Chief Executive Officer or acting in a similar capacity during the last completed fiscal year and the Company’s Chief Financial Officer (the “Named Executive Officers”). No other executive officer of the Company received total compensation in excess of $100,000 during the fiscal year ended December 31, 2009.
| Name and Principal Position |
Year | Salary ($) |
Option Award ($)(1) |
Non-Equity Incentive Compensation ($)(2) |
All Other Compensation ($) |
Total ($) | ||||||||||||||||||
| Ali Haghighi-Mood, Ph.D. |
2009 | 275,000 | 1,032,545 | 77,000 | — | 1,384,545 | ||||||||||||||||||
| President and Chief Executive Officer |
2008 | 275,000 | 1,091,939 | — | — | 1,366,939 | ||||||||||||||||||
| Roderick de Greef (3) |
2009 | 120,000 | 55,176 | — | — | 175,176 | ||||||||||||||||||
| Chairman of the Board |
2008 | 12,308 | 6,930 | — | 32,916 | (4) | 52,154 | |||||||||||||||||
| Vincenzo LiCausi |
2009 | 155,000 | 245,958 | 26,040 | — | 426,988 | ||||||||||||||||||
| Vice President Finance and Administration, Chief Financial Officer |
2008 | 155,000 | 244,595 | 23,000 | — | 422,595 | ||||||||||||||||||
| (1) | Reflects the compensation cost related to all outstanding awards recognized in 2008 and 2009 for financial statement reporting purposes in accordance with FASB ASC Topic 718, excluding the impact of estimated forfeitures related to service-based vesting conditions. Assumptions made in the calculation of these amounts are included in Note 2 to the Company’s audited financial statements for the fiscal year ended December 31, 2009. |
| (2) | For 2008, consists of cash bonus earned pursuant to non-equity incentive plan awards. For 2009, represents the cash bonuses earned pursuant to non-equity incentive plan awards but foregone by the Named Executive Officers. In March 2010, Dr. Haghighi-Mood and Mr. LiCausi agreed to accept options to purchase 668,468 and 226,064 shares of common stock, respectively, in lieu of earned cash bonuses for 2009 of $77,000 in the case Dr. Haghighi-Mood, and $26,040 in the case of Mr. LiCausi. See “Senior Management Bonus Plan for 2009” for a description of the terms of these option awards. |
| (3) | Mr. de Greef became our Chairman of the Board in November 2008. |
| (4) | Consists of fees paid to Mr. de Greef for consulting services provided from July 2008 until November 2008. |
Severance Arrangements with Chief Executive Officer and Chief Financial Officer
The Company has entered into agreements with Dr. Haghighi-Mood and Mr. LiCausi providing for the payment of severance benefits in the event of a qualifying termination of employment. Under these agreements, if the executive officer’s employment is terminated by the Company without cause (as defined in the respective agreement), the executive officer will be entitled to receive severance compensation equal to the executive officer’s base salary as in effect at the time of such termination and continued healthcare benefits for a period of six months in the case of Mr. LiCausi and 12 months in the case of Dr. Haghighi-Mood.
In the event that Dr. Haghighi-Mood terminates his employment within 30 days following the occurrence of changed circumstances, he is entitled to receive the severance benefits as though his employment had been terminated by the Company without cause. For purposes of his employment agreement, changed circumstances includes (i) a material reduction in the nature or scope of Dr. Haghighi-Mood’s responsibilities, authority or powers as President and Chief Executive Officer of
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the Company, including, without limitation, due to the Board having hired or appointed another senior executive officer to whom Dr. Haghighi-Mood is requested by the Board to report or who reports directly to the Board or who is given responsibilities or authority normally exercised by an executive in the positions of President and Chief Executive Officer of a company generally comparable to the Company, in each case without Dr. Haghighi-Mood’s consent; and (ii) any failure by the Company to nominate and recommend to stockholders that they reelect Dr. Haghighi-Mood to serve as a director of the Company upon the expiration of his term.
In the event of a change in control (as defined in the severance agreements) that does not result in termination of the executive officer’s employment, 50% of Mr. LiCausi’s unvested options and 100% of Dr. Haghighi-Mood’s unvested options that are then outstanding will become immediately exercisable. In the event of a change in control that results in the termination of the executive officer’s employment without cause or by the executive officer for good reason (each as defined in the severance agreements), the executive officer will be entitled to receive severance compensation in an amount equal to the executive officer’s base salary as in effect at the time of such termination for a period of 12 months, continued healthcare benefits for a period of 12 months, and all of the executive officer’s unvested options which are then outstanding will become immediately exercisable.
The Company included enhanced severance benefits in the event of a change in control of the Company in order to remove any financial concerns an executive may have when evaluating a potential transaction and to allow the executive to focus on maximizing value for the Company’s stockholders. The Board of Directors determined that these change in control benefits are necessary given the volatility and uncertainty inherent in the Company’s line of business.
Employment Agreement with Chief Executive Officer
On December 14, 2007, the Company appointed Dr. Haghighi-Mood as the Company’s President and Chief Executive Officer and elected him as a director of the Company. Dr. Haghighi-Mood and the Company entered into an employment agreement dated December 14, 2007, the terms of which were approved by the Board of Directors of the Company after negotiations with Dr. Haghighi-Mood.
Under the terms of the employment agreement, Dr. Haghighi-Mood will be paid an annual base salary of $275,000 per year and will be entitled to receive the severance benefits described above under the title “Severance Arrangements with Named Executive Officers.” Dr. Haghighi-Mood also will have the opportunity to earn an annual performance bonus based upon the achievement by the Company of performance goals to be agreed upon by Dr. Haghighi-Mood and the Board of Directors or the Compensation Committee.
Under the terms of the employment agreement, Dr. Haghighi-Mood will have the opportunity to earn an annual performance bonus in the amount, and contingent upon the achievement by the Company or Dr. Haghighi-Mood, as the case may be, of performance goals to be agreed upon by Dr. Haghighi-Mood and the Board of Directors of the Company. See “Senior Management Bonus Plan for 2009” for a description of the 2009 performance bonus criteria for Dr. Haghighi-Mood.
Effective March 1, 2010, Dr. Haghighi-Mood agreed to a 10% reduction in his base salary for 2010. See “Management Stock Option Awards” for a description of the terms of a stock option awarded to Dr. Haghighi-Mood in recognition of the reduced base salary.
Senior Management Bonus Plan for 2009
Dr. Haghighi-Mood and Mr. LiCausi, as well as other senior management of the Company (excluding Mr. de Greef), were eligible to participate in the Senior Management Bonus Plan for 2009 (the “2009 Bonus Plan”). The objective of the 2009 Bonus Plan is to provide an effective tool to help
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motivate the senior management team’s performance in achieving the Company’s defined strategy and goals by aligning measurement and accountability with cash incentive rewards. The total bonus potential under the 2009 Bonus Plan for Dr. Haghighi-Mood and Mr. LiCausi was 50% and 30% of annual base pay, respectively.
Rewards under the 2009 Bonus Plan were based on the achievement of performance goals for the Company established by the Compensation Committee and approved by the Board of Directors in consultation with Dr. Haghighi-Mood. The performance goals under the 2009 Bonus Plan consisted of four separate goals each weighted between 8% and 60% relating to:
| • | the execution of one or more strategic distribution agreements approved by the Board of Directors; |
| • | the completion of the development of a MTWA OEM Module and any other requirements of any strategic distribution agreements to which the Company is a party; |
| • | the achievement of a cash balance at December 31, 2009 in an amount determined by the Board of Directors; and |
| • | the completion of a capital raising transaction upon terms agreed to by the Board of Directors that results in the Company achieving a total cash balance at December 31, 2009 in an amount determined by the Board of Directors. |
The Compensation Committee determined that a portion of the performance goal related to the execution of one or more strategic distribution agreements, the entire performance goal related to the development of a MTWA OEM Module, and a portion of the performance goal related to the completion of a capital raising transaction had been achieved, and that the performance goal related to the achievement of an amount of cash at December 31, 2009 had not been achieved. Based on the foregoing, the Compensation Committee determined that the bonus amounts earned by Dr. Haghighi-Mood and Mr. LiCausi under the 2009 Bonus Plan were $77,000 and $26,040, respectively.
On March 11, 2010, the Compensation Committee awarded, and Dr. Haghighi-Mood and Mr. LiCausi agreed to accept, stock options in lieu of any cash bonus for 2009. Specifically, Dr. Haghighi-Mood and Mr. LiCausi were awarded options to purchase 668,468 and 226,064 shares of common stock, respectively, at an exercise price of $0.16 per share, which was the closing price of the Company’s common stock on the date of grant. The number of shares covered by each option award was determined based on the amount of the 2009 bonus earned by each recipient and the fair value of the option awards using the Black-Scholes option pricing model, which requires the Company to make certain assumptions regarding the expected term of the options, forfeiture rate and volatility of the underlying stock. The option awards are immediately exercisable and will continue to be exercisable following the termination of the employment of the recipient until the expiration of the ten-year term.
Employment Agreement with Chairman of the Board
On November 24, 2008, the Board of Directors elected Mr. de Greef as a member of the Board of Directors and appointed him to serve as the Chairman of the Board. Mr. de Greef and the Company entered into an employment agreement dated November 24, 2008 the terms of which were approved by the Board of Directors of the Company after negotiations with Mr. de Greef.
The employment agreement provides that Mr. de Greef will devote approximately 50% of a regular work week to the business and interests of the Company. Specifically, the employment agreement provides that Mr. de Greef will work with the Company’s Chief Executive Officer and the Board of Directors to formulate the strategic plan of the Company and to oversee the execution of corporate strategy. Mr. de Greef will serve on the Company’s Board as the Chairman of the Board. During the term of Mr. de Greef’s employment by the Company, at each annual meeting of the Company’s stockholders at which Mr. de Greef’s membership on the Board has expired, the Company will nominate Mr. de Greef to serve as a member of the Board.
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The Employment Agreement has a term of three years commencing on November 24, 2008 and ending on November 24, 2011 (the “Employment Period”). The Employment Period will automatically be extended for successive one year periods unless either party gives the other 30 days written notice that it does not wish to extend the term of the employment agreement.
The employment agreement provides that Mr. de Greef will be paid an annual base salary of $120,000 per year. He will be entitled to participate in any and all of the Company’s employee benefit plans in effect for part-time employees, except to the extent that such benefits are in a category otherwise specifically provided to Mr. de Greef. In the event that Mr. de Greef is not eligible to participate in the Company’s health insurance benefit plan, the Company will reimburse Mr. de Greef up to $2,000 per month for the cost of maintaining his current family medical insurance coverage.
On November 24, 2008, the Board awarded to Mr. de Greef a stock option to purchase 550,000 shares of common stock of the Company. The option was granted under and subject to the terms of the Company’s 2001 Stock Incentive Plan (the “2001 Plan”). The exercise price of the option was the closing price per share of the Company’s common stock on November 24, 2008 (the “Grant Date”). The option becomes exercisable in three equal annual installments, beginning on the first anniversary of the Effective Date. The option will expire on the tenth anniversary of the Grant Date. The dates on which the option will become exercisable will accelerate with regard to a specified number of shares upon the occurrence of certain performance goals (the “Performance Goals”). The Performance Goals include: (i) the achievement by the Company of a specified 12-month trailing revenue target of $7.0 million (the “Revenue Target”); (ii) the consummation by the Company of one or more equity financing transactions in a twelve-month period that result in the receipt by the Company of sufficient proceeds to fund the Company’s operations for a 12-month period as determined in good faith by the Board (the “Financing Target”); and (iii) the consummation by the Company of a strategic distribution agreement (the “Strategic Transaction Target”). Upon the occurrence of a Performance Goal, the stock option will become exercisable with respect to a number of shares equal to the lesser of (A) the number of shares specified in the employment agreement for each Performance Goal (162,500 shares for each of the Revenue Target and the Financing Target and 62,500 shares for the Strategic Transaction Target) and (B) the positive difference between total number of shares under the stock option that are not yet exercisable and the number of shares specified in the employment agreement for the Performance Goal. The shares that become exercisable upon the achievement of a Performance Goal will reduce the number of shares that otherwise would next become exercisable on a regular annual vesting date following the date of achievement of the Performance Goal. As of December 31, 2009, both the Financing Target and the Strategic Transaction Target had been achieved.
In addition, prior to his appointment as Chairman of the Board, from July 2008 to November 2008, Roderick de Greef served as a consultant pursuant to the terms of a consulting agreement between the Company and Mr. de Greef dated July 29, 2008 (the “Consulting Agreement”). The Consulting Agreement provided that Mr. de Greef would provide consulting services to the Company to promote and execute the Company’s business development activities as an independent contractor. Mr. de Greef was paid a total of $32,916 in fees under the Consulting Agreement. On July 29, 2008, Mr. de Greef received an option to purchase 100,000 shares of the Common Stock of the Company at an exercise price of $0.33 per share (the “July 2008 Option”). The option becomes exercisable if, during the term of the Consulting Agreement or within 12 months thereafter, the Company executes a strategic transaction in which Mr. de Greef was involved. The July 2008 Option became exercisable in 2009.
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In the event the Company terminates Mr. de Greef’s employment without cause, he would be entitled to severance benefits as set forth in the employment agreement, including payment of Mr. de Greef’s salary for three months following termination. Mr. de Greef would also receive continuation of his health care benefits or reimbursement, as the case may be, for three months following termination. In addition, the stock option granted under the employment agreement would become exercisable for the number of shares that would have become exercisable had Mr. de Greef remained employed with the Company for an additional six months following termination and had the stock option become exercisable in 12 equal quarterly installments. If termination occurs prior to November 24, 2011, Mr. de Greef will have the right to exercise the stock option received under the Employment Agreement as well as the July 2008 Option for a period of two years following termination (but in no event after the expiration of the stock option) to the extent that he was entitled to exercise the stock option on that date.
In the event that a change in control of the Company occurs and Mr. de Greef’s employment is terminated without cause within 12 months following the change in control, Mr. de Greef is entitled to receive the severance benefits described above for a period of six months following the date of termination. In the event of a change in control of the Company, Mr. de Greef’s stock options received under the Employment Agreement and the July 2008 Option will become exercisable in full as of the date of the change in control, provided that all stock options must be exercised within the applicable dates provided in the applicable stock option agreement and the 2001 Plan.
In 2009, the stock options awarded to Mr. de Greef on November 24, 2008 associated with the execution of a Strategic Transaction and the Financing Target Performance Goals, and the July 2008 Option became exercisable.
Effective March 1, 2010, Mr. de Greef agreed to a 10% reduction in his base salary for 2010. See “2010 Management Stock Option Awards” for a description of the terms of a stock option awarded to Mr. de Greef in recognition of the reduced in base salary.
2010 Management Stock Option Awards
Effective March 1, 2010, the senior management team of the Company agreed to a 10% reduction in their base salaries for 2010. After giving effect to this reduction, the annual salary rates for the Named Executive Officers was as follows: $247,500 for Dr. Haghighi-Mood, $108,000 for Mr. de Greef, and $83,700 for Mr. LiCausi. In recognition of the reduction of the salaries of the senior management team, the Compensation Committee granted to each senior management member a stock option award (the “Salary Reduction Option Award”) on March 11, 2010 that becomes exercisable in nine equal monthly installments beginning on April 11, 2010, and will continue to be exercisable following the termination of the employment of the recipient to the same extent that the option was exercisable on the date of termination until expiration of the ten-year term. The Salary Reduction Option Awards were granted outside of the Company’s 2001 Stock Incentive Plan, but are nevertheless subject to the terms and conditions of the plan as if granted thereunder. Dr. Haghighi-Mood, Mr. de Greef and Mr. LiCausi received Salary Reduction Option Awards to purchase 198,949, 86,814 and 67,281 shares of common stock, respectively, at an exercise price of $0.16 per share, which was the closing price of the Company’s common stock on the date of grant. The number of shares covered by each Salary Reduction Option Award was determined based on the amount of the reduction of the 2010 salary for each recipient and the fair value of the Salary Reduction Option Awards using the Black-Scholes option pricing model, which requires the Company to make certain assumptions regarding the expected term of the options, forfeiture rate and volatility of the underlying stock.
Additionally, on March 11, 2010, each of the members of the senior management team of the Company (other than Mr. de Greef) entered into individual option exchange agreements with the Company whereby previously granted stock options to purchase an aggregate of 2,983,333 shares of common stock issued at varying times and at varying prices (ranging from $0.29 per share to $4.00 per share) were cancelled and replaced with new stock options (the “Management Stock Option Awards”) to
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purchase an aggregate of 3,583,333 shares of common stock of the Company at an exercise price of $0.16 per share, which was the closing price of the Company’s common stock on the date of grant. The Management Stock Option Awards become exercisable in three equal annual installments beginning on first anniversary of the date of grant. Dr. Haghighi-Mood and Mr. LiCausi received awards to purchase 2,383,333 and 450,000 shares of common stock of the Company, respectively, in exchange for the cancellation of previously granted stock options to purchase 2,383,333 and 350,000 shares of common stock. The Management Stock Option Awards were granted outside of the Company’s 2001 Stock Incentive Plan, but are nevertheless subject to the terms and conditions of the plan as if granted thereunder.
The following table sets forth certain information concerning stock options held by the Named Executive Officers as of December 31, 2009.
Outstanding Equity Awards At Fiscal Year-end For 2009
| Name |
Option Awards(1) | |||||||||||||||
| Number of Securities Underlying Unexercised Options Exercisable (#) |
Number of Securities Underlying Unexercised Options Unexercisable (#) |
Option Exercise Price ($) |
Option Expiration Date |
|||||||||||||
| Ali Haghighi-Mood, Ph.D. |
333,333 | $ | 0.29 | 8/15/2015 | ||||||||||||
| Ali Haghighi-Mood, Ph.D. |
700,000 | $ | 3.30 | 12/14/2016 | ||||||||||||
| Ali Haghighi-Mood, Ph.D. |
600,000 | 300,000 | $ | 1.15 | 12/11/2017 | |||||||||||
| Ali Haghighi-Mood, Ph.D. |
300,000 | 150,000 | $ | 1.15 | 12/11/2017 | |||||||||||
| Vincenzo LiCausi |
50,000 | 100,000 | $ | 2.53 | 10/16/2016 | |||||||||||
| Vincenzo LiCausi |
20,000 | $ | 3.26 | 4/30/2017 | ||||||||||||
| Vincenzo LiCausi |
20,000 | 10,000 | $ | 4.00 | 5/18/2017 | |||||||||||
| Vincenzo LiCausi |
100,000 | 50,000 | $ | 1.07 | 2/12/2018 | |||||||||||
| Roderick de Greef |
345,833 | 204,167 | (2) | $ | 0.15 | 11/24/2018 | ||||||||||
| Roderick de Greef |
100,000 | $ | 0.33 | 7/29/2018 | ||||||||||||
| (1) | Except as otherwise noted, each option becomes exercisable in three equal annual installments, beginning on the first anniversary of the date of grant. |
| (2) | Option becomes exercisable in three equal annual installments, beginning on the first anniversary of the date of grant. The dates on which the option will become exercisable will accelerate with regard to a specified number of shares upon the occurrence of certain performance goals (the “Performance Goals”). The Performance Goals include: (i) the achievement by the Company of a 12-month trailing revenue target of $7.0 million (the “Revenue Target”); (ii) the consummation by the Company of one or more equity financing transactions in a 12-month period that result in the receipt by the Company of sufficient proceeds to fund the Company’s operations for a 12-month period as determined in good faith by the Board (the “Financing Target”); and (iii) the consummation by the Company of a strategic distribution agreement (the “Strategic Transaction Target”). Upon the occurrence of a Performance Goal, the stock option will become exercisable with respect to a number of shares equal to the lesser of (A) the number of shares specified for each Performance Goal (162,500 shares for each of the Revenue Target and the Financing Target and 62,500 shares for the Strategic Transaction Target) and (B) the positive difference between total |
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| number of shares under the stock option that are not yet exercisable and the number of shares specified for the Performance Goal. The shares that become exercisable upon the achievement of a Performance Goal will reduce the number of shares that otherwise would next become exercisable on a regular annual vesting date following the date of achievement of the Performance Goal. |
Director Compensation
In 2009, non-employee directors received a fee of $2,500 per in-person meeting of the Board of Directors and $500 per telephonic meeting of the Board of Directors or committee meeting, and non-employee directors who served as Chairman of the Board or as chairman of one or more committees of the Board of Directors (currently Messrs. McGuire, Wiggins and McCormick) received a fee of $3,125 per in-person meeting of the Board of Directors and $625 per telephonic meeting of the Board of Directors or committee meeting. In 2009, each of the Company’s non-employee directors received an annual retainer of $15,000, payable in equal quarterly installments.
Effective March 31, 2010, the Board of Directors has reduced the amount of cash compensation paid to the non-employee directors of the Company. Specifically, all per meeting fees have been eliminated and the cash annual retainer paid to non-employee directors has been reduced to $12,000 per year, payable in equal quarterly installments.
In recognition of this reduction in fees, each of the non-employee directors was awarded a stock option to purchase 112,858 shares of common stock of the Company (the “Director Fee Reduction Option Award”), having a fair value of $13,000 using the Black Scholes option pricing model. The Director Fee Reduction Option Awards become exercisable in nine equal monthly installments beginning on April 11, 2010 and will continue to be exercisable following the termination of the director’s service with the Company to the same extent that the stock option was exercisable on the date of resignation or termination until expiration of the ten-year term. The Director Fee Reduction Option Awards were granted outside of the Company’s 2001 Stock Incentive Plan, but are nevertheless subject to the terms and conditions of the plan as if granted thereunder.
Additionally, on March 11, 2010, the Compensation Committee granted each of the non-employee directors a stock option to purchase 100,000 shares of the common stock of the Company under and pursuant to the Company’s 2001 Stock Incentive Plan. The stock options become exercisable in full on the one-year anniversary of the date of grant and will continue to be exercisable following the termination of services of the recipient to the same extent that it was exercisable on the date of termination until the expiration of the ten-year term.
The following table sets forth compensation actually paid, earned or accrued during 2009 by the Company’s directors.
| Name |
Fees Earned or Paid in Cash ($) |
Stock Awards ($)(1) |
Option Awards ($)(1) |
Total ($) | ||||||||||||
| Richard J. Cohen(2) |
27,500 | 233,180 | (3) | 20,147 | (4) | 280,828 | ||||||||||
| Kenneth V. Hachikian(5) |
36,250 | — | 22,398 | (6) | 58,648 | |||||||||||
| Reed Malleck(7) |
33,500 | — | 20,147 | (8) | 53,647 | |||||||||||
| John F. McGuire |
40,625 | — | 64,331 | (9) | 104,956 | |||||||||||
| Keith M. Serzen(10) |
6,250 | — | — | 6,250 | ||||||||||||
| Jeffrey Wiggins |
36,875 | — | 17,059 | (11) | 53,934 | |||||||||||
| Paul McCormick |
— | — | — | — | ||||||||||||
| (1) | Reflects the dollar amounts recognized for financial statement reporting purposes for the fiscal year ended December 31, 2009, in accordance with FASB ASC Topic 718 (excluding the impact of estimated forfeitures related to service-based vesting conditions), and thus may include amounts attributable to awards granted during and before 2009. Assumptions made in the calculation of these amounts are included in Note 2 to the Company’s audited financial statements for the fiscal year ended December 31, 2009. |
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| (2) | Dr. Cohen resigned as director on December 30, 2009. See “Consulting and Technology Agreement with Richard J. Cohen, M.D., Ph.D.” contained in “Related Party Transactions and Director Independence” for a description of royalty fees paid to Dr. Cohen under an Amended and Restated Consulting and Technology Agreement between Dr. Cohen and the Company. |
| (3) | As of December 31, 2009, Dr. Cohen held 175,000 shares of restricted stock. |
| (4) | As of December 31, 2009, Dr. Cohen held options to purchase (a) 287,500 shares of Common Stock at exercise price of $0.30 per share, (b) 30,000 shares of Common Stock at an exercise price of $2.90 per share and (c) 300,000 shares of Common Stock at an exercise price of $0.34 per share. |
| (5) | Mr. Hachikian resigned as director on December 30, 2009. |
| (6) | As of December 31, 2009, Mr. Hachikian held options to purchase (a) 80,000 shares of Common Stock at an exercise price of $0.30 per share and (b) 30,000 shares of Common Stock at an exercise price of $2.90 per share. |
| (7) | Mr. Malleck resigned as director on December 30, 2009. |
| (8) | As of December 31, 2009, Mr. Malleck held options to purchase (a) 80,000 shares of Common Stock at an exercise price of $0.30 per share and (b) 30,000 shares of Common Stock at an exercise price of $2.90 per share. |
| (9) | As of December 31, 2009, Mr. McGuire held options to purchase 100,000 shares of Common Stock at an exercise price of $2.40 per share. |
| (10) | Mr. Serzen resigned as a director on April 22, 2009. |
| (11) | As of December 31, 2009, Mr. Wiggins held options to purchase 100,000 shares of common stock at an exercise price of $0.63 per share. |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of Common Stock, Series C-1 Convertible Preferred Stock (the “Series C-1 Preferred”) and Series D Convertible Preferred Stock (the “Series D Preferred”) by: (i) each director, (ii) each of the executive officers named in the Summary Compensation Table above, (iii) all current directors and executive officers as a group, and (iv) each stockholder known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, Series C-1 Preferred or Series D Preferred.
Unless otherwise indicated in the footnotes to the table, all information set forth in the table is as of January 15, 2011, and the address for each director and executive officer of the Company is: c/o Cambridge Heart, Inc., 100 Ames Pond Drive, Tewksbury, MA 01876. The addresses for the greater than 5% stockholders are set forth in the footnotes to this table.
| Common Stock | Series C-1 Preferred | Series D Preferred | ||||||||||||||||||||||
| Number of Shares Beneficially Owned(1) |
Percentage of Class Outstanding(2) |
Number of Shares Beneficially Owned(1) |
Percentage of Class Outstanding |
Number of Shares Beneficially Owned(1) |
Percentage of Class Outstanding |
|||||||||||||||||||
| Directors |
||||||||||||||||||||||||
| Ali Haghighi-Mood, Ph.D. |
1,661,861 | (3) | 1.7 | % | — | — | — | — | ||||||||||||||||
| Roderick de Greef |
1,713,542 | (4) | 1.7 | % | — | — | 50 | 2.7 | % | |||||||||||||||
| Paul McCormick |
212,858 | (5) | * | — | — | — | — | |||||||||||||||||
| John McGuire |
312,858 | (6) | * | — | — | — | — | |||||||||||||||||
| Jeffrey Wiggins |
6,864,892 | (7) | 6.8 | % | — | — | 300 | 16.2 | % | |||||||||||||||
| Named Executive Officers |
||||||||||||||||||||||||
| Ali Haghighi-Mood, Ph.D. |
1,661,861 | (3) | 1.7 | % | — | — | — | — | ||||||||||||||||
| Roderick de Greef |
1,713,542 | (4) | 1.7 | % | — | — | 50 | 2.7 | % | |||||||||||||||
| Vincenzo LiCausi |
443,345 | (8) | * | — | — | — | — | |||||||||||||||||
| All directors and executive officers as a group (6 persons) |
11,209,356 | (9) | 10.6 | % | — | — | 350 | 18.9 | % | |||||||||||||||
| 5% Stockholders |
||||||||||||||||||||||||
| Osiris Investment Partners, L.P. |
8,176,830 | (10) | 8.0 | % | 270 | 14.6 | % | |||||||||||||||||
| Vincente Madrigal |
6,585,367 | (11) | 6.5 | % | — | — | 300 | 16.2 | % | |||||||||||||||
| Saba Malak |
8,608,924 | (12) | 8.5 | % | — | — | 300 | 16.2 | % | |||||||||||||||
| Luis Martins |
11,814,634 | (13) | 11.5 | % | — | — | 315 | 17.0 | % | |||||||||||||||
| St. Jude Medical, Inc. |
4,180,602 | (14) | 4.1 | % | 5,000 | 100 | % | — | — | |||||||||||||||
| * | Represents less than 1% of the outstanding Common Stock. |
| (1) | The Company believes that each stockholder has sole voting and investment power with respect to the shares of Common Stock, Series C-1 Preferred and Series D Preferred listed, except as otherwise noted. The number of shares beneficially owned by each stockholder is determined under rules of the Securities and Exchange Commission, and the information is not necessarily |
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| indicative of ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after January 15, 2011 through the exercise of any stock option, warrant, conversion of preferred stock or other right. The inclusion herein of any shares of Common Stock, Series C-1 Preferred or Series D Preferred deemed beneficially owned does not constitute an admission by such stockholder of beneficial ownership of such shares. Shares of Common Stock, Series C-1 Preferred or Series D Preferred which an individual or entity has a right to acquire within the 60-day period following January 15, 2011 pursuant to the exercise of options, warrants or conversion rights are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or entity, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person or entity shown in the table. |
| (2) | Based on 97,494,185 shares of Common Stock outstanding as of January 15, 2011. |
| (3) | Consists of 1,661,861 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (4) | Consists of (i) 609,756 shares of Common Stock issuable upon the conversion of 50 shares of Series D Preferred and (ii) 615,981 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (5) | Consists of 212,858 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (6) | Consists of 312,858 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (7) | Consists of (i) 3,658,537 shares of Common Stock issuable upon the conversion of 300 shares of Series D Preferred beneficially owned by Mr. Wiggins through his relationship with the Jeffrey Wiggins Trust and (ii) 279,525 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (8) | Consists of 443,345 shares of Common Stock that may be acquired under stock options that are presently exercisable or will be exercisable on March 16, 2011. |
| (9) | See notes 2 through 8 above. |
| (10) | Osiris Investment Partners, L.P., Osiris Partners, L.P. and Paul S. Stuka have shared voting power over 8,176,830 shares of Common Stock, including (i) 3,759,147 shares of Common Stock, (ii) 3,292,683 shares of Common Stock issuable upon conversion of 270 shares of Series D Preferred and (iii) 1,125,000 shares of Common Stock issuable on exercise of warrants to purchase Common Stock. The business address of Osiris Investment Partners, L.P. is c/o Osiris Partners, LLC, One Liberty Square, 5th Floor, Boston, Massachusetts, 02109. All shares of common stock (including any shares issuable pursuant to the exercise of warrants) reported herein for Osiris Investment Partners, L.P. (the “LP”) are held of record and beneficially owned by the LP. Osiris Partners, LLC (the “LLC”) serves as general partner of the LP, and as such, may be deemed to have investment and/or voting power with respect to the shares held by the LP. Mr. Paul Stuka serves as the managing member of the LLC, and as such, may also be deemed to have investment and/or voting power with respect to the shares held by the LP. Each of the LP, the LLC and Mr. Stuka disclaims beneficial ownership of the shares of common stock (including any shares issuable pursuant to the exercise of warrants) reported herein except to the extent of its or his pecuniary interest therein. |
| (11) | Vincente Madrigal beneficially owns 6,585,367 shares of Common Stock, including (i) 3,658,537 shares of Common Stock issuable upon conversion of 300 shares of Series D Preferred and (ii) 2,926,830 shares of Common Stock. Mr. Madrigal’s address is 79 East 79th Street, Apartment 12, New York, New York 10075. |
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| (12) | Saba Malak beneficially owns 8,608,924 shares of Common Stock, including (i) 4,950,387 shares of Common Stock and (ii) 3,658,537 shares of Common Stock issuable upon conversion of 300 Shares of Series D Preferred. Mr. Malak’s address is 225 Commonwealth Avenue, Apartment 4, Boston, Massachusetts 02116. |
| (13) | Luis Martins beneficially owns 11,814,634 share of Common Stock, including (i) 6,973,171 shares of Common Stock, (ii) 3,841,463 shares of Common Stock issuable upon conversion of 315 shares of Series D Preferred, and (iii) 1,000,000 shares of Common Stock issuable upon exercise of warrants to purchase Common Stock. Mr. Martins’ address is 1886 Beacon Street, Waban/Newton, Massachusetts 02468. |
| (14) | Includes 4,180,602 shares of Common Stock issuable upon the conversion of shares of Series C-1 Preferred. The business address of St. Jude Medical, Inc. is One Lillehei Plaza, St. Paul, MN 55117. |
Change in Control
There were no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of our company.
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RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The Board of Directors of the Company reviews the material facts of transactions with a related person that are required to be disclosed under Item 404(a) of Regulation S-K under the Securities Exchange Act of 1934, as amended. In general, that rule requires disclosure of any transaction in which the Company is a participant, the aggregate amount involved exceeds $120,000, and any related person has or will have a direct or indirect material interest. A “related person” means any director or executive officer, any nominee for director, or any immediate family member of a director or executive officer of the registrant, or of any nominee for director. In reviewing related party transactions, the Board will take into account, among other factors it deems appropriate, whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. Related party transactions are referred to the Board by management for review, approval, ratification or other action. This policy is not in writing but is followed consistently by the Board.
Settlement Agreement with AFB Fund, LLC, Louis Blumberg and Laurence Blumberg
On May 19, 2008, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the AFB Fund, LLC (“AFB”), Louis Blumberg and Laurence Blumberg relating to AFB’s stockholder proposal seeking stockholder approval of a recommendation to the Company’s Board of Directors that the Company’s certificate of incorporation be amended to eliminate those provisions of the certificate of incorporation that provide for a staggered Board of Directors and to impose four-year term limits upon director service on the Board of Directors and the nomination of Louis Blumberg by AFB to the Company’s Board of Directors in lieu of one of the Board of Directors’ nominees (the “AFB Stockholder Proposal”).
In accordance with the terms of the Settlement Agreement, the Company expanded the size of the Board of Directors to create one new directorship and appointed Louis Blumberg to the Board of Directors to fill the newly created vacancy. As required by the Settlement Agreement, the Company also submitted and recommended a proposal to its stockholders at the Company’s 2009 annual meeting of stockholders to amend the Company’s certificate of incorporation in order to eliminate the staggered Board of Directors, which was approved by the stockholders.
Under the Settlement Agreement, AFB agreed to terminate the AFB Stockholder Proposal. AFB, Louis Blumberg and Laurence Blumberg also agreed through the 2008 annual meeting of stockholders (the “2008 Meeting”) not to conduct a proxy solicitation from the Company’s stockholders, otherwise engage in any course of conduct with the purpose of causing the stockholders to vote contrary to the recommendation of the Board of Directors on any matter presented to the stockholders for their vote, or otherwise act, directly or indirectly, alone or in concert with others, to seek to control or influence the management, the Board of Directors, policies and affairs of the Company, other than through Louis Blumberg, in his capacity as a member of the Board of Directors.
In accordance with the terms of the Settlement Agreement, AFB, Louis Blumberg and Laurence Blumberg voted, and caused each of their affiliates to vote, the securities of the Company beneficially owned by them (i) for the director nominees recommended by the Board of Directors; (ii) for the other proposals set forth in the Proxy Statement for the 2008 Meeting; and (iii) in accordance with the recommendation of the Board of Directors on any proposals of any other stockholder of the Company, including with regard to nomination of one or more nominees for election as director in opposition to the nominees of the Board of Directors, at the 2008 Meeting.
On June 5, 2008, Louis Blumberg resigned from the Board of Directors.
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Voting Agreement with Robert Khederian
On December 14, 2007, the Company entered into the Restated Voting Agreement with Mr. Khederian, in connection with the appointment of Dr. Haghighi-Mood as the Company’s President and Chief Executive Officer. The Restated Voting Agreement amended and restated the Voting Agreement dated October 29, 2007 with Mr. Khederian that was executed by the parties in connection with the appointment to the Board of two new independent directors of the Company.
At that time, the Company’s certificate of incorporation provided that the holders of Series A Preferred, voting as a separate class, were entitled to elect up to four members of the Board and that at such time the total number of directors could not exceed nine. All of the outstanding shares of Series A Preferred were then held by Mr. Khederian. Mr. Khederian also held warrants to purchase 78,054 shares of Series A Preferred, which together with his Series A Preferred, represents approximately 67.6% of the outstanding Series A Preferred and Series A Warrants.
Under the Restated Voting Agreement, Mr. Khederian agreed to hold and not transfer or otherwise dispose of any of the Series A Warrants registered in his name or any shares of Series A Stock that he acquired upon exercise of his Series A Warrants if, as a result of such transfer or disposition, he would not hold a majority of the Series A Preferred (assuming the exercise of all outstanding Series A Warrants). Mr. Khederian also agreed that upon the request of the Board he would exercise that number of Series A Warrants so that he holds at least a majority of the shares of Series A Preferred then outstanding and entitled to vote. Mr. Khederian further agreed to vote all of his shares of Series A Preferred so as to elect up to three individuals that are nominated or recommended for election as Series A Preferred directors by a majority of the Board, provided that, in the case of each such director, the Board determined that such individual qualified as an independent director under the Nasdaq Marketplace Rules then in effect or such director was serving at the time of the election as the Chief Executive Officer of the Company.
On May 14, 2008, the Company and Mr. Khederian entered into Amendment No. 1 to the Amended and Restated Voting Agreement (the “Amendment”). Under the Amendment, Mr. Khederian agreed that, upon the request of the Board of Directors, Mr. Khederian would vote all of his shares of Common Stock and all of his shares of Series A Preferred in favor of any amendment to the Company’s certificate of incorporation in order to eliminate the staggered Board of Directors and any amendment to the certificate of incorporation to eliminate the rights of the Series A Holders, as a separate class, to elect any members of the Board of Directors.
On May 31, 2008, the Company and Mr. Khederian entered into Amendment No. 2 to the Amended and Restated Voting Agreement. Under Amendment No. 2, Mr. Khederian agreed to vote all of his shares of Series A Preferred so as to elect up to four individuals (increased from three under the prior Voting Agreement) who were nominated or recommended for election as Series A Preferred directors by a majority of the Board, provided that, in the case of each such director, the Board determined that such individual qualified as an independent director under the Nasdaq Marketplace Rules then in effect or such director was serving at the time of the election as the Chief Executive Officer of the Company.
On June 29, 2009, the Company’s stockholders approved amendments to the Company’s Certificate of Incorporation to eliminate the provisions allowing for the election of directors by the holders of the Series A Convertible Preferred Stock, voting separately as a class. The amendment was made effective for elections taking place after the 2009 Annual Meeting.
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Series A Convertible Preferred Stock Redemption
On December 21, 2009, the Company purchased and redeemed 154 shares of Series A Preferred Stock, representing 100% of the issued and outstanding shares of Series A Preferred Stock, from Mr. Khederian for an aggregate purchase price of $681.
Consulting and Technology Agreement with Richard J. Cohen, M.D., Ph.D.
The Company and Richard J. Cohen, M.D., Ph.D., who serves as the Chairman of the Company’s Scientific Advisory Board and, until December 30, 2009, served as a member of the Company’s Board of Directors, are parties to a Consulting and Technology Agreement pursuant to which Dr. Cohen agreed to provide consulting services and license certain technologies to the Company in exchange for compensation and the payment of certain royalties by the Company. In May 2007, the Company and Dr. Cohen entered into an Amended and Restated Consulting and Technology Agreement (the “Consulting Agreement”), the material terms of which are described below.
Under the terms of the Consulting Agreement, during the period beginning January 1, 2007 and ending on December 31, 2009 (the “Interim Consulting Period”), Dr. Cohen agreed to be available to the Company for consultation for up to 42 days per year. Thereafter, Dr. Cohen agrees to be available to the Company for consultation for a minimum of 18 days per year until the expiration of the consulting period on December 31, 2015 (the “Additional Consulting Period”).
Under the Consulting Agreement, the Company will pay Dr. Cohen royalties on net sales related to certain technologies (including the sale of the Company’s HearTwave II System and other Microvolt T-Wave Alternans products) equal to 1.5% of such net sales. If the Company sublicenses, or grants rights to any sublicense with respect to, such technologies to an unrelated company, Dr. Cohen shall receive royalties equal to 7% of gross revenue to the Company from the sublicense. Pursuant to the terms of the Consulting Agreement, the Company will pay Dr. Cohen additional royalties of $10,000 per month during the Interim Consulting Period, subject to an annual percentage increase equal to the annual percentage increase in the National Consumer Price Index for the prior year (the “Monthly Royalty”).
Under the Consulting Agreement, Dr. Cohen received in May 2007, as compensation for his consulting effort, an aggregate of 175,000 shares of restricted common stock of the Company subject to the terms and conditions of the Company’s 2001 Stock Incentive Plan. The restricted shares vested on January 1, 2010. Dr. Cohen will not receive any additional compensation for the Additional Consulting Period.
In March 2010, the Company entered into Amendment No. 1 to the Amended and Restated Consulting and Technology Agreement with Dr. Cohen (“Amendment No. 1”). Pursuant to Amendment No. 1, the Interim Consulting Period was extended to December 31, 2010. Additionally, Dr. Cohen agreed to accept a reduced Monthly Royalty payment of $5,811.17 per month for the period beginning on January 1, 2010 and ending on December 31, 2010. In consideration for the reduction in Monthly Royalty payments, Dr. Cohen received a stock option to purchase 561,982 shares of common stock of the Company, which became exercisable in nine equal monthly installments beginning on April 11, 2010 and which was granted outside of the Company’s 2001 Stock Incentive Plan, but nevertheless subject to the terms and conditions of the 2001 Stock Incentive Plan. Pursuant to Amendment No. 1, in recognition of his service as Chairman of the Scientific Advisory Committee, Dr. Cohen received a stock option, under the Company’s 2001 Stock Incentive Plan, to purchase 100,000 shares of the common stock of the Company, which became exercisable in full on March 11, 2010. Additionally, in consideration for his services as Chairman of the Company’s Scientific Advisory Board during 2010, Dr. Cohen received a stock option to purchase 43,407 shares of common stock of the Company, which became exercisable in nine equal monthly installments beginning on April 11, 2010 and which was granted outside of the Company’s 2001 Stock Incentive Plan, but nevertheless subject to the terms and conditions of the 2001 Stock Incentive Plan, and will be paid a total cash fee of $5,000, payable monthly for the fiscal year 2010. All of the options granted to Dr. Cohen in connection with Amendment No. 1 have an exercise price of $0.16 per shares, which is the closing price of the common stock on the date of grant.
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In 2009, the Company paid Dr. Cohen approximately $178,202 in royalties under the Consulting Agreement.
Under the Consulting Agreement, the Company will have the right to terminate the Consulting Agreement within the 30-day period immediately following a Change in Control (as defined in the Consulting Agreement) of the Company, in which case the Company shall pay Dr. Cohen a termination royalty as determined in the Consulting Agreement. Either party may terminate the Consulting Agreement for material breach or default by the other party of the other party’s obligations under the Consulting Agreement upon 90 days’ notice.
Securities Purchase Agreement for Series D Convertible Preferred Stock
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”) at a purchase price of $1,000 per share (the “Series D Original Issue Price”) and common stock warrants described below to new and current institutional and private investors, including three directors of the Company, pursuant to the terms of a Securities Purchase Agreement dated December 23, 2009 between the Company and the purchasers of Series D Preferred (the “Series D Financing”). Three directors of the Company purchased an aggregate of 385 shares of Series D Preferred for a total purchase price of $385,000. Specifically, Roderick de Greef, who serves as Chairman of the Board, Richard J. Cohen, who was then serving as a member of the Board, and Jeffery Wiggins purchased 50, 35 and 300 shares of Series D Preferred, respectively, and were issued Short-Term Warrants (as defined below) to purchase 304,878, 213,415 and 1,829,269 shares of common stock, respectively, and Long-Term Warrants (as defined below) to purchase 182,927, 128,049 and 1,097,561 shares of common stock, respectively.
Each share of Series D Preferred is convertible into a number of shares of common stock of the Company equal to $1,000 divided by the conversion price of the Series D Preferred, which is initially $0.082. Each share of Series D Preferred is currently convertible into approximately 12,195 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 1,852 shares of Series D Preferred issued and sold in the financing is 22,585,366, or approximately 32.69% of the Company’s issued and outstanding common stock on an as converted basis.
The Company also issued to the investors two types of warrants. The first warrant, which expired on December 23, 2010, entitles the investor to purchase a number of shares of common stock equal to 50% of the number of shares of common stock into which the Series D Preferred purchased by the investor was convertible (the “Short-Term Warrant”). A total of 11,292,686 shares of common stock were issuable under the Short-Term Warrants at an exercise price of $0.107 per share. The second warrant, which expires on December 23, 2014, entitled the investor to purchase a number of shares of common stock equal to 30% of the number of shares of common stock into which the Series D Preferred purchased by the investor is convertible (the “Long-Term Warrant”). A total of 6,775,611 shares of common stock are issuable under the Long-Term Warrants at an exercise price of $0.142 per share.
In May 2010, the Company elected to exercise its right to call all outstanding Long-Term Warrants to purchase the Company’s common stock issued in connection with the Series D Financing. Pursuant to the terms of the Long-Term Warrants the Company was entitled to call the warrants if the closing price of the Company’s common stock was at least $0.284 for a period of 20 consecutive trading days. On or before June 4, 2010, investors in the December 2009 Series D Convertible Preferred Stock financing exercised all of the outstanding Long-Term Warrants. The exercise of the long-term warrants, which
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were called on May 5, 2010, generated a total of $962,138 in proceeds, and resulted in the issuance of 6,775,611 shares of common stock. Included in the issuance of the 6,775,611 shares of common stock were the exercise of Long-Term Warrants to purchase 182,927 and 1,097,561 shares of the Company’s common stock resulting in proceeds of $25,976 and $155,854, by Roderick de Greef and Jeffrey Wiggins, respectively, each of whom is a director of the Company.
Short-Term Warrants to purchase aggregate of 11,292,686 shares of common stock were exercised on or before December 23, 2010 at an exercise price of $0.107 per share, resulting in aggregate proceeds to the Company of $1,208,317 and the issuance of 11,292,686 shares of common stock. Included in the issuance of the 11,292,686 shares of common stock were the exercise of Short-Term Warrants to purchase 304,878 and 1,829,269 shares of the Company’s common stock resulting in proceeds of $32,619 and $195,732, by Roderick de Greef and Jeffrey Wiggins, respectively.
The conversion price of the Series D Preferred is subject to adjustment if the Company issues shares of common stock at a purchase price below the conversion price of the Series D Preferred at any time within 18 months after the issue date. In the event of a liquidation of the Company, the holders of Series D Preferred are entitled to receive an amount equal to the Series D Original Issue Price plus declared but unpaid dividends before the payment of any amount to the holders of common stock, Series C-1 Convertible Preferred Stock and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series D Preferred with respect to liquidation preference.
Participation in Private Placement of Common Stock and Warrants
On December 20, 2010, the Company issued and sold 14,500,000 units (the “Units”) for an aggregate purchase price of $2,900,000 (less fees and commissions), each Unit consisting of (i) one share of the Company’s Common Stock and (ii) one five-year warrant to purchase one share of Common Stock, pursuant to the terms and conditions of a Securities Purchase Agreement, dated as of December 20, 2010, by and among the Company and certain accredited investors (the “2010 Private Placement”). The Units were offered and sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. Among the investors who participated in the 2010 Private Placement were Luis Martins and Osiris Investment Partners, L.P., each of whom is a “related person” as defined in Item 404 of Regulation S-K as a result of their ownership of 5% or more of a class of securities of the Company.
Mr. Martins purchased 1,000,000 Units, for an aggregate purchase price of $200,000, in connection with the 2010 Private Placement. Mr. Martins’ investment represented approximately 7.6% of the aggregate net proceeds received by the Company in the 2010 Private Placement.
Osiris Investment Partners, L.P. purchased 1,125,000 Units, for an aggregate purchase price of $225,000, in connection with the 2010 Private Placement. The investment by Osiris Investment Partners, L.P. represented approximately 8.5% of the aggregate net proceeds received by the Company in the 2010 Private Placement.
Director Independence
The Board has determined that Messrs. Wiggins, McGuire and McCormick are independent directors, as defined by the rules of The Nasdaq Stock Market. The Board of Directors has established three standing committees—Audit, Compensation, and Nominating and Governance. The Audit and Nominating and Governance Committees each operate under a charter that has been approved by the Board. Current copies of the charters of the Audit and Nominating and Governance Committees are posted in the Corporate Governance section of the Company’s website at www.cambridgeheart.com.
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The members of the Audit Committee are Mr. McGuire (Chairman), Mr. Wiggins and Mr. McCormick. The Board of Directors has determined that all members of the Audit Committee are independent as determined under Rule 10A-3 promulgated under the Securities Exchange Act of 1934 and as defined by the rules of The Nasdaq Stock Market.
The members of the Compensation Committee are Mr. McCormick (Chairman), Mr. Wiggins and Mr. McGuire. All members of the Compensation Committee are independent as defined under the rules of The Nasdaq Stock Market.
The members of the Nominating and Governance Committee are Mr. Wiggins (Chairman), Mr. McGuire and Mr. McCormick. All members of the Nominating Committee are independent as defined under the rules of The Nasdaq Stock Market.
Compensation Committee Interlocks and Insider Participation
Messrs. Wiggins, McGuire and McCormick served as members of the Compensation Committee in 2010. During the last completed fiscal year, no executive officer of the Company has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a member of the Compensation Committee or director of the Company. Mr. Wiggins participated in the Series D Financing, as further described above in “Securities Purchase Agreement for Series D Convertible Preferred Stock.”
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We have entered into registration rights agreements with certain of the selling stockholders pursuant to which we have agreed to file a registration statement, of which this prospectus is a part, under the Securities Act of 1933, as amended (the “Securities Act”), registering the resale by the selling stockholder of the shares of common stock covered by this prospectus. We have also agreed to cause such registration statement to become effective, and to keep such registration statement effective. Our failure to satisfy the deadlines set forth in the registration rights agreements may subject us to payment of certain monetary penalties pursuant to the terms of the registration rights agreements.
We are registering the shares of common stock covered by this prospectus in order to permit the selling stockholders to offer such shares for resale from time to time. The registration of these shares does not require that any of the shares be offered or sold by the selling stockholders. The selling stockholders may from time to time offer and sell all or a portion of their shares in the over-the-counter market, in negotiated transactions, or otherwise, at prices then prevailing or related to the then current market price or at negotiated prices.
The registered shares may be sold directly or through brokers or dealers, or in a distribution by one or more underwriters on a firm commitment or best efforts basis. To the extent required, the names of any agent or broker-dealer and applicable commissions or discounts and any other required information with respect to any particular offer will be set forth in a prospectus supplement. Please see “Plan of Distribution.” The selling stockholders and any agents or broker-dealers that participate with the selling stockholders in the distribution of registered shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any commissions received by them and any profit on the resale of the registered shares may be deemed to be underwriting commissions or discounts under the Securities Act.
No estimate can be given as to the amount or percentage of our common stock that will be held by the selling stockholders after any sales made pursuant to this prospectus because the selling stockholders are not required to sell any of the shares being registered under this prospectus. The following table assumes that the selling stockholders will sell all of the shares listed in this prospectus.
The following table sets forth the beneficial ownership of the selling stockholders. The term “selling stockholder” or “selling stockholders” includes the stockholders listed below and their respective transferees, assignees, pledges, donees or other successors. Except as indicated in the footnotes to the table below, the selling stockholders have not had any material relationship with us within the past three years, except for their ownership of our common stock.
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| Shares of Common Stock Beneficially Owned Prior to Offering (1) |
Number of Shares of Common Stock Included in Prospectus (2) |
Shares of Common Stock to be Beneficially Owned After Offering (1)(3) |
||||||||||||||||||
| Name of Selling Stockholder |
Number | Percentage | Number | Percentage | ||||||||||||||||
| George M. Abraham |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| James E. Anderson |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| Jay R. Angle |
2,000,000 | 2.0 | % | 2,000,000 | 0 | * | ||||||||||||||
| Anthony Athanas, Jr. |
750,000 | * | 750,000 | 0 | * | |||||||||||||||
| George Hervey Bathurst |
750,000 | * | 750,000 | 0 | * | |||||||||||||||
| John Blum, Jr. |
400,000 | * | 400,000 | 0 | * | |||||||||||||||
| Michael S. Brodherson, M.D. |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| Bunkap Industries, Inc. |
750,000 | * | 750,000 | 0 | * | |||||||||||||||
| Virginia Cahal |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Francis Chan and Jeffrey Chan, JTWROS |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Alan David Cohen |
200,000 | * | 200,000 | 0 | * | |||||||||||||||
| Charles and Sandra Curtis, JTWROS |
400,000 | * | 400,000 | 0 | * | |||||||||||||||
| Jason Curtis |
300,000 | * | 300,000 | 0 | * | |||||||||||||||
| Dawson James Securities, Inc. (4) (5) |
518,440 | * | 518,440 | 0 | * | |||||||||||||||
| Arthur Dunkin |
425,000 | * | 400,000 | 25,000 | * | |||||||||||||||
| Steven Etra |
2,500,000 | 2.5 | % | 2,500,000 | 0 | * | ||||||||||||||
| Brenda Forwood |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Frederick Reese Freyer |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Frank J. Garofalo |
800,000 | * | 800,000 | 0 | * | |||||||||||||||
| Gunther Motor Company of Plantation |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| Constantine Hagepanos |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Thomas Hands (6) |
100,000 | * | 100,000 | 0 | * | |||||||||||||||
| Gregory Harrison |
1,000,000 | 1.0 | % | 1,000,000 | 0 | * | ||||||||||||||
| Robert Henely |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Stephen Holzel |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Francis Howard |
1,500,000 | 1.5 | % | 1,500,000 | 0 | * | ||||||||||||||
| Daniel Hudson IRA |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Intermark, LLC |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| ISeeFitPeople, Inc. |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Robert Jacobs and Susan Jacobs, JTWROS |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| James Krag, M.D. |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Stephen Leppo |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Craig Lindberg |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| John D. Marks |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| Patrick William O’Reilly |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| Michael Pantelis |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| John R. Rogers |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| John R. Rogers, IRA |
500,000 | * | 500,000 | 0 | * | |||||||||||||||
| Albert Poliak (6) |
100,000 | * | 100,000 | 0 | * | |||||||||||||||
| Bret Shapiro (6) |
99,000 | * | 99,000 | 0 | * | |||||||||||||||
| John J. Shaw |
1,000,000 | 1.0 | % | 1,000,000 | 0 | * | ||||||||||||||
| Chris Sidhilall |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| John F. Sloan |
400,000 | * | 400,000 | 0 | * | |||||||||||||||
| Gerald and Seena Sperling, JTWROS |
300,000 | * | 300,000 | 0 | * | |||||||||||||||
| F. Richard Stark |
200,000 | * | 200,000 | 0 | * | |||||||||||||||
| Martin Richard Stephenson |
1,000,000 | 1.0 | % | 1,000,000 | 0 | * | ||||||||||||||
| Raymond Tinney, IRA |
400,000 | * | 400,000 | 0 | * | |||||||||||||||
| Theodore W. VanVick |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| James Harvey Walker |
400,000 | * | 400,000 | 0 | * | |||||||||||||||
| David Weinstein (6) |
342,560 | * | 342,560 | 0 | * | |||||||||||||||
| Robert Zens |
250,000 | * | 250,000 | 0 | * | |||||||||||||||
| * | Represents less than 1% of total outstanding common stock. |
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| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding, including for purposes of computing the percentage ownership of the person holding the option, warrant or convertible security, but not for purposes of computing the percentage of any other holder. |
| (2) | Includes shares of common stock being registered and shares of common stock being registered which are issuable upon the exercise of warrants issued to such person. |
| (3) | Assumes that all securities registered will be sold. |
| (4) | Representatives of this selling stockholder have advised us that Albert Poliak has voting or dispositive power with respect to the common shares held by this selling stockholder. |
| (5) | Represents shares underlying selling agent warrants issued to Dawson James Securities, Inc. (“Dawson James”), which acted as a placement agent for the Company in the private placement completed in December 2010. Dawson James is a registered broker-dealer. |
| (6) | Represents shares underlying selling agent warrants issued to these selling stockholders, who are either officers or accredited employees of Dawson James, the firm which served as placement agent in the private placement completed in December 2010. |
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PLAN OF DISTRIBUTION
The shares of common stock offered by this prospectus are being offered by selling stockholders and their donees, pledgees, transferees or other successors-in-interest. The common stock may be sold, transferred or otherwise disposed of on any stock exchange, the OTC Bulletin Board or any other market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:
| • | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| • | block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; |
| • | through brokers, dealers or underwriters who may act solely as agents; |
| • | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| • | an exchange distribution in accordance with the rules of the applicable exchange; |
| • | privately negotiated transactions; |
| • | short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC; |
| • | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
| • | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; or |
| • | a combination of any such methods of sale. |
The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment or supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
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In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.
The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.
Each of the other selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the securities offered under this prospectus may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person. We intend to make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.
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We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.
We have agreed to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of or (2) the date on which all of the shares may be sold without volume limitations pursuant to Rule 144 of the Securities Act. We also are required to pay certain fees and expenses incurred by us incidental to the registration of the shares of common stock.
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General
Our authorized capital consists of 150,000,000 shares of common stock, $0.001 par value per share, and 2,000,000 shares of preferred stock. As of the date of this prospectus, there were:
| • | 97,494,185 shares of common stock issued and outstanding; |
| • | 5,000 shares of Series C-1 Convertible Preferred Stock issued and outstanding, which are convertible into 4,180,602 shares of common stock; |
| • | 1,852 shares of Series D Convertible Preferred Stock issued and outstanding, which are convertible into 22,585,366 shares of common stock; and |
| • | warrants to purchase 15,660,000 shares of common stock issued and outstanding; and |
| • | options to purchase up to an aggregate of 9,816,545 shares of common stock outstanding. |
Common Stock
Our common stock is traded on the OTC Bulletin Board under the symbol “CAMH.” Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. The outstanding shares of common stock are fully paid and non-assessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of Series C-1 Preferred, Series D Preferred, and of any additional series of preferred stock which we may designate and issue in the future.
Preferred Stock
Our Board of Directors has the authority from time to time to issue preferred stock in one or more series, and in connection with the creation of any series. The Board of Directors may determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of preferred stock may provide that such series shall be superior or rank equally or be junior to the preferred stock of any other series to the extent permitted by law and the Company’s Certificate of Incorporation.
Series C-1 Convertible Preferred Stock
On March 21, 2007, the Company and St. Jude Medical entered into an agreement for the sale of $12.5 million of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred”) to St. Jude Medical resulting in $11.7 million net of issuance costs. Under the terms of the financing, the Company issued and sold 5,000 shares of its Series C Preferred at a purchase price of $2,500 per share (the “Series C Original Issue Price”). In connection with the Series D Financing, as described below, the
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Company entered into a Share Exchange Agreement with St. Jude Medical, dated as of December 23, 2009, pursuant to which St. Jude Medical exchanged 5,000 shares of the Company’s Series C Preferred, representing 100% of the issued and outstanding Series C Preferred, for 5,000 newly issued shares of the Series C-1 Preferred.
The holders of the Series C Preferred were entitled to receive cumulative cash dividends at the rate of 8% of the Series C Original Issue Price per year (the “Series C Dividend”) on each outstanding share of Series C Preferred, provided, however, that the Series C Dividend was only payable when and if declared by the Board of Directors. The Series C Dividend was payable prior and in preference to any declaration or payment of any dividend on common stock, other series of preferred stock or any other capital stock of the Company.
The holders of Series C-1 Preferred are entitled to receive cash dividends deemed to be accrued as of December 23, 2009 of $2,761,643 plus cumulative cash dividends at the rate of 8% of the Deemed Series C-1 Original Issue Price (which is $2,500) per year on each outstanding share of Series C-1 Preferred (the “Series C-1 Dividend”), provided, however, that the Series C-1 Dividend is only payable when and if declared by the Board of Directors. The Series C-1 Dividend is payable prior and in preference to any declaration or payment of any dividend on common stock, other series of preferred stock or any other capital stock of the Company.
The holders of Series C-1 Preferred are entitled to vote, on an as-if converted basis, along with holders of the Company’s common stock on all matters on which holders of common stock are entitled to vote.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series C-1 Certificate of Designation), the holders of Series C-1 Preferred are entitled to receive an amount equal to the Deemed Series C-1 Original Issue Price plus declared but unpaid dividends after the payment to the holders of Series D Preferred, but before any amount to the holders of common stock, and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series C-1 Preferred with respect to liquidation preference.
Series D Convertible Preferred Stock
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”) and common stock warrants described below to new and current institutional and private investors pursuant to the terms of a Securities Purchase Agreement dated December 23, 2009 between the Company and the purchasers of Series D Preferred (the “Series D Financing”).
Each share of Series D Preferred is convertible into a number of shares of common stock of the Company equal to $1,000 divided by the conversion price of the Series D Preferred, which is initially $0.082. Each share of Series D Preferred is currently convertible into approximately 12,195 shares of common stock. The conversion price of the Series D Preferred is subject to adjustment in certain circumstances. If the Company issues shares of common stock at a purchase price below the conversion price of the Series D Preferred at any time on or before August 23, 2011, the conversion price of the Series D Preferred will be adjusted as set forth in the Series D Certificate of Designation.
The holders of the Series D Preferred are entitled to share in any dividends declared and paid, or set aside for payment, on the common stock, pro rata, in accordance with the number of shares of common stock into which such shares of Series D Preferred are then convertible.
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The holders of the Series D Preferred are entitled to the number of votes equal to the number of shares of common stock into which such shares of Series D Preferred could be converted immediately after the close of business on the record date fixed for an annual or special meeting of stockholders or the effective date of a written consent of stockholders. The holders of the Series D Preferred have voting rights and powers equal to the voting rights and powers of the common stock. The Series D Preferred shall vote together with the common stock at any annual or special meeting of the stockholders and not as a separate class, and act by written consent in the same manner as the common stock.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series D Certificate of Designation), the holders of Series D Preferred are entitled to receive an amount equal to the Series D Original Issue Price plus declared but unpaid dividends before the payment of any amount to the holders of common stock, Series C-1 Convertible Preferred Stock and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series D Preferred with respect to liquidation preference.
The Company may not authorize, create or issue a class of equity ranking, as to dividends, redemption or distribution of assets upon a liquidation, senior to or pari passu with the Series C-1 Preferred or the Series D Preferred, without the written consent of the holders of at least a majority of the then-outstanding shares of Series C-1 Preferred or Series D Preferred, respectively, voting as a separate class. Further, the Company may not, without the written consent of the holders of at least a majority of the then-outstanding shares of Series D Preferred, authorize, create or issue a class of debt securities convertible into any equity securities of the Company.
Delaware Law And Certain Charter And By-Law Provisions
We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is (i) a person who, together with affiliates and associates, owns 15% or more of the corporation’s voting stock or (ii) an affiliate or associate of Cambridge Heart who was the owner, together with affiliates and associates, of 15% or more of our outstanding voting stock at any time within the 3-year period prior to the date for determining whether such person is “interested.”
Our certificate of incorporation provides that directors may be removed only for cause by the affirmative vote of the holders of two-third of the shares of capital stock of the corporation entitled to vote. Under our certificate of incorporation, any vacancy on our board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. The limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company.
Our certificate of incorporation also provides that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. Our certificate of incorporation further provides that special meetings of our stockholders may only be called by the chairman of the board of directors, by our chief executive officer or by our board of directors. Under our by-laws, in order for any matter to be considered properly brought before a meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. The
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foregoing provisions could have the effect of delaying until the next stockholders’ meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders’ meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s certificate of incorporation or by-laws, as the case may be, requires a greater percentage. Our certificate of incorporation and by-laws require the affirmative vote of the holders of at least 75% of our shares of capital stock issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the prior two paragraphs.
Our certificate of incorporation contains certain provisions permitted under the General Corporation Law of Delaware relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director’s duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Further, our certificate of incorporation contains provisions to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors.
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MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock has been traded on the OTC Bulletin Board over-the-counter market since May 8, 2003 under the symbol “CAMH.” As of January 26, 2011, the closing price of our common stock was $0.25. The following price information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:
| Quarter Ended |
High | Low | ||||||
| December 31, 2010 |
$ | 0.25 | $ | 0.21 | ||||
| September 30, 2010 |
$ | 0.24 | $ | 0.22 | ||||
| June 30, 2010 |
$ | 0.27 | $ | 0.25 | ||||
| March 31, 2010 |
$ | 0.42 | $ | 0.37 | ||||
| December 31, 2009 |
$ | 0.08 | $ | 0.07 | ||||
| September 30, 2009 |
$ | 0.12 | $ | 0.08 | ||||
| June 30, 2009 |
$ | 0.10 | $ | 0.08 | ||||
| March 31, 2009 |
$ | 0.10 | $ | 0.09 | ||||
Stockholders
As of January 15, 2011, there were approximately 200 holders of record of our common stock, not including any persons who hold their stock in “street name.”
Dividend Policy
We have never declared or paid cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends, current and anticipated cash needs and other factors the board of directors deems relevant. If we were to pay dividends, such dividends would be paid to holders of our preferred stock, prior to any such distribution to holders of common stock. On December 23, 2009, the holder of shares of our Series C Preferred exchanged all outstanding shares of Series C Preferred for an equal number of shares of our Series C-1 Preferred in connection with our private placement sale of Series D Convertible Preferred Stock. The holders of our Series C-1 Preferred are entitled to receive a cash dividend of $2.76 million (which is the total dividends deemed to be accrued as of December 23, 2009 when the Series C Preferred was exchanged for shares of Series C-1 Preferred) plus cumulative cash dividends at the rate of eight percent (8%) of the deemed original issue price of the Series C-1 Preferred (which is $2,500 per share) per year on each outstanding share of Series C-1 Preferred (the “Series C-1 Dividend”), provided, however, that the Series C-1 Dividend is only payable when, as and if declared by the Board of Directors. The Series C-1 Dividend is payable prior and in preference to any declaration or payment of any dividend on common stock, other series of our preferred stock or any other capital stock of the Company.
Transfer Agent and Registrar.
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company. Their address is 59 Maiden Lane, New York, NY 10038, and their telephone number is (800) 937-5449.
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The validity of the common stock offered hereby will be passed upon for us by Nutter, McClennen & Fish, LLP, Boston, Massachusetts.
The financial statements of the Company as of and for each of the years ended December 31, 2008 and 2009 included in this prospectus have been so included in reliance on the report of Caturano and Company, Inc. (formerly Caturano and Company, P.C.), an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room 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. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that no director shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except for any breach of the director’s duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for any transaction from which the director derived any improper personal benefit or to the extent indemnification is not permitted under the Delaware General Corporation Law.
Our certificate of incorporation also provides that we shall indemnify any person against all liability and expense incurred by reason of the fact that he or she is or was a director or officer, or was serving at the request of the Company as a director, officer, partner, trustee of, or employee or agent of another corporation, partnership or other entity, and shall reimburse such person for all legal and other expenses reasonably incurred by him or her in connection with any such claim or liability.
The rights accruing to any person under our bylaws and certificate of incorporation do not exclude any other right to which any such person may lawfully be entitled, and we may indemnify or reimburse such person in any proper case, even though not specifically provided for by the bylaws and certificate of incorporation.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
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| Page | ||||
| Unaudited Condensed Financial Statements |
||||
| Unaudited Condensed Balance Sheet at September 30, 2010 and December 31, 2009 |
F-2 | |||
| F-3 | ||||
| Unaudited Condensed Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009 |
F-4 | |||
| F-5 | ||||
| Audited Financial Statements |
||||
| F-16 | ||||
| F-17 | ||||
| Statements of Operations for the years ended December 31, 2009 and 2008 |
F-18 | |||
| Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008 |
F-19 | |||
| Statements of Cash Flows for the years ended December 31, 2009 and 2008 |
F-20 | |||
| F-21 | ||||
Table of Contents
CONDENSED BALANCE SHEETS
(Unaudited)
| December 31, 2009 |
September 30, 2010 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 3,159,468 | $ | 1,515,960 | ||||
| Restricted cash, current portion |
100,000 | 100,000 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $171,515 and $137,590 at December 31, 2009 and September 30, 2010, respectively |
458,887 | 604,286 | ||||||
| Inventory, net |
1,152,620 | 783,503 | ||||||
| Prepaid expenses and other current assets |
118,312 | 87,195 | ||||||
| Total current assets |
4,989,287 | 3,090,944 | ||||||
| Fixed assets, net |
239,970 | 204,134 | ||||||
| Restricted cash, net of current portion |
400,000 | 300,000 | ||||||
| Other assets |
42,655 | 53,816 | ||||||
| Total Assets |
$ | 5,671,912 | $ | 3,648,894 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 383,768 | $ | 282,699 | ||||
| Accrued expenses |
1,116,663 | 909,829 | ||||||
| Current portion of capital lease |
13,571 | 4,660 | ||||||
| Total current liabilities |
1,514,002 | 1,197,188 | ||||||
| Capital lease obligation, long-term portion |
13,551 | 30,094 | ||||||
| Total liabilities |
1,527,553 | 1,227,282 | ||||||
| Commitments and contingencies (Note 7) |
||||||||
| Convertible Preferred Stock, $.001 par value; 2,000,000 shares authorized at December 31, 2009 and September 30, 2010, respectively; 6,852 shares issued and outstanding at December 31, 2009 and September 30, 2010, respectively. Liquidation preference and redemption value of $14,352,000 as of December 31, 2009 and September 30, 2010, respectively. |
12,870,613 | 12,870,613 | ||||||
| 12,870,613 | 12,870,613 | |||||||
| Stockholders’ deficit: |
||||||||
| Common Stock, $.001 par value; 150,000,000 shares authorized at December 31, 2009 and September 30, 2010, respectively; 64,904,955 shares issued and outstanding at December 31, 2009; 75,969,793 shares issued and outstanding at September 30, 2010 |
64,905 | 75,970 | ||||||
| Additional paid-in capital |
87,201,360 | 89,413,101 | ||||||
| Accumulated deficit |
(95,992,519 | ) | (99,938,072 | ) | ||||
| Total stockholders’ deficit |
(8,726,254 | ) | (10,449,001 | ) | ||||
| Total Liabilities and Stockholders’ Deficit |
$ | 5,671,912 | $ | 3,648,894 | ||||
The accompanying notes are an integral part of these condensed financial statements.
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CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
| Revenue |
$ | 798,345 | $ | 792,734 | $ | 2,426,957 | $ | 2,104,623 | ||||||||
| Cost of goods sold |
455,968 | 535,135 | 1,411,469 | 1,475,674 | ||||||||||||
| Gross profit |
342,377 | 257,599 | 1,015,488 | 628,949 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Research and development |
91,561 | 119,924 | 258,248 | 423,141 | ||||||||||||
| Selling, general and administrative |
1,931,878 | 1,258,559 | 6,382,657 | 4,144,215 | ||||||||||||
| Total operating expenses |
2,023,439 | 1,378,483 | 6,640,905 | 4,567,356 | ||||||||||||
| Loss from operations |
(1,681,062 | ) | (1,120,884 | ) | (5,625,417 | ) | (3,938,407 | ) | ||||||||
| Interest income |
1,217 | 459 | 14,913 | 606 | ||||||||||||
| Interest expense |
(1,596 | ) | (2,640 | ) | (5,197 | ) | (7,752 | ) | ||||||||
| Net loss |
$ | (1,681,441 | ) | $ | (1,123,065 | ) | $ | (5,615,701 | ) | $ | (3,945,553 | ) | ||||
| Net loss per common share-basic and diluted |
$ | (0.03 | ) | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.06 | ) | ||||
| Weighted average common shares outstanding-basic and diluted |
64,602,186 | 75,913,013 | 64,563,033 | 70,448,030 | ||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
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CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2009 | 2010 | |||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (5,615,701 | ) | $ | (3,945,553 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
67,794 | 38,530 | ||||||
| Inventory provision |
— | 124,476 | ||||||
| Stock-based compensation expense |
1,506,750 | 791,960 | ||||||
| Credit for allowance for bad debts |
(64,295 | ) | (7,837 | ) | ||||
| Gain on disposal of fixed assets |
— | (6,589 | ) | |||||
| Changes in operating assets and liabilities: |
||||||||
| Movement of restricted cash |
— | 100,000 | ||||||
| Accounts receivable |
259,785 | (137,562 | ) | |||||
| Inventory |
155,398 | 258,604 | ||||||
| Prepaid expenses and other assets |
(31,857 | ) | 19,956 | |||||
| Accounts payable and accrued expenses |
119,811 | (307,903 | ) | |||||
| Net cash used in operating activities |
(3,602,315 | ) | (3,071,918 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of fixed assets |
(1,887 | ) | — | |||||
| Net cash used in investing activities |
(1,887 | ) | — | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from exercise of common stock warrants |
— | 1,418,846 | ||||||
| Proceeds from exercise of common stock options |
— | 12,000 | ||||||
| Principal payments on capital lease obligations |
(8,141 | ) | (2,436 | ) | ||||
| Net cash provided by (used in) financing activities |
(8,141 | ) | 1,428,410 | |||||
| Net increase (decrease) in cash and cash equivalents |
(3,612,343 | ) | (1,643,508 | ) | ||||
| Cash and cash equivalents, beginning of period |
6,207,074 | 3,159,468 | ||||||
| Cash and cash equivalents, end of period |
$ | 2,594,731 | $ | 1,515,960 | ||||
Supplemental Disclosure of Cash Flow Information
The Company paid $5,197 and $7,752 in interest expense for the nine month period ended September 30, 2009 and 2010, respectively.
The accompanying notes are an integral part of these condensed financial statements.
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CAMBRIDGE HEART, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed financial statements of Cambridge Heart, Inc. (the “Company”) have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (the “FASB”). The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure our financial condition, results of operations, and cash flows are consistently reported.
The Company’s interim financial statements as of September 30, 2009 and 2010 are unaudited and, in the opinion of management, reflect all adjustments (consisting solely of normal and recurring items) necessary to state fairly the Company’s financial position as of September 30, 2010, results of operations for the three and nine months ended September 30, 2009 and 2010 and cash flows for the nine months ended September 30, 2009 and 2010.
The preparation of financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an on-going basis, including those related to incentive compensation, revenue recognition, allowance for doubtful accounts, inventory valuation, intangible assets, income taxes, warranty obligations, the fair value of preferred stock and warrants, stock-based compensation and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material to the financial statements.
Management believes that the existing resources and currently projected financial results are sufficient to fund operations through December 31, 2010. In the event that the remaining outstanding Short-Term Warrants issued in connection with the December 2009 Series D Convertible Preferred Stock financing are exercised before their expiration on December 23, 2010, which would result in the issuance of 7,024,392 of common stock and $751,610 of proceeds, the Company believes it would have sufficient resources to fund its operations through March 31, 2011. Conversely, if we encounter material deviations from our plans including, but not limited to, lower than expected level of sales under the Development, Supply and Distribution Agreement with Cardiac Science, or if we experience lower than expected sales of our HearTwave II Systems and Micro-V Alternans Sensors, our ability to fund our operations will be negatively impacted. Therefore, we are pursuing opportunities to raise additional capital. However, there can be no assurance that such capital will be available at all, or if available, that the terms of such financing would not be dilutive to other stockholders. If the Company is unsuccessful in raising additional capital as circumstances require, it may be required to implement additional cost cutting initiatives or may not be able to continue its operations at all. These financial statements assume that the Company will continue as a going concern. If the Company is unable to continue as a going concern, it may be unable to realize its assets and discharge its liabilities in the normal course of business.
The interim financial statements of the Company presented herein are intended to be read in conjunction with the financial statements of the Company for the year ended December 31, 2009.
The interim results of operations are not necessarily indicative of results to be expected for the entire year or future periods.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company are as follows:
Cash and Cash Equivalents
The Company maintains its cash and cash equivalents in bank deposit accounts, which may, at times, exceed federally insured limits. The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The carrying amount of the Company’s cash equivalents approximates fair value due to the short maturities of these investments. This may include short-term commercial paper, short-term securities of state government agencies with maturities less than three months from date of purchase, money market funds and demand deposits with financial institutions.
At December 31, 2009 and September 30, 2010, respectively, $3,152,042 and $1,507,933 of the Company’s cash and cash equivalents were in a transaction account. As of September 30, 2010, this transaction account was covered by Federal Deposit Insurance Coverage (“FDIC”) in the amount of $250,000. At December 31, 2009 and September 30, 2010, respectively, the Company classified investments in money market funds totaling $7,426 and $7,464, respectively, as cash equivalents since these investments are readily convertible into known amounts of cash and do not have significant valuation risk. These investments are currently in a fund that invests exclusively in short-term U.S. Government obligations, including securities issued or guaranteed by the U.S. Government, its agencies and U.S. Treasury securities. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
In November 2007, the Company entered into a definitive agreement with Farley White Management Company, LLC to lease 17,639 usable square feet of office space. The initial lease term was for 62 months with an option to extend the lease for one extension period of five years. During the term of the lease, the Company is required to maintain a standby letter of credit in favor of the landlord as security for the Company’s obligations under the lease. The amount of the letter of credit is $500,000 for the first and second lease years and is reduced by $100,000 at the end of the second, third and fourth lease years. The Company first occupied the space in February 2008 and the first reduction of the letter of credit in the amount of $100,000 took place during the first three months of 2010. The Company has recorded this letter of credit as restricted cash on its balance sheets.
Revenue Recognition and Accounts Receivable
Revenue from the sale of product to all of the Company’s customers is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of the Company’s obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of product to all of our third-party distributors is subject to the same recognition criteria. These distributors provide all direct repair and support services to their customers. Revenue from the sale of the Microvolt T Wave Alternans (MTWA) Module to Cardiac Science is subject to the same revenue recognition criteria. The Company provides standard warranty coverage on the MTWA Modules. The HearTwave II System and the CH 2000 Cardiac Stress Test System can be sold with a treadmill or as stand-alone systems, and pursuant to the Company’s Development, Supply and Distribution Agreement with Cardiac Science, MTWA Module is sold with a start-up kit including Micro-V Alternans Sensors. Therefore, as necessary, the Company allocates the purchase price to the separate items proportionately based on the relative fair value or amounts charged when sold on a stand-alone basis and, accordingly, defers revenue recognition on unshipped elements until shipment. The Company also sells maintenance agreements with the HearTwave II System. Revenue from maintenance contracts is recognized separately based on amounts charged when sold on a stand-alone basis and is recorded over the term of the underlying agreement. Payments of $276,284 at September 30, 2010 ($302,573 at December 31, 2009) received in advance of services being performed are recorded as deferred revenue and included in current liabilities in the accompanying balance sheet. The Company offers usage agreements under its Technology Placement Program (“TPP”) whereby customers have use of the HearTwave II System and a pre-set level of Micro-V Alternans Sensors for a 90-day period. Under the TPP, the Company retains title to the HearTwave II System. The revenue from the TPP is recognized over the term of the usage agreement, which is generally three months. At September 30, 2010, the amount of revenue recognized from the TPP was $17,867.
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Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off when identified. For the year ended December 31, 2009 and the nine months ended September 30, 2010, the Company’s actual experience of customer receivables written off directly was $145,465 and $28,627, respectively. At December 31, 2009 and September 30, 2010, the allowance for doubtful accounts was $171,515 and $137,590, respectively.
Shipping and Handling Costs
The Company classifies freight and handling billed to customers as sales revenue and related costs as cost of sales.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statement of operations over the requisite service period.
Net Loss Per Share
Basic loss per share amounts are based on the weighted average number of shares of common stock outstanding during the period. Due to experiencing a net loss in the three and nine month periods ended September 30, 2009 and 2010 the impact of options to purchase 5,918,367 and 9,911,046 shares of common stock, short-term warrants to purchase 0 and 7,024,392 shares of common stock, 154 and 0 shares of Series A Convertible Preferred Stock, 5,000 and 0 shares of Series C Convertible Preferred Stock, 0 and 5,000 shares of Series C-1 Convertible Preferred Stock, 0 and 1,852 shares of Series D Convertible Preferred Stock and 302,467 and 53,200 restricted shares have been excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive for the three and nine month periods ended September 30, 2009 and 2010, respectively.
Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, and capital lease obligations, approximate their fair values at December 31, 2009 and September 30, 2010 due to their short term nature. The fair value of capital lease obligations is estimated at its carrying value based upon current rates.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which includes allocations of labor and overhead. Standard cost approximates actual cost on a first-in, first-out method. Management assesses the value of inventory for estimated obsolescence or unmarketable inventory on a quarterly basis. If necessary, inventory value may be written down to the estimated fair market value based upon assumptions about future demand and market conditions. At December 31, 2009, the Company had a reserve of $967,148 for excess inventory in connection with our contractual obligation as part of the Co-Marketing Agreement with St. Jude Medical. The reserve is based on the uncertainty about realizing the value of excess inventory. In the first nine months of 2009 and 2010, the Company increased the reserve by $0 and $124,476, respectively. The Company does not believe that the inventory is exposed to obsolescence risk. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required from time to time that could adversely affect operating results for the fiscal period in which such write-downs are affected.
Product Warranty
Management warrants all non-disposable products as compliant with their specifications and warrants that the products are free from defects in material and workmanship for a period of 13 months from the date of delivery. Management maintains a reserve for the estimated cost of future repairs of our products during this warranty period. The amount of the reserve is based on our actual return and historical repair cost experience. If the rate and cost of future warranty activities differs significantly from our historical experience, additional costs would have to be reserved that could materially affect our operating results.
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Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method based on estimated useful lives. Repair and maintenance costs are expensed as incurred. Upon retirement or sale, the costs of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of net income.
Licensing Fees and Patent Costs
The Company has entered into a licensing agreement giving the Company the exclusive rights to certain patents and technologies and the right to market and distribute any products developed based upon such patents and technologies, subject to certain covenants. Payments made under the licensing agreement and costs associated with patent applications have generally been expensed as incurred because recovery of these costs is uncertain. However, certain costs associated with patent applications for products and processes which have received regulatory approval and are available for commercial sale, have been capitalized and are being amortized over their estimated economic life of five years.
Recent Accounting Pronouncements
In September 2009, the Emerging Issues Task Force issued new rules pertaining to the accounting for revenue arrangements with multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes the prior multiple element revenue arrangement accounting rules that are currently used by the Company. This guidance is effective for the Company on January 1, 2011 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In September 2009, the Emerging Issues Task Force issued new rules which changed the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. This guidance is effective for the Company on January 1, 2011 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In January 2010, the FASB issued an Accounting Standards Update which improves disclosures about fair value measurements. More specifically, the update requires the disclosure of transfers in and out of levels 1 and 2 and the reason for the transfers. Additionally, it requires separate reporting of purchases, sales, issuances and settlements for level 3. This update is effective for periods beginning after December 15, 2009. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.
3. MAJOR CUSTOMERS, EXPORT SALES AND CONCENTRATION OF CREDIT RISK
There were no major customers that accounted for over 10% of the Company’s total revenues and accounts receivable balance for the three or nine month periods ended September 30, 2009 and 2010. For the three month periods ended September 30, 2009 and 2010, international sales accounted for 14% and 16% of total revenues, respectively. For the nine month periods ended September 30, 2009 and 2010, international sales accounted for 12% and 19% of total revenues, respectively.
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4. INVENTORIES, NET
| December 31, 2009 |
September 30, 2010 |
|||||||
| Raw materials |
$ | 379,423 | $ | 174,524 | ||||
| Work in process |
3,818 | 3,321 | ||||||
| Finished goods |
769,379 | 605,657 | ||||||
| Total inventory, net |
$ | 1,152,620 | $ | 783,503 | ||||
5. CONVERTIBLE PREFERRED STOCK
The Company’s authorized capital stock includes 2,000,000 shares of $0.001 par value preferred stock. The preferred stock may be issued at the discretion of the Board of Directors (without further stockholder approval) with such designations, rights and preferences as the Board of Directors may determine from time to time. This preferred stock may have dividend, liquidation, redemption, conversion, voting or other rights, which may be more expansive than the rights of the holders of the Company’s common stock.
Total shares of preferred stock issued and outstanding at December 31, 2009 and September 30, 2010, respectively, were as follows:
| December 31, 2009 |
September 30, 2010 |
|||||||
| Series C-1 Convertible Preferred |
||||||||
| Shares issued and outstanding |
5,000 | 5,000 | ||||||
| Liquidation preference and redemption value |
$ | 12,500,000 | $ | 12,500,000 | ||||
| Series D Convertible Preferred |
||||||||
| Shares issued and outstanding |
1,852 | 1,852 | ||||||
| Liquidation preference and redemption value |
$ | 1,852,000 | $ | 1,852,000 | ||||
| Total Convertible Preferred |
||||||||
| Shares issued and outstanding |
6,852 | 6,852 | ||||||
| Liquidation preference and redemption value |
$ | 14,352,000 | $ | 14,352,000 | ||||
The preferred Series C-1 stock is entitled to dividends when and if declared by the Board of Directors prior to the payment of any such dividends to the holders of common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the preferred stock then outstanding are entitled to be paid out of the assets of the corporation before any payment is made to the holders of common stock. Each holder of the preferred stock is entitled to the number of votes equal to the number of shares of common stock the preferred stock is convertible into on any matter reserved to the stockholders of the Company for their action at any meeting of the stockholders of the corporation.
Series C and Series C-1 Convertible Preferred Stock
On March 21, 2007, the Company and St. Jude Medical entered into an agreement for the sale of $12.5 million of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred”) to St. Jude Medical resulting in $11.7 million net of issuance costs. Under the terms of the financing, the Company issued and sold 5,000 shares of its Series C Preferred at a purchase price of $2,500 per share (the “Series C Original Issue Price”). Each share of Series C Preferred was convertible into a number of shares of common stock equal to $2,500 divided by the conversion price of the Series C Preferred, which was initially $2.99. Each share of Series C Preferred was convertible into approximately 836.12 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 5,000 shares of Series C Preferred issued and sold in the financing was approximately 4,180,602.
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The holders of the Series C Preferred were entitled to receive cumulative cash dividends at the rate of eight percent (8%) of the Series C Original Issue Price per year (the “Series C Dividend”) on each outstanding share of Series C Preferred, provided, however, that the Series C Dividend is only payable when, and if declared by the Board of Directors. The Series C Dividend was payable prior and in preference to any declaration or payment of any dividend on Common Stock, other series of Preferred Stock or any other capital stock of the Company.
The conversion price feature of the Series C Preferred was subject to adjustment in certain circumstances if the Company issued shares of common stock under those circumstances on or before March 21, 2008 at a purchase price below the conversion price of the Series C Preferred. No additional shares were issued as a result of this provision.
The holders of Series C Preferred were entitled to receive, prior and in preference to any distribution of the proceeds from any liquidation (including change-in-control events), dissolution or winding up of the Company, whether voluntary or involuntary, to holders of common stock, other series of preferred stock or any other capital stock of the Company, an amount per share equal to the Series C Preferred par value, plus declared but unpaid dividends on such shares.
The holders of Series C Preferred were entitled to vote, on an as-if converted basis, along with holders of the Company’s common stock on all matters on which holders of common stock are entitled to vote.
In order to be able to issue securities in the Series D Financing, described below, that are senior to the Series C Preferred previously issued by the Company, the Company entered into a Share Exchange Agreement with St. Jude Medical, dated as of December 23, 2009, pursuant to which St. Jude Medical exchanged 5,000 shares of the Company’s Series C Preferred, representing 100% of the issued and outstanding Series C Preferred, for 5,000 newly issued shares of the Company’s Series C-1 Convertible Preferred Stock (the “Series C-1 Preferred”). The terms of the Series C-1 Preferred are substantially the same as the terms of the Series C Preferred except that the Series C-1 Preferred is junior to the Series D Preferred in the event of a liquidation or deemed liquidation of the Company.
The holders of Series C-1 Preferred are entitled to receive cash dividends deemed to be accrued as of December 23, 2009 of $2,761,643 plus cumulative cash dividends at the rate of 8% of the Deemed Series C-1 Original Issue Price (which is $2,500) per year on each outstanding share of Series C-1 Preferred (the “Series C-1 Dividend”), provided, however, that the Series C-1 Dividend is only payable when and if declared by the Board of Directors. The Series C-1 Dividend is payable prior and in preference to any declaration or payment of any dividend on common stock, other series of preferred stock or any other capital stock of the Company.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series C-1 Certificate of Designation), the holders of Series C-1 are entitled to receive an amount equal to the Deemed Series C-1 Original Issue Price ($2,500 per share) plus declared but unpaid dividends after the payment to the holders of Series D Preferred, but before any amount to the holders of common stock, and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series C-1 Preferred with respect to liquidation preference.
Under Emerging Issues Task Force (“EITF”) issued guidance, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company classified the Series C-1 Preferred outside of permanent equity based on the rights of the Series C-1 Preferred in a deemed liquidation.
Series D Convertible Preferred Stock
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”) and common stock warrants described below to new and current institutional and private investors pursuant to the terms of a Securities Purchase Agreement dated December 23, 2009 between the Company and the purchasers of Series D Preferred (the “Series D Financing”). The aggregate proceeds from the Series D Financing were $1.8 million, net of issuance costs.
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Under the terms of the Series D Financing, the Company issued 1,852 shares of its Series D Preferred at a purchase price of $1,000 per share (the “Series D Original Issue Price”). Each share of Series D Preferred Sock is convertible into a number of shares of common stock of the Company equal to $1,000 divided by the conversion price of the Series D Preferred, which is initially $0.082, representing a 15% premium to the 20-day trailing average of the Company’s closing common stock price as of December 21, 2009 (the “Closing Price”). Each share of Series D Preferred is currently convertible into approximately 12,195 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 1,852 shares of Series D Preferred issued and sold in the financing is 22,585,366.
The Company also issued to the investors two types of warrants. The first warrants (the “Short-Term Warrants”) entitle the investors to purchase an aggregate of 11,292,696 shares of common stock (which is equal to 50% of the number of shares of common stock into which the Series D Preferred purchased by the investors are convertible) at an exercise price of $0.107 per share,$0.107 per share (which is 150% of the Series D Closing Price). As of November 10, 2010, Short-Term warrants to purchase an aggregate of 4,268,294 shares of common stock have been exercised resulting in aggregate proceeds to the Company of $456,708, and Short-Term Warrants to purchase an aggregate 7,024,392 shares of common stock remain outstanding. The Short-Term Warrants expire on December 23, 2010.
The second warrants (the “Long-Term Warrants”) entitle the investors to purchase an aggregate of 6,775,611 shares of common stock (which is equal to 30% of the number of shares of common stock into which the Series D Preferred purchased by the investors are convertible) at an exercise price of $0.142 per share (which is 200% of the Series D Closing Price). In May 2010, the Company elected to exercise its right to call all outstanding Long-Term Warrants. On or before June 4, 2010, all Long-Term Warrants to purchase an aggregate of 6,775,611 shares of common stock were exercised in full resulting in aggregate proceeds to the Company of $962,138.
Three individuals who were serving as directors of the Company at the time of the Series D Financing purchased an aggregate of 385 shares of Series D Preferred for a total purchase price of $385,000. Specifically, Roderick de Greef, Chairman of the Board of the Company, Richard J. Cohen, who previously served as a director of the Company, and Jeffery Wiggins, a director of the Company, purchased 50, 35 and 300 shares of Series D Preferred, respectively, and were issued Short-Term Warrants to purchase 304,878, 213,415 and 1,829,269 shares of common stock, respectively, and Long-Term Warrants to purchase 182,927, 128,049 and 1,097,561 shares of common stock, respectively. Mr. Wiggins exercised his Short-Term Warrants and Long-Term Warrants in full in April 2010, and Messrs. Cohen and de Greef exercised their Long-Term Warrants in full in May and June 2010, respectively.
An analysis was performed on the exercise and settlement provisions of the Long-Term and Short-Term Warrants. As a result, it was determined that they are not considered derivative instruments under Accounting Standards Codification (“ASC”) 815— Derivatives and Hedging as they meet the scope exception since they are both indexed to the Company’s own stock and are classified in stockholders’ deficit in the Company’s balance sheet.
The conversion price of the Series D Preferred is subject to adjustment in certain circumstances. If the Company issues shares of common stock at a purchase price below the conversion price of the Series D Preferred at any time on or before August 23, 2011, the conversion price of the Series D Preferred will be adjusted as set forth in the Series D Certificate of Designation (as defined below). In determining the appropriate accounting for the conversion feature for the Series D Preferred, the Company determined that the conversion feature does not require bifurcation, and as a result is not considered a derivative under the provisions of ASC 815— Derivatives and Hedging.
The holders of the Series D Preferred are entitled to share in any dividends declared and paid, or set aside for payment, on the common stock, pro rata, in accordance with the number of shares of common stock into which such shares of Series D Preferred are then convertible.
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The holders of the Series D Preferred are entitled to the number of votes equal to the number of shares of common stock into which such shares of Series D Preferred could be converted immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent and shall have voting rights and powers equal to the voting rights and powers of the common stock and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Company. The Series D Preferred shall vote together with the common stock at any annual or special meeting of the stockholders and not as a separate class, and act by written consent in the same manner as the common stock.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series D Certificate of Designation), the holders of Series D Preferred are entitled to receive an amount equal to the Series D Original Issue Price plus declared but unpaid dividends before the payment of any amount to the holders of common stock, Series C-1 Convertible Preferred Stock and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series D Preferred with respect to liquidation preference.
Under EITF issued guidance, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company classified the Series D Preferred outside of permanent equity based on the rights of the Series D Preferred in a deemed liquidation.
Under GAAP, proceeds from the sale of securities are to be allocated to each financial instrument based on their relative fair market value. Further, if the convertible preferred stock has an effective price that is less than the fair value of the common stock into which it is convertible on the date of issuance, the difference between the effective price and the fair value represents a beneficial conversion feature. In this regard, we allocated the net proceeds from the Series D Financing based on the relative fair market value of the Series D Preferred using the Company’s closing common stock price as of December 23, 2009 and to the related warrants using the Black-Scholes option pricing model. Upon issuance, the following assumptions were used to estimate the fair market value of the warrants using the Black-Scholes option pricing model:
| Short- Term |
Long- Term |
|||||||
| Dividend Yield |
0.0 | % | 0.0 | % | ||||
| Expected Volatility |
170 | % | 132 | % | ||||
| Risk Free Interest Rate |
0.41 | % | 2.51 | % | ||||
| Expected Option Terms (in years) |
1 | 5 | ||||||
Based on this allocation, the relative fair value of the Series D Preferred was $1,247,780. The aggregate fair value of the common stock into which the Series D Preferred are convertible was $1,355,122. Therefore, the difference between the relative fair value of the Series D Preferred and the fair value of the common stock into which the Series D Preferred are convertible represents a beneficial conversion feature of $107,342. The amount of the beneficial conversion feature was immediately accreted and the accretion resulted in a deemed dividend as the Series D Preferred was immediately convertible. The deemed dividend was reflected as an adjustment to the net loss applicable to common stockholders on the Company’s Statement of Operations for the year ended December 31, 2009.
6. STOCK-BASED COMPENSATION
The stock-based compensation charge increased the Company’s loss from operations as well as its net loss by $1,506,750 and $791,960 or $0.02 and $0.01 per share in the nine month periods ending September 30, 2009 and 2010, respectively.
The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including the expected volatility of the Company’s common stock over the estimated term of the options granted, estimates on the expected time period that employees will retain their vested stock options prior to exercising them, and the number of shares that are expected to be forfeited before the options are vested. The use of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and as a result, provide significantly different amounts recognized in the Company’s Statement of Operations.
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The following weighted average assumptions were used to estimate the fair market value of options granted using the Black-Scholes valuation method:
| Nine Months Ended September 30, | ||||||||
| 2009 | 2010 | |||||||
| Dividend Yield |
0.0 | % | 0.0 | % | ||||
| Expected Volatility |
133.3 | % | 161.6 | % | ||||
| Risk Free Interest Rate |
1.4 | % | 1.5 | % | ||||
| Expected Option Terms (in years) |
5 | 3 | ||||||
The expected volatility is based on the price of the Company’s common stock over a historical period which approximates the expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted. The expected term is estimated based on historical experience.
The Company has granted 705,389 stock options to consultants, of which 502,504 are vested and are revalued at each period end using the Black-Scholes model. As of September 30, 2010, 446,887 and 55,616 stock options were valued using the following assumptions: dividend yield of 0.0%; an expected volatility of 131.8% and 176.8%; a risk free interest rate of 2.5% and 0.6%; and an expected term of 10 and 3 years, respectively. The fair value adjustment resulted in $44,661 and $116,404 in expense for the three and nine month period ended September 30, 2010, respectively.
On March 11, 2010, the Compensation Committee of the Board of Directors of the Company approved the grant of stock option awards to certain employees, directors and consultants of the Company to purchase an aggregate of 7,028,512 shares of common stock of the Company. Of the option awards granted, 4,988,858 shares were granted outside of the Company’s stock option plans. The remaining 2,039,654 options were granted under the Company’s 2001 Stock Incentive Plan. Each of the option awards has a term of ten years and an exercise price of $0.16, which was the closing price of the Company’s common stock on the date of grant. In connection with the approval of certain option awards granted outside of the Company’s stock option plans, stock options to purchase an aggregate of 2,983,333 shares of common stock of the Company previously granted to members of senior management were cancelled. Also, the Company replaced 10% of senior management’s salaries for 2010 and 100% of senior management’s 2009 earned cash bonuses with stock options to purchase shares of common stock of the Company; and the Company also eliminated per meeting director fees and reduced the annual retainer paid to directors. In recognition of this reduction in fees, the Company awarded each director options to purchase shares of common stock of the Company.
In addition to the senior management cancellations, an additional 80,000 and 114,000 options were forfeited during the three and nine months ended September 30, 2010. All stock options granted have exercise prices equal to the fair market value of the common stock on the date of grant. Options granted under all of the Company’s equity incentive plans generally vest annually over a three to four year vesting period.
Stock option transactions under the Company’s equity incentive plans and outside of the Company’s incentive plans during the nine month period ended September 30, 2010 are summarized as follows:
| Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2009 |
5,928,367 | $ | 1.47 | 7.21 | ||||||||||||
| Granted |
7,128,512 | 0.16 | ||||||||||||||
| Exercised |
(40,000 | ) | 0.30 | |||||||||||||
| Canceled/Forfeited |
(3,105,833 | ) | 1.79 | |||||||||||||
| Outstanding and Expected to Vest at September 30, 2010 |
9,911,046 | $ | 0.42 | 8.04 | $ | 587,600 | ||||||||||
| Exerciseable at September 30, 2010 |
4,738,735 | $ | 0.70 | 7.59 | $ | 181,917 | ||||||||||
| Vested and expected to vest at September 30, 2010 |
9,911,046 | $ | 0.42 | 8.04 | $ | 587,600 | ||||||||||
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The fair value of options granted during the nine months ended September 30, 2010 was $1,133,562, with a per share weighted average fair value of $0.16. The fair value was estimated using the Black-Scholes option pricing model with the assumptions listed above. As of September 30, 2010, there was $599,834 of total unrecognized compensation cost related to approximately 5,172,311 unvested outstanding stock options. The expense is anticipated to be recognized over a weighted average period of 2.82 years. The intrinsic value of both outstanding and expected to vest and exercisable shares was $587,600 and $181,917, respectively, at September 30, 2010. For the nine months ended September 30, 2009 and 2010, 0 and 40,000 stock options were exercised, respectively.
There were no new restricted stock grants issued to employees in the nine month period ended September 30, 2010. For the nine month period ended September 30, 2010, approximately 1,139,283 shares of restricted stock were available for future grant. Included in total stock-based compensation in the Company’s statement of operations for the three and nine months ended September 30, 2010 was $5,651 and $14,683 of compensation related to restricted stock previously granted. At December 31, 2009 and September 30, 2010, there was $41,863 and $17,064 of unrecognized compensation related to restricted stock previously granted, respectively.
Restricted stock activity for the nine months ended September 30, 2010 was as follows:
| Number of Restricted Shares |
Weighted Average Grant Date Fair Value |
|||||||
| Nonvested balance as of December 31, 2009 |
293,800 | $ | 2.32 | |||||
| Granted |
— | — | ||||||
| Vested |
(221,533 | ) | 2.93 | |||||
| Forfeited |
(19,067 | ) | 0.48 | |||||
| Nonvested balance as of September 30, 2010 |
53,200 | $ | 0.43 | |||||
The Company recognized the full impact of its share-based payment plans in the statement of operations for the three and nine months ended September 30, 2009 and 2010 and did not capitalize any such costs on the balance sheets. The following table presents share-based compensation expense included in the Company’s statement of operation:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
| Cost of goods sold |
$ | 1,410 | $ | 2,397 | $ | 2,595 | $ | 5,323 | ||||||||
| Research and development |
802 | 1,907 | 30,084 | 6,198 | ||||||||||||
| Selling, general and administrative |
494,685 | 190,465 | 1,474,071 | 780,439 | ||||||||||||
| Share-based compensation expense |
$ | 496,897 | $ | 194,769 | $ | 1,506,750 | $ | 791,960 | ||||||||
At September 30, 2010, there were approximately 2,688,855 shares of common stock available for future grants under all of the Company’s equity incentive plans.
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7. COMMITMENTS AND CONTINGENCIES
Guarantor Arrangements
The Company undertakes certain indemnification obligations under its agreements with other companies in the ordinary course of its business, typically with business partners and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company maintains a products liability insurance policy that is intended to limit its exposure to this risk. Based on the Company’s historical activity in combination with its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2009 and September 30, 2010.
The Company warrants all of its non-disposable products as compliant with their specifications and warrants that the products are free from defects in material and workmanship for a period of 13 months from date of delivery. The Company maintains a reserve for the estimated costs of future repairs of its products during this warranty period. The amount of the reserve is based on the Company’s actual repair cost experience. The Company had $52,754 and $9,087 of accrued warranties at September 30, 2009 and 2010, respectively, as set forth in the following table:
| For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
| Balance at beginning of period |
$ | 57,788 | $ | 18,199 | $ | 39,076 | $ | 29,383 | ||||||||
| Provision for warranty for units sold |
11,000 | 12,350 | 29,875 | 34,125 | ||||||||||||
| Cost of warranty incurred |
(16,034 | ) | (21,462 | ) | (16,197 | ) | (54,421 | ) | ||||||||
| Balance at end of period |
$ | 52,754 | $ | 9,087 | $ | 52,754 | $ | 9,087 | ||||||||
8. OTHER DEVELOPMENTS
On March 11, 2010, the Company and Dr. Richard J. Cohen, M.D. Ph.D. entered into Amendment No. 1 to the Amended and Restated Consulting and Technology Agreement (“Amendment No. 1”), which extended the Interim Consulting Period to December 31, 2010. Pursuant to Amendment No. 1, Dr. Cohen will receive a reduced Monthly Royalty payment of $5,811 per month for the period beginning on January 1, 2010 and ending on December 31, 2010.
9. SUBSEQUENT EVENTS
We have assessed and determined there were no subsequent events that occurred through the date of issuance of these financial statements requiring additional disclosure.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Cambridge Heart, Inc.:
We have audited the accompanying balance sheets of Cambridge Heart, Inc. as of December 31, 2008 and 2009, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cambridge Heart, Inc. as of December 31, 2008 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses, inability to generate cash flows from operations, and liquidity uncertainties from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ Caturano and Company, P.C. |
| CATURANO and COMPANY, P.C. |
| Boston, Massachusetts |
| March 31, 2010 |
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BALANCE SHEET
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 6,207,074 | $ | 3,159,468 | ||||
| Restricted cash, current portion |
100,000 | 100,000 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $283,576 and $171,515 at December 31, 2008 and 2009, respectively |
766,879 | 458,887 | ||||||
| Inventory, net |
1,455,330 | 1,152,620 | ||||||
| Prepaid expenses and other current assets |
123,080 | 118,312 | ||||||
| Total current assets |
$ | 8,652,363 | $ | 4,989,287 | ||||
| Fixed assets, net |
358,434 | 239,970 | ||||||
| Restricted cash, net current portion |
400,000 | 400,000 | ||||||
| Other assets |
47,845 | 42,655 | ||||||
| Total Assets |
$ | 9,458,642 | $ | 5,671,912 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 475,556 | $ | 383,768 | ||||
| Accrued expenses |
1,275,144 | 1,116,663 | ||||||
| Current portion of capital lease obligation |
11,135 | 13,571 | ||||||
| Total current liabilities |
1,761,835 | 1,514,002 | ||||||
| Capital lease obligation, net of current portion |
27,121 | 13,551 | ||||||
| Total liabilities |
1,788,956 | 1,527,553 | ||||||
| Commitments and contingencies (Note 14) |
||||||||
| Convertible Preferred Stock, $.001 par value; 2,000,000 shares authorized at December 31, 2008 and 2009, respectively; 5,154 and 6,852 shares issued and outstanding at December 31, 2008 and 2009, respectively. Liquidation preference and redemption value of $12,501,135 and $14,352,000 as of December 31, 2008 and 2009, respectively |
11,678,244 | 12,870,613 | ||||||
| 11,678,244 | 12,870,613 | |||||||
| Stockholders’ deficit: |
||||||||
| Common Stock, $.001 par value; 150,000,000 shares authorized; 65,016,521 and 64,904,955 shares issued and outstanding at December 31, 2008 and 2009, respectively |
65,017 | 64,905 | ||||||
| Additional paid-in capital |
84,570,518 | 87,201,360 | ||||||
| Accumulated deficit |
(88,644,093 | ) | (95,992,519 | ) | ||||
| Total stockholders’ deficit |
(4,008,558 | ) | (8,726,254 | ) | ||||
| Total Liabilities and Stockholders’ Deficit |
$ | 9,458,642 | $ | 5,671,912 | ||||
The accompanying notes are an integral part of these financial statements.
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STATEMENT OF OPERATIONS
| 2008 | 2009 | |||||||
| Revenue |
$ | 4,238,743 | $ | 3,231,909 | ||||
| Cost of goods sold |
3,178,849 | 1,841,926 | ||||||
| Gross profit |
1,059,894 | 1,389,983 | ||||||
| Costs and expenses: |
||||||||
| Research and development |
542,102 | 380,840 | ||||||
| Selling, general and administrative |
10,861,678 | 8,380,199 | ||||||
| Total costs and expenses |
11,403,780 | 8,761,039 | ||||||
| Loss from operations |
(10,343,886 | ) | (7,371,056 | ) | ||||
| Interest income |
356,941 | 29,556 | ||||||
| Interest expense |
(43,144 | ) | (6,926 | ) | ||||
| Net loss |
(10,030,089 | ) | (7,348,426 | ) | ||||
| Beneficial conversion feature (Note 9) |
— | (107,342 | ) | |||||
| Net loss attributable to common stockholders |
$ | (10,030,089 | ) | $ | (7,455,768 | ) | ||
| Net loss per common share-basic and diluted |
$ | (0.16 | ) | $ | (0.12 | ) | ||
| Weighted average common shares outstanding-basic and diluted |
64,543,021 | 64,574,536 | ||||||
The accompanying notes are an integral part of these financial statements.
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STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
| Common stock, $.001 par | Total stockholders’ equity (deficit) |
|||||||||||||||||||
| Number of Shares |
Par Value |
Additional paid-in Capital |
Accumulated deficit |
|||||||||||||||||
| Balance at December 31, 2007 |
64,718,021 | $ | 64,718 | $ | 82,030,007 | $ | (78,614,004 | ) | $ | 3,480,721 | ||||||||||
| Compensation related to employee granted restricted stock |
24,537 | 24,537 | ||||||||||||||||||
| Compensation related to non-employee granted restricted stock |
241,736 | 241,736 | ||||||||||||||||||
| Issuance of restricted stock |
298,500 | 299 | (299 | ) | — | |||||||||||||||
| Stock options granted |
2,278,372 | 2,278,372 | ||||||||||||||||||
| Compensation related to non-employee stock options granted |
(3,835 | ) | (3,835 | ) | ||||||||||||||||
| Net Loss |
(10,030,089 | ) | (10,030,089 | ) | ||||||||||||||||
| Balance at December 31, 2008 |
65,016,521 | $ | 65,017 | $ | 84,570,518 | $ | (88,644,093 | ) | $ | (4,008,558 | ) | |||||||||
| Issuance of common stock warrants |
604,218 | 604,218 | ||||||||||||||||||
| Beneficial conversion feature recognized on issuance of Series D Preferred Stock |
107,342 | 107,342 | ||||||||||||||||||
| Accretion of beneficial conversion feature related to Series D Preferred Stock |
(107,342 | ) | (107,342 | ) | ||||||||||||||||
| Redemption of Series A Preferred Stock |
454 | 454 | ||||||||||||||||||
| Compensation related to employee granted restricted stock |
20,312 | 20,312 | ||||||||||||||||||
| Compensation related to non-employee granted restricted stock |
233,181 | 233,181 | ||||||||||||||||||
| Cancelation of restricted stock |
(111,566 | ) | (112 | ) | 112 | — | ||||||||||||||
| Compensation related to employee stock options granted |
1,769,705 | 1,769,705 | ||||||||||||||||||
| Compensation related to non-employee stock options granted |
2,860 | 2,860 | ||||||||||||||||||
| Net Loss |
(7,348,426 | ) | (7,348,426 | ) | ||||||||||||||||
| Balance at December 31, 2009 |
64,904,955 | $ | 64,905 | $ | 87,201,360 | $ | (95,992,519 | ) | $ | (8,726,254 | ) | |||||||||
The accompanying notes are an integral part of these financial statements.
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STATEMENT OF CASH FLOWS
| Year ended December 31, | ||||||||
| 2008 | 2009 | |||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (10,030,088 | ) | $ | (7,348,426 | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: |
||||||||
| Depreciation and amortization |
90,199 | 91,888 | ||||||
| Inventory provision |
924,825 | 26,983 | ||||||
| Stock based compensation expense |
2,540,810 | 2,026,058 | ||||||
| Provisions for allowance for bad debts |
33,360 | 33,404 | ||||||
| Gain on sale of fixed assets |
(14,100 | ) | — | |||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
1,147,653 | 274,588 | ||||||
| Inventory |
(112,358 | ) | 309,380 | |||||
| Prepaid expenses and other current assets |
(52,354 | ) | 4,768 | |||||
| Other assets |
19,921 | — | ||||||
| Accounts payable and accrued expenses |
(232,673 | ) | (250,269 | ) | ||||
| Net cash used for operating activities |
(5,684,806 | ) | (4,831,626 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of fixed assets |
(178,431 | ) | (1,889 | ) | ||||
| Proceeds from the sale of fixed assets |
14,100 | — | ||||||
| Purchases of marketable securities |
(2,472,000 | ) | — | |||||
| Proceeds from the maturity of marketable securities |
13,672,000 | — | ||||||
| Net cash provided by (used in) investing activities |
11,035,669 | (1,889 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from exercise of common and convertible preferred stock warrants |
852 | — | ||||||
| Redemption of Series A Preferred Stock |
— | (681 | ) | |||||
| Proceeds from revolving line of credit |
5,672,302 | — | ||||||
| Payments on revolving line of credit |
(5,672,302 | ) | — | |||||
| Proceeds from issuance of preferred stock and stock warrants, net issuance costs |
— | 1,797,724 | ||||||
| Principal payments on capital lease obligations |
(11,151 | ) | (11,134 | ) | ||||
| Net cash provided by (used in) financing activities |
(10,299 | ) | 1,785,909 | |||||
| Net increase (decrease) in cash and cash equivalents |
5,340,564 | (3,047,606 | ) | |||||
| Cash and cash equivalents, beginning of year |
866,510 | 6,207,074 | ||||||
| Cash and cash equivalents, end of year |
$ | 6,207,074 | $ | 3,159,468 | ||||
Supplemental Disclosure of Cash Flow Information
During 2008 and 2009, the Company paid $43,144 and $6,926 respectively, in interest expense.
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The Company
Cambridge Heart, Inc. (the “Company”) was incorporated in Delaware on January 16, 1990 and is engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. The Company sells its products primarily to cardiology group practices, hospitals and research institutions. The Company is subject to risks common to companies in the biotechnology, medical device and diagnostic industries, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with governmental regulations.
Basis of Presentation and Liquidity
The accompanying financial statements have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board, the (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure our financial condition, results of operations, and cash flows are consistently reported.
The preparation of financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an on-going basis, including those related to incentive compensation, revenue recognition, allowance for doubtful accounts, inventory valuation, income taxes, warranty obligations, the fair value of preferred stock and warrants, stock-based compensation and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material to the financial statements.
The accompanying financial statements have been prepared on a “going concern basis,” which assumes we will realize our assets and discharge our liabilities in the normal course of business. We have experienced recurring losses from operations of $7,371,056 and $10,343,886 for the years ended December 31, 2009 and 2008, respectively. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
In March 2009, the Company underwent a significant cost reduction initiative that affected all functions of the Company and included a headcount reduction and the restructuring of the sales organization. In June 2009, we partnered with Cardiac Science to develop and market the MTWA Module, which we expect to begin selling to Cardiac Science in the third quarter of 2010. In December 2009, we received $1.8 million in aggregate proceeds from the Series D Financing. In December 2009, the Company reduced the size of its Board of Directors from seven members to five, in order to reduce costs and streamline the Company’s decision making process. In March 2010, the Company replaced 10% of senior management’s salaries and 100% of senior management’s 2009 earned bonuses with stock options to purchase shares of common stock of the Company; the Company eliminated per meeting director fees and reduced the annual retainer paid to directors. The Company is also scaling back on the level of consulting services incurred across all functions of the Company and have renegotiated certain consultative and advisory rates for 2010. Additionally, the Company is currently exploring other ways to further reduce its overhead costs and other operating expenses. As the year progresses, the Company intends to assess the existing organizational structure relative to the level of sales and, if necessary, may implement adjustments accordingly.
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The Company has evaluated its future cash flow assuming that the existing business remains steady, operational costs are reduced and sales of the MTWA Module to Cardiac Science commence in the third quarter of 2010. Further, given the build up of inventory as a result of the contractual obligations to St. Jude Medical, the Company does not anticipate having to make significant inventory purchases in 2010 related to the HearTwave II System. Based on this assessment, the Company believes that the existing resources and currently projected financial results, which include sales of the MTWA Module and Micro-V Alternans Sensors to Cardiac Science, are sufficient to fund its operations through December 31, 2010. In the event the short-term warrants and/or the long-term warrants issued in connection with the Series D Preferred private placement are exercised in 2010, which would result in $1.2 million and $0.9 million, respectively, of proceeds, and to the extent that sales of the MTWA Module and Micro-V Alternans Sensors exceed the Company’s projected base-line levels, the Company may have sufficient resources to fund its operations beyond the end of 2010.
Conversely, if the Company encounters material deviations from the projections including, but not limited to, a delay in gaining FDA clearance for the MTWA Module, a delay in launching the MTWA Module, lower than expected level of sales to Cardiac Science, or if the Company experiences an adverse effect on the expected sales of the existing HearTwave II post the launch of the MTWA Module, the time-line may be negatively impacted. Therefore, the Company will evaluate the need to implement additional cost cutting initiatives or to raise additional capital as the year progresses.
If we are unable to generate adequate cash flows or obtain sufficient additional funding when needed, we may have to significantly cut back our operations, sell some or all of our assets, license potentially valuable technologies to third parties, and/or cease some or all of our operations.
2. Summary of Significant Accounting Policies
Significant accounting policies followed by the Company are as follows:
Cash and Cash Equivalents
The Company maintains its cash and cash equivalents in bank deposit accounts, which may, at times, exceed federally insured limits. The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The carrying amount of the Company’s cash equivalents approximates fair value due to the short maturities of these investments. This may include short-term commercial paper, short-term securities of state government agencies with maturities less than three months from date of purchase, money market funds and demand deposits with financial institutions.
At December 31, 2009, $3,152,042 of the Company’s cash and cash equivalent was in a transaction account which is fully covered by Federal Deposit Insurance Coverage (“FDIC”) through June 30, 2010 under the Temporary Liquidity Guarantee Program. At December 31, 2008 and 2009, the Company classified investments in money market funds totaling $3,196,586 and $7,426, respectively, as cash equivalents since these investments are readily convertible into known amounts of cash and do not have significant valuation risk. These investments are currently in a fund that invests exclusively in short-term U.S. Government obligations, including securities issued or guaranteed by the U.S. Government, its agencies and U.S. Treasury securities. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
In June 2008, the Company entered into a revolving credit facility with Citigroup Global Markets, Inc. for borrowings of up to, and secured by, 50% of the Company’s auction rate securities (“ARS”) owned at the time. The revolving credit facility contained no financial covenants. Any borrowings under the revolving credit facility accrued interest at a variable rate based on short-term market interest rates. During 2008, the Company borrowed $5,672,302 under the revolving credit facility bearing an annual interest rate of 3.175%. The Company used the funds to support working capital needs. In November 2008, the total amount outstanding under the credit facility was repaid with proceeds from the liquidation of the Company’s investments in ARS at par value.
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In November 2007, the Company entered into a definitive agreement with Farley White Management Company, LLC to lease 17,639 usable square feet of office space. The initial lease term was for 62 months with an option to extend the lease for one extension period of five years. During the term of the lease, the Company is required to maintain a standby letter of credit in favor of the landlord as security for the Company’s obligations under the lease. The amount of the letter of credit is $500,000 for the first and second lease years and is reduced by $100,000 at the end of the second, third and fourth lease years. The Company occupied the space in February 2008 and therefore the reduction will begin in 2010. The Company has recorded this letter of credit as restricted cash on its balance sheets.
Investments
In 2008, investments consisted of money market funds and marketable securities. The money market funds were readily convertible into known amounts of cash, and, therefore, classified as cash equivalents. See “Cash and Cash Equivalents” in Note 2 for further details regarding cash equivalents. The marketable securities consisted of municipal bonds with long-term nominal maturities that were triple “A” credit rated debt instruments collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”) up to 98%. The interest rates on these municipal bonds reset through an auction process every 28 – 30 days and, therefore, are referred to as ARSs. Investments which are considered held-to-maturity are stated at amortized cost plus accrued interest, which approximates market value. Investments which are considered available-for-sale are carried at fair market value plus accrued interest. Unrealized gains and losses are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ deficit. Realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase, are included in interest and investment income. In November 2008, we sold all of our investments in marketable securities at par value. During 2009, we invested our cash in money market funds. At December 31, 2008 and 2009 the Company’s investments consisted solely of money market funds classified in cash and cash equivalents.
Revenue Recognition and Accounts Receivable
Revenue from the sale of product to all of the Company’s customers is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of the Company’s obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of product to all of our third-party distributors is subject to the same recognition criteria. These distributors provide all direct repair and support services to their customers. The HearTwave II System and the CH 2000 Cardiac Stress Test System can be sold with a treadmill or as standalone systems. As necessary, the Company allocates the purchase price to the separate items proportionately based on fair value or amounts charged when sold on a stand-alone basis and, accordingly, defers revenue recognition on unshipped elements until shipment. The Company also sells maintenance agreements with the HearTwave System. Revenue from maintenance contracts is recognized separately based on amounts charged when sold on a stand-alone basis and is recorded over the term of the underlying agreement. Payments of $302,573 at December 31, 2009 ($362,938 at December 31, 2008) received in advance of services being performed are recorded as deferred revenue and included in current liabilities in the accompanying balance sheet. The Company offers usage agreements under its Technology Placement Program (“TPP”) whereby customers have use of the HearTwave System and a pre-set level of Micro-V Alternans Sensors for a 90-day period. Under the TPP, the Company retains title to the HearTwave System. The revenue from the TPP is recognized over the term of the usage agreement, which is generally three months.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off when identified. The Company’s actual experience of customer receivables written off directly during 2008 and 2009 was $3,764 and $145,465, respectively. At December 31, 2008 and 2009 the allowance for doubtful accounts was $283,576 and $171,515, respectively.
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Shipping and Handling Costs
The Company classifies freight and handling billed to customers as sales revenue and related costs as cost of sales.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statement of operations over the requisite service period.
The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including the expected volatility of the Company’s common stock over the estimated term of the options granted, estimates of the expected time period that employees will retain their vested stock options prior to exercising them, and the number of shares that are expected to be forfeited before the options are vested. The use of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and, as a result, provide significantly different amounts recognized in the Company’s statement of operations.
The following weighted average assumptions were used to estimate the fair market value of options granted using the Black-Scholes valuation method:
| 2008 | 2009 | |||||||
| Dividend Yield |
0.0 | % | 0.0 | % | ||||
| Expected Volatility |
124 | % | 134 | % | ||||
| Risk Free Interest Rate |
1.49 | % | 1.39 | % | ||||
| Expected Option Terms (in years) |
5 | 5 | ||||||
The expected volatility is based on the price of the Company’s common stock over a historical period which approximates the expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted. The expected term is estimated based on historical experience and comparable peer group data.
Net Loss Per Share
Basic loss per share amounts are based on the weighted average number of shares of common stock outstanding during the period. Due to experiencing a net loss in 2008 and 2009, the impact of options to purchase 6,909,868 and 5,928,367 shares of common stock, short term warrants to purchase 0 and 11,292,686 shares of common stock, long term warrants to purchase 0 and 6,775,611 shares of common stock, warrants for the purchase of 115,231 and 0 shares of Series A Convertible Preferred Stock, 154 and 0 shares of Series A Convertible Preferred Stock, 5,000 and 0 shares of Series C Convertible Preferred Stock, 0 and 5,000 shares of Series C-1 Convertible Preferred Stock, 0 and 1,852 shares of Series D Convertible Preferred Stock and 473,500 and 293,800 restricted shares have been excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive as of December 31, 2008 and 2009, respectively.
Comprehensive Loss
Comprehensive loss is comprised of two components, net loss and other comprehensive income (loss). In June 2008, the Company recorded other comprehensive loss consisting of unrealized gains and losses on investments classified as available-for-sale totaling $412,079. In September 2008, the Company reversed the unrealized loss in connection with the Company’s sale of investments in ARSs at par value. See Note 3 of the notes to these financial statements. For the years ended December 31, 2008 and 2009, the Company had no elements of other comprehensive loss.
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Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and capital lease obligations, approximate their fair values at December 31, 2008 and 2009 because of their short term nature. The fair value of capital lease obligations is estimated at its carrying value based on current rates.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which includes allocations of labor and overhead. Standard cost approximates actual cost on a first-in, first-out method. Management assesses the value of inventory for estimated obsolescence or unmarketable inventory. If necessary, inventory value may be written down to the estimated fair market value based upon assumptions about future demand and market conditions. In the fourth quarter of 2008, the Company recorded a provision of $920,787 for excess inventory built up in connection with our contractual obligation as part of the Co-Marketing Agreement with St. Jude Medical. The provision is based on the uncertainty about realizing the value of the excess inventory. In 2009, we increased the reserve by $26,983. The Company does not believe that the inventory is exposed to obsolescence risk. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required from time to time that could adversely affect operating results for the fiscal period in which such write-downs are affected.
Product Warranty
The Company warrants all non-disposable products as compliant with their specifications and that the products are free from defects in material and workmanship for a period of 13 months from the date of delivery. A reserve is maintained for the estimated cost of potential future repairs of products during this warranty period. The amount of the reserve is based on actual return and repair cost experience. If the rate and cost of future warranty activities materially differs from the Company’s historical experience, additional costs would have to be reserved that could materially affect operating results.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method based on estimated useful lives. Repair and maintenance costs are expensed as incurred. Upon retirement or sale, the costs of the assets disposed and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of net loss. At year end 2008 and 2009, the Company had $14,100 and $0 gain from the sale of fixed assets.
Licensing Fees and Patent Costs
The Company has entered into a licensing agreement giving the Company the exclusive rights to certain patents and technologies and the right to market and distribute any products developed, subject to certain covenants. Payments made under this licensing agreement and costs associated with patent applications have generally been expensed as incurred, because recovery of these costs is uncertain. However, certain costs associated with patent applications for products and processes which have received regulatory approval and are available for commercial sale have been capitalized and are being amortized over their estimated economic life of 5 years. The amount of unamortized cost capitalized and included in other assets in the accompanying balance sheets at December 31, 2008 and 2009 was $47,767 and $42,577, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax reporting bases of assets and liabilities and are measured by applying the enacted tax rates and laws to taxable years in which the differences are expected to reverse. The Company recognizes a deferred tax asset for the tax benefit of net operating loss carry forwards when it is more likely than not that the tax benefits will be realized and reduce the deferred tax asset with a valuation reserve when it is more likely than not that some portion of the tax benefits will not be realized.
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We use a comprehensive model for the recognition, measurement, and financial statement disclosure of uncertain tax positions. Unrecognized tax benefits are the differences between tax positions taken, or expected to be taken, in tax returns, and the benefits recognized for accounting purposes.
Recent Accounting Pronouncements
Effective January 1, 2009 the Company adopted new fair value guidance with respect to non-financial assets and liabilities measured on a non-recurring basis. The adoption of this guidance did not affect our financial position or results of operations.
In December 2007, the FASB established principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. It also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This guidance became effective for the Company beginning January 1, 2009. The adoption of these requirements did not affect our financial position or results of operations, and will not unless the Company consummates an acquisition.
In December 2007, the FASB established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The FASB also established disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance became effective for the Company beginning January 1, 2009 and did not have an impact on the Company financial position or results of operations.
In March 2008, the FASB issued a pronouncement that enhanced the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This guidance became effective for us beginning January 1, 2009 and did not have an impact on the Company’s financial position or results of operations.
In June 2008, the FASB Emerging Issues Task Force issued guidance clarifying whether an equity-linked financial instrument is indexed to an entity’s own stock for purposes of determining whether it should be accounted for in equity accounts or subject to derivative accounting. The guidance became effective for the Company on January 1, 2009. Management performed an analysis of the Company’s existing instruments and determined that it has no impact on the Company’s results of operations and financial condition.
In April 2009, the FASB issued guidance to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This became effective for our second fiscal quarter ended June 30, 2009 and had no impact on the Company’s results of operations, financial condition or financial statements.
In April 2009, the FASB issued guidance to provide guidelines for making fair value measurements more consistent with the principles presented by the FASB. It is applicable to all assets and liabilities (i.e. financial and nonfinancial) and provides additional authoritative guidance to determine whether a market is active or inactive or whether a transaction is distressed. This guidance became effective for our second fiscal quarter ended June 30, 2009 and had no impact on the Company’s results of operations, financial condition or financial statements.
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In June 2009, the Company adopted the provisions of FASB which requires disclosures about the fair value of financial instruments in interim as well as in annual financial statements. The adoption of this standard increased disclosure requirements related to the Company’s interim financial statements but did not impact the Company’s financial position, results of operations or cash flows.
In June 2009, the FASB issued guidance establishing the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. The Company has updated references to GAAP in its financial statements issued for the period ended September 30, 2009. The adoption increased disclosure requirements related to the Company’s interim financial statements but did not impact the Company’s financial position, results of operations or cash flows.
In June 2009, the Company adopted the FASB provisions establishing general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance did not have an impact on the Company’s financial position, results of operations, or cash flows. See Subsequent Events at Note 17.
In September 2009, the Emerging Issues Task Force issued new rules pertaining to the accounting for revenue arrangements with multiple deliverables. The new rules provide an alternative method for establishing fair value of a deliverable when vendor specific objective evidence cannot be determined. The guidance provides for the determination of the best estimate of selling price to separate deliverables and allows the allocation of arrangement consideration using this relative selling price model. The guidance supersedes the prior multiple element revenue arrangement accounting rules that are currently used by the Company. This guidance is effective for the Company on January 1, 2011 and is not expected to be material to the Company’s consolidated financial position or results of operations.
In September 2009, the Emerging Issues Task Force issued new rules which changed the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. This guidance is effective for the Company on January 1, 2011 and is not expected to be material to the Company’s consolidated financial position or results of operations.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) which improves disclosures about fair value measurements. More specifically, ASU 2010-06 updates Topic 820-10 to require disclosure of transfers in and out of levels 1 and 2 and the reason for the transfers. Additionally, it requires separate reporting of purchases, sales, issuances and settlements for level 3. This update is effective for periods beginning after December 15, 2009. The adoption of this standard will not have an impact on the Company’s financial position or results of operations.
3. Investments
The Company’s investments at December 31, 2008 and 2009 consisted of money market funds. As discussed in Note 2 of the notes to these financial statements, the Company classifies investments in money market funds as cash equivalents since these investments are readily convertible into known amounts of cash and have insignificant valuation risk.
The Company had no investments in marketable debt and equity securities at December 31, 2008 and 2009.
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4. Inventory
Inventories consisted of the following at December 31, 2008 and 2009, respectively:
| 2008 | 2009 | |||||||
| Raw materials |
$ | 383,152 | $ | 379,423 | ||||
| Work in process |
10,927 | 3,818 | ||||||
| Finished goods |
1,061,251 | 769,379 | ||||||
| $ | 1,455,330 | $ | 1,152,620 | |||||
5. Fixed Assets
Fixed assets consist of the following:
| Estimated useful lives |
December 31, | |||||||||||
| (years) | 2008 | 2009 | ||||||||||
| Computer equipment |
3-5 | $ | 914,565 | $ | 916,451 | |||||||
| Manufacturing equipment |
5 | 424,668 | 424,670 | |||||||||
| Office furniture |
7 | 130,396 | 130,395 | |||||||||
| Sales demonstration and clinical equipment |
3-5 | 1,210,609 | 1,174,163 | |||||||||
| Leasehold Improvements |
Life of Lease | 47,204 | 47,204 | |||||||||
| 2,727,442 | 2,692,883 | |||||||||||
| Less-accumulated depreciation |
2,369,008 | 2,452,913 | ||||||||||
| $ | 358,434 | $ | 239,970 | |||||||||
The Company recorded depreciation expense of $78,757 and $86,698 for the years ended December 31, 2008 and 2009, respectively.
6. Other Assets
Other assets consist of the following:
| Estimated useful lives |
December 31, | |||||||||||
| (years) | 2008 | 2009 | ||||||||||
| Capitalized software development costs |
3 | $ | 1,482,728 | $ | 1,482,728 | |||||||
| Patents |
5 | 228,548 | 228,548 | |||||||||
| Other assets |
78 | 78 | ||||||||||
| 1,711,354 | 1,711,354 | |||||||||||
| Less-accumulated amortization |
1,663,509 | 1,668,699 | ||||||||||
| $ | 47,845 | $ | 42,655 | |||||||||
The Company recorded amortization expense of $11,442 and $5,190 for the years ended December 31, 2008 and 2009, respectively.
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7. Accrued Expenses
Accrued expenses consist of the following:
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Accrued employee compensation |
268,803 | 321,227 | ||||||
| Deferred revenue |
362,938 | 302,573 | ||||||
| Deferred rent |
114,500 | 129,216 | ||||||
| Accrued consulting costs |
26,000 | — | ||||||
| Accrued product warranty costs |
39,076 | 29,384 | ||||||
| Accrued professional fees |
235,073 | 171,236 | ||||||
| Accrued co-marketing agent fees |
91,361 | — | ||||||
| Accrued other |
137,393 | 163,027 | ||||||
| $ | 1,275,144 | $ | 1,116,663 | |||||
8. Capital Lease
The Company is the lessee of office equipment under a capital lease expiring in 2011. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for fiscal year 2009.
Following is a summary of property held under capital leases:
| Office equipment |
$ | 56,000 | ||
| Accumulated amortization |
(28,878 | ) | ||
| $ | 27,122 | |||
Minimum future lease payments under capital leases as of December 31, 2009, were as follows:
| Amount | ||||
| 2010 |
$ | 17,784 | ||
| 2011 |
14,821 | |||
| Net minimum lease payments |
32,605 | |||
| Amount representing interest |
(5,483 | ) | ||
| Present value of net minimum lease payments |
$ | 27,122 | ||
Interest rate on capital leases is 20% and is imputed based on the lower of the Company’s incremental borrowing rate at the inception of each lease or the lessor’s implicit rate of return. Certain capital leases provide renewal or purchase options.
9. Convertible Preferred Stock
The Company’s authorized capital stock includes 2,000,000 shares of $0.001 par value preferred stock. The preferred stock may be issued at the discretion of our Board of Directors (without further stockholder approval) with such designations, rights and preferences as the Board of Directors may determine from time to time. This preferred stock may have dividend, liquidation, redemption, conversion, voting or other rights, which may be more expansive than the rights of the holders of the common stock.
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Total shares of Convertible Preferred Stock issued and outstanding at December 31, 2008 and 2009, respectively, are as follows:
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Series A Convertible Preferred |
||||||||
| Shares issued and outstanding |
154 | — | ||||||
| Liquidation preference and redemption value |
$ | 1,135 | — | |||||
| Series C Convertible Preferred |
||||||||
| Shares issued and outstanding |
5,000 | — | ||||||
| Liquidation preference and redemption value |
$ | 12,500,000 | — | |||||
| Series C-1 Convertible Preferred |
||||||||
| Shares issued and outstanding |
— | 5,000 | ||||||
| Liquidation preference and redemption value |
— | $ | 12,500,000 | |||||
| Series D Convertible Preferred |
||||||||
| Shares issued and outstanding |
— | 1,852 | ||||||
| Liquidation preference and redemption value |
— | $ | 1,852,000 | |||||
| Total Convertible Preferred |
||||||||
| Shares issued and outstanding |
5,154 | 6,852 | ||||||
| Liquidation preference and redemption value |
$ | 12,501,135 | $ | 14,352,000 | ||||
The preferred stock is entitled to dividends when and if declared by the Board of Directors prior to the payment of any such dividends to the holders of common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the company, the holders of the preferred stock then outstanding are entitled to be paid out of the assets of the corporation before any payment is made to the holders of common stock. Each holder of the preferred stock is entitled to the number of votes equal to the number of shares of common stock the preferred stock is convertible into on any matter reserved to the stockholders of the Company for their action at any meeting of the stockholders of the corporation.
Series A Convertible Preferred Stock
On May 12, 2003, the Company entered into an agreement for the sale of $6.5 million of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) to Medtronic, Inc. and a group of private investors, pursuant to which the Company sold 696,825 shares of its Series A stock at a purchase price of $4.42 per share providing gross proceeds of $3,079,966. Each share of Series A stock is convertible into 13 shares of the Company’s common stock.
The holders of Series A Preferred Stock are entitled to receive dividends in an amount at least equal to the product of (i) the per share dividend to be declared, paid or set aside for the common stock, multiplied by (ii) the number of shares of common stock into which such share of Series A Preferred Stock is then convertible. The Series A dividend is payable prior and in preference to any declaration or payment of any dividend on common stock.
In the event of any voluntary or involuntary liquidation (including change-in-control events), dissolution or winding up of the Company, the holder of Series A Preferred Stock shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to holders of common stock or any other class or series of stock ranking on liquidation junior to the Series A Preferred Stock, an amount equal to the greater of (i) par value per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had each such share been converted into common stock, as per the conversion price feature, immediately prior to such liquidation, dissolution or winding up.
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The conversion price feature of the Series A Preferred Stock was subject to adjustment in certain circumstances if the Company issued shares of common stock under those circumstances on or before November 12, 2004 at a purchase price below the conversion price of the Series A Preferred Stock. No additional shares were issued as a result of this provision.
The holders of Series A Preferred Stock are entitled to vote, on an as-if converted basis, along with the holders of the Company’s common stock on all matters on which holders of common stock are entitled to vote.
On December 21, 2009, the Company purchased and redeemed 154 shares of Series A Preferred Stock, representing 100% of the issued and outstanding shares of Series A Preferred Stock, from the holder thereof for an aggregate purchase price of $681.
Under EITF issued guidance, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company classified the Series A Preferred Stock outside of permanent equity based on the rights of the Series A Preferred Stock in a deemed liquidation.
In connection with the sale of the Series A Preferred Stock, the Company issued warrants for the purchase of an additional 773,724 shares of Series A Preferred Stock at a purchase price of $4.42 per share with monthly expiration dates beginning September 1, 2003 and ending February 1, 2004. During 2003, investors purchased 663,999 shares of Series A Preferred Stock through the exercise of these warrants providing additional proceeds of $2,934,876. During 2004, investors exercised the remaining warrants for the purchase of 109,725 shares of Series A Preferred Stock providing the Company with gross proceeds of $484,985.
As part of the financing described above, the Company also issued to both Medtronic and the private investors warrants exercisable for 471,703 shares of Series A Preferred Stock. The exercise price of Medtronic’s warrant is $4.42 and the exercise price per share of the warrants issued to the other investors is $5.525. During the twelve month periods ended December 31, 2008 and 2009, 154 and 0 warrants to purchase Series A stock were exercised. The Company had warrants for the purchase of 115,231 and 0 shares of Series A Preferred Stock, which are convertible into an additional 1,498,003 and 0 shares of common stock, outstanding at December 31, 2008 and December 31, 2009, respectively. The expiration date of these warrants was extended from January 1, 2009 to June 30, 2009 in accordance with the terms of the registration rights agreement between the Company and the investors. Warrants for the purchase of 115,231 shares of Series A Preferred Stock expired unexercised during 2009.
Series C and Series C-1 Convertible Preferred Stock
On March 21, 2007, the Company and St. Jude Medical entered into an agreement for the sale of $12.5 million of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred”) to St. Jude Medical resulting in $11.7 million net of issuance costs. Under the terms of the financing, the Company issued and sold 5,000 shares of its Series C Preferred at a purchase price of $2,500 per share (the “Series C Original Issue Price”). Each share of Series C Preferred was convertible into a number of shares of common stock equal to $2,500 divided by the conversion price of the Series C Preferred, which was initially $2.99. Each share of Series C Preferred was convertible into approximately 836.12 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 5,000 shares of Series C Preferred issued and sold in the financing was approximately 4,180,602.
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The holders of the Series C Preferred were entitled to receive cumulative cash dividends at the rate of eight percent (8%) of the Series C Original Issue Price per year (the “Series C Dividend”) on each outstanding share of Series C Preferred, provided, however, that the Series C Dividend is only payable when, and if declared by the Board of Directors. The Series C Dividend was payable prior and in preference to any declaration or payment of any dividend on Common Stock, other series of Preferred Stock or any other capital stock of the Company.
The conversion price feature of the Series C Preferred was subject to adjustment in certain circumstances if the Company issued shares of common stock under those circumstances on or before March 21, 2008 at a purchase price below the conversion price of the Series C Preferred. No additional shares were issued as a result of this provision.
The holders of Series C Preferred were entitled to receive, prior and in preference to any distribution of the proceeds from any liquidation (including change-in-control events), dissolution or winding up of the Company, whether voluntary or involuntary, to holders of common stock, other series of preferred stock or any other capital stock of the Company, an amount per share equal to the Series C Preferred par value, plus declared but unpaid dividends on such shares.
The holders of Series C Preferred were entitled to vote, on an as-if converted basis, along with holders of the Company’s common stock on all matters on which holder of common stock are entitled to vote.
In order to be able to issue securities in the Series D Financing, described below, that are senior to the Series C Preferred previously issued by the Company, the Company entered into a Share Exchange Agreement with St. Jude Medical, dated as of December 23, 2009, pursuant to which St. Jude Medical exchanged 5,000 shares of the Company’s Series C Preferred, representing 100% of the issued and outstanding Series C Preferred, for 5,000 newly issued shares of the Company’s Series C-1 Convertible Preferred Stock (the “Series C-1 Preferred”). The terms of the Series C-1 Preferred are substantially the same as the terms of the Series C Preferred except that the Series C-1 Preferred is junior to the Series D Preferred in the event of a liquidation or deemed liquidation of the Company.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series C-1 Certificate of Designation), the holders of Series C-1 Preferred are entitled to receive an amount equal to the Deemed Series C-1 Original Issue Price plus declared but unpaid dividends after the payment to the holders of Series D Preferred, but before any amount to the holders of common stock, and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series C Preferred with respect to liquidation preference.
Under EITF issued guidance, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company classified the Series C-1 Preferred outside of permanent equity based on the rights of the Series C-1 Preferred in a deemed liquidation.
Series D Convertible Preferred Stock
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”) and common stock warrants described below to new and current institutional and private investors pursuant to the terms of a Securities Purchase Agreement dated December 23, 2009 between the Company and the purchasers of Series D Preferred (the “Series D Financing”). The aggregate proceeds from the Series D Financing were $1.8 million, net of issuance costs.
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Under the terms of the Series D Financing, the Company issued 1,852 shares of its Series D Preferred at a purchase price of $1,000 per share (the “Series D Original Issue Price”). Each share of Series D Preferred Stock is convertible into a number of shares of common stock of the Company equal to $1,000 divided by the conversion price of the Series D Preferred, which is initially $0.082, representing a 15% premium to the 20-day trailing average of the Company’s closing common stock price as of December 21, 2009 (the “Closing Price”). Each share of Series D Preferred is currently convertible into approximately 12,195 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 1,852 shares of Series D Preferred issued and sold in the financing is 22,585,366, or approximately 32.69% of the Company’s issued and outstanding common stock assuming that all outstanding shares of preferred stock are converted to common stock.
The Company also issued to the investors two types of warrants. The first warrant, which expires on December 23, 2010, entitles the investor to purchase a number of shares of common stock equal to 50% of the number of shares of common stock into which the Series D Preferred purchased by the investor is convertible (the “Short-Term Warrant”). A total of 11,292,686 shares of common stock are issuable under the Short-Term Warrants. The exercise price of the Short-Term Warrants is $0.107 per share, which is 150% of the Closing Price. The second warrant, which expires on December 23, 2014, entitles the investor to purchase a number of shares of common stock equal to 30% of the number of shares of common stock into which the Series D Preferred purchased by the investor is convertible (the “Long-Term Warrant”). A total of 6,775,611 shares of common stock are issuable under the Long-Term Warrants. The exercise price of the Long-Term Warrants is $0.142 per share, or 200% of the Closing Price. The Company may call the Long-Term Warrants if the closing price of the Company’s common stock is at least $0.284 for a period of 20 consecutive trading days. An analysis was performed on the exercise and settlement provisions of the Long-Term and Short-Term Warrants. As a result, it was determined that they are not considered derivative instruments under ASC 815— Derivatives and Hedging as they meet the scope exception since they are both indexed to the Company’s own stock and are classified in stockholders’ equity (deficit) in the Company’s balance sheet.
The conversion price of the Series D Preferred is subject to adjustment in certain circumstances. If the Company issues shares of common stock at a purchase price below the conversion price of the Series D Preferred at any time on or before August 23, 2011, the conversion price of the Series D Preferred will be adjusted as set forth in the Series D Certificate of Designation (as defined below). In determining the appropriate accounting for the conversion feature for the Series D Preferred, the Company determined that the conversion feature does not require bifurcation, and as a result is not considered a derivative under the provisions of ASC 815— Derivatives and Hedging.
The holders of the Series D Preferred are entitled to share in any dividends declared and paid, or set aside for payment, on the common stock, pro rata, in accordance with the number of shares of common stock into which such shares of Series D Preferred are then convertible.
The holders of the Series D Preferred are entitled to the number of votes equal to the number of shares of common stock into which such shares of Series D Preferred could be converted immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent and shall have voting rights and powers equal to the voting rights and powers of the common stock and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Company. The Series D Preferred shall vote together with the common stock at any annual of special meeting of the stockholders and not as a separate class, and act by written consent in the same manner as the common stock.
In the event of a liquidation of the Company (including an Acquisition Transaction or Asset Transfer, each as defined in the Series D Certificate of Designation), the holders of Series D Preferred are entitled to receive an amount equal to the Series D Original Issue Price plus declared but unpaid dividends before the payment of any amount to the holders of common stock, Series C-1 Convertible Preferred and all other equity or equity equivalent securities of the Company other than those securities that are explicitly senior to or on parity with the Series D Preferred with respect to liquidation preference.
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Under EITF issued guidance, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company classified the Series D Preferred outside of permanent equity based on the rights of the Series D Preferred in a deemed liquidation.
Under GAAP, proceeds from the sale of securities are to be allocated to each financial instrument based on their relative fair market value. Further, if the convertible preferred stock has an effective price that is less than the fair value of the common stock into which it is convertible on the date of issuance, the difference between the effective price and the fair value represents a beneficial conversion feature. In this regard, we allocated the net proceeds from the Series D Financing based on the relative fair market value of the Series D Preferred using the Company’s closing common stock price as of December 23, 2009 and to the related warrants using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair market value of the warrants using the Black-Scholes option pricing model:
| Short- Term |
Long- Term |
|||||||
| Dividend Yield |
0.0 | % | 0.0 | % | ||||
| Expected Volatility |
170 | % | 132 | % | ||||
| Risk Free Interest Rate |
0.41 | % | 2.51 | % | ||||
| Expected Option Terms (in years) |
1 | 5 | ||||||
Based on this allocation, the relative fair value of the Series D Preferred was $1,247,780. The aggregate fair value of the common stock into which the Series D Preferred are convertible was $1,355,122. Therefore, the difference between the relative fair value of the Series D Preferred and the fair value of the common stock into which the Series D Preferred are convertible represents a beneficial conversion feature of $107,342. The amount of the beneficial conversion feature was immediately accreted and the accretion resulted in a deemed dividend as the Series D Preferred was immediately convertible. The deemed dividend was reflected as an adjustment to the net loss applicable to common stockholders on the Company’s Statement of Operations for the year ended December 31, 2009.
10. Stockholders’ Equity
Common Stock
The Company’s Board of Directors has authorized 150,000,000 shares of the Company’s $0.001 par value common stock. At December 31, 2009, the Company had 64,904,955 common shares outstanding. At March 31, 2010, the Company had 64,904,955 common shares outstanding.
Warrants
At December 31, 2008, there were 0 warrants for the purchase of common stock outstanding. At December 31, 2009, there were short term warrants to purchase 11,292,686 shares of common stock outstanding and long term warrants to purchase 6,775,611 shares of common stock outstanding.
11. Stock Plans
1993 and 1996 Stock Option Plans
During 1993, the Company adopted the 1993 Incentive and Non-Qualified Stock Option Plan (the “1993 Plan”) and in 1996 the Board of Directors authorized the 1996 Equity Incentive Plan (the “1996 Plan”). The Plans provide for the grant of incentive and non-qualified stock options to management, other key employees, consultants and directors of the Company. No new awards may be made under the 1993 Plan. In 1999, the Board of Directors authorized and the stockholders approved an amendment to the 1996 Plan to increase the total number of shares authorized for issuance under the plan from 1,000,000 to 1,300,000 shares of the Company’s common stock. The total
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shares of common stock that may be issued pursuant to the exercise of options granted under the 1993 and 1996 Plans are 155,000. All of these options were exercisable at December 31, 2007. No new awards may be made under the 1993 Plan or the 1996 Plan. Under the terms of both plans, incentive stock options may not be granted at less than fair market value of the Company’s common stock at the date of the grant and for a term not to exceed ten years.
2001 Stock Incentive Plan
The 2001 Stock Incentive Plan (the “2001 Plan”) provides for the grant of stock options and restricted stock awards to eligible employees, officers, directors, consultants and advisors of the Company. During 2008, the Board of Directors authorized and the stockholders approved an amendment of the 2001 Plan to increase the total number of shares authorized for issuance under the 2001 Plan from 8,250,000 to 9,750,000 shares of the Company’s common stock and to increase the number of shares of restricted common stock authorized for issuance under the 2001 Plan from 1,500,000 to 2,100,000 shares of the Company’s common stock. A total of 175,000 shares of restricted stock were granted under the 2001 Plan in 2007 and 322,400 shares of restricted stock were granted under the 2001 Plan in 2008. Under the terms of the plan, stock options may not be granted at less than fair market value of the Company’s common stock at the date of the grant and for a term not to exceed ten years.
Options granted under all of the Company’s equity incentive plans generally vest annually over a three to four year vesting period. Certain stock option awards are subject to accelerated vesting.
Non-Plan Options
At December 31, 2009, the Company had 650,000 non-plan stock options outstanding which were granted in 2006 and 2007 to senior executives. Although granted outside of the Company’s 2001 Incentive Plan, the options nevertheless are subject to the terms and conditions of the 2001 Plan as if granted thereunder.
There were 322,400 new restricted stock grants issued for the year ended December 31, 2008 and 1,011,350 shares of restricted stock were available for future grant on December 31, 2008. Included in the Company’s statement of operations was $266,273 of compensation expense related to restricted stock for the year ended December 31, 2008. There were 473,500 shares of restricted stock unvested at December 31, 2008. There were 0 new restricted stock grants issued for the year ended December 31, 2009 and 1,120,217 shares of restricted stock were available for future grant on December 31, 2009. Included in the Company’s statement of operations was $262,455 of compensation expense related to restricted stock for the year ended December 31, 2009. Unvested restricted stock activity for the years ended December 31, 2008 and 2009 was as follows:
| Number of Restricted Shares |
Weighted Average Grant Date Fair Value |
|||||||
| Nonvested balance as of December 31, 2007 |
175,000 | $ | 3.58 | |||||
| Granted |
322,400 | 0.47 | ||||||
| Vested |
— | — | ||||||
| Forfeited |
(23,900 | ) | 0.48 | |||||
| Nonvested balance as of December 31, 2008 |
473,500 | $ | 1.62 | |||||
| Granted |
— | — | ||||||
| Vested |
(68,133 | ) | 0.46 | |||||
| Forfeited |
(111,567 | ) | 0.48 | |||||
| Nonvested balance as of December 31, 2009 |
293,800 | $ | 2.32 | |||||
There were 1,398,000 new stock options granted during 2008, including 550,000 stock options granted to the Company’s Chairman. At December 31, 2008, 6,889,868 shares of common stock were reserved for issuance upon exercise of the options issued under the Company’s stock option plans and there were 1,289,650 options available for future grant.
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There were 75,000 new stock options granted during 2009. At December 31, 2009, 5,928,367 shares of common stock were reserved for issuance upon exercise of the options issued under the Company’s stock option plans and there are 2,186,110 options available for future grant.
Stock option transactions under all of the Company’s equity incentive plans during the years ended December 31, 2008 and 2009 summarized as follows:
| Number of Options |
Weighted Average Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at January 1, 2008 |
7,173,784 | $ | 1.99 | |||||||||||||
| Granted |
1,398,000 | 0.57 | ||||||||||||||
| Exercised |
— | — | ||||||||||||||
| Canceled/Forfeited |
(1,661,916 | ) | 2.87 | |||||||||||||
| Outstanding at December 31, 2008 |
6,909,868 | $ | 1.50 | 8.00 | $ | — | ||||||||||
| Exerciseable at December 31, 2008 |
3,509,466 | $ | 1.55 | 7.06 | $ | — | ||||||||||
| Outstanding at January 1, 2009 |
6,909,868 | $ | 0.57 | |||||||||||||
| Granted |
75,000 | 0.09 | ||||||||||||||
| Exercised |
— | — | ||||||||||||||
| Canceled/Forfeited |
(1,056,501 | ) | 1.63 | |||||||||||||
| Outstanding and expected to vest at December 31, 2009 |
5,928,367 | $ | 1.47 | 7.21 | $ | — | ||||||||||
| Exerciseable at December 31, 2009 |
4,562,199 | $ | 1.59 | 6.85 | $ | — | ||||||||||
The fair value of the options granted in 2009 was $5,880 with a per share weighted average fair value of $0.078. The fair value of options granted in 2008 was $615,052, with a per share weighted average fair value of $0.44. The amount was estimated using the Black-Scholes option pricing model with the assumptions listed in Note 2. All stock options granted have exercise prices equal to the fair market value of the common stock on the date of grant.
As of December 31, 2009, there was $1,202,506 of total unrecognized compensation cost related to approximately 1,366,167 unvested outstanding stock options. The expense is anticipated to be recognized over a weighted average period of 3 years. There were no stock option exercises during 2008 and 2009.
The following table summarizes information about stock options outstanding under all of the Company’s stock option plans at December 31, 2009:
| Range of exercise prices |
Number Outstanding |
Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Number of Options Exerciseable |
Average Remaining Contractual Life in Years |
Weighted Average Exercise Price of Options Exerciseable |
||||||||||||||||||
| $0.08 – $0.19 |
625,000 | 9.01 | 0.14 | 225,000 | 8.90 | 0.15 | ||||||||||||||||||
| $0.20 – $0.50 |
1,506,667 | 6.23 | 0.31 | 1,469,999 | 6.17 | 0.31 | ||||||||||||||||||
| $0.51 – $1.00 |
175,000 | 7.82 | 0.67 | 76,333 | 7.09 | 0.68 | ||||||||||||||||||
| $1.01 – $2.50 |
2,192,500 | 7.66 | 1.41 | 1,487,500 | 7.43 | 1.50 | ||||||||||||||||||
| $2.51 – $4.00 |
1,320,200 | 6.96 | 3.22 | 1,206,033 | 6.91 | 3.21 | ||||||||||||||||||
| $4.01 – $9.38 |
109,000 | 3.16 | 6.19 | 97,333 | 2.64 | 6.42 | ||||||||||||||||||
| 5,928,367 | 7.21 | $ | 1.47 | 4,562,199 | 6.85 | $ | 1.59 | |||||||||||||||||
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The Company recognized the full impact of its share-based payment plans in the statement of operations for 2008 and 2009 and did not capitalize any such costs on the balance sheets. The following table presents share-based compensation expense included in the Company’s statements of operations:
| 2008 | 2009 | |||||||
| Cost of goods sold |
$ | 12,281 | $ | 2,417 | ||||
| Research and development |
110,407 | 32,807 | ||||||
| Selling, general and administrative |
2,418,122 | 1,990,834 | ||||||
| Stock-based compensation expense |
$ | 2,540,810 | $ | 2,026,058 | ||||
The Company has recorded compensation expense (benefit) related to options granted to non-employee consultants for services rendered, totaling $(3,835) in 2008 and $2,860 in 2009 based on the fair value of our common stock.
12. Income Taxes
The income tax benefit consists of the following:
| 2008 | 2009 | |||||||
| Income tax benefit: |
||||||||
| Federal |
2,679,401 | 1,763,340 | ||||||
| State |
233,147 | 123,273 | ||||||
| 2,912,548 | 1,886,613 | |||||||
| Deferred tax asset valuation allowance |
(2,912,548 | ) | (1,886,613 | ) | ||||
| — | — | |||||||
| Deferred tax assets (liabilities) are comprised of the following: |
||||||||
| Deferred tax assets (liabilities) are comprised of the following: |
||||||||
| Net operating loss carryforwards |
13,423,325 | 15,592,026 | ||||||
| Research and development tax credit carryforwards |
251,342 | 310,311 | ||||||
| Capitalized research and development |
1,300,464 | 859,141 | ||||||
| Stock-based compensation |
1,126,416 | 1,116,136 | ||||||
| Other |
1,475,265 | 1,539,001 | ||||||
| Gross deferred tax assets |
17,576,812 | 19,416,615 | ||||||
| Capitalized software |
(102,782 | ) | (99,843 | ) | ||||
| Fixed assets |
(4,706 | ) | 14,154 | |||||
| Patent costs |
(39,759 | ) | (14,748 | ) | ||||
| Net deferred tax assets |
17,429,565 | 19,316,178 | ||||||
| Deferred tax asset valuation allowance |
(17,429,565 | ) | (19,316,178 | ) | ||||
| — | — | |||||||
The Company has generated taxable losses from operations since inception and, accordingly, has no taxable income available to offset the carryback of net operating losses. In addition, although management’s operating plans anticipate taxable income in future periods, such plans provide for taxable losses over the near term and make significant assumptions which cannot be reasonably assured. Based upon the weight of all available evidence, the Company has provided a full valuation allowance for its net deferred tax assets since, in the opinion of management, realization of these future benefits is not sufficiently assured (defined as a likelihood of more than 50 percent).
During 2009, the valuation allowance increased by $1,886,613, net of expired federal and state net operating loss carryforwards.
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Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following:
Summary
| Statutory US federal tax rate |
(34 %) | |||
| State taxes, net of federal benefit |
(3.7%) | |||
| Non-deductible expenses |
8.0% | |||
| Other |
3.9% | |||
| Valuation allowance |
25.8% | |||
| Net |
0% |
As of December 31, 2009, the Company has approximately $41,415,000 federal and $28,577,000 state net operating loss carryforwards and $21,000 and $446,000 of federal and state research and development credits, respectively, which may be used to offset future federal and state taxable income and tax liabilities, respectively. The credits and carryforwards expire in various years ranging from 2010 to 2025.
An ownership change, as defined in the Internal Revenue Code, resulting from the Company’s issuance of additional stock may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax liabilities. The amount of the annual limitation is determined based upon the Company’s value immediately prior to the ownership change. Cambridge Heart has performed a preliminary analysis of its change in ownership and believes that ownership changes have occurred that will limit the future utilization of the Company’s loss carryforwards. The Company has estimated that as of December 31, 2009 approximately $31,802,000 of Federal and $0 state NOLs may be limited and unavailable to offset future taxable income, resulting in a reduction of the related deferred tax asset and valuation allowance of approximately $10,813,000. The Company has also estimated that as of December 31, 2009 approximately $1,061,000 of Federal and $0 state R&D credits may be limited and unavailable to offset future taxable income, resulting in a reduction of the related deferred tax asset and valuation allowance of approximately $1,061,000. It is possible that additional changes in ownership can further limit the amounts of net operating losses which may be utilized. As the Company finalizes this analysis, these amounts may change.
As of December 31, 2009 and 2008, the total amount of unrecognized tax benefits was $166,000, all of which, if recognized, would affect the effective tax rate prior to the adjustment for the Company’s valuation allowance. The Company did not recognize an increase in tax liability for the unrecognized tax benefits because the Company has recorded a tax net operating loss carryforward that would offset this liability.
The change in unrecognized tax benefits for the 12 months ended December 31, 2009 is as follows:
| Balance beginning January 1, 2009 |
$ | 166,000 | ||
| Inc/Dec for tax positions related to prior years |
— | |||
| Inc/Dec for tax positions related to the current year |
— | |||
| Settlements |
— | |||
| Reductions for Expiration of Statue of Limitations |
— | |||
| Balance ending December 31, 2009 |
$ | 166,000 | ||
The Company recognizes interest and penalties related to unrecognized tax benefits in operating expenses. Since a full valuation allowance was recorded against the Company’s net deferred tax assets and the unrecognized tax benefits determined under ASC 740 – Income Taxes would not result in a tax liability, the Company has not accrued for any interest and penalties relating to these unrecognized tax benefits.
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Tax years ended December 31, 2006, 2007, 2008 and 2009 remain subject to examination by major taxing jurisdictions, which are Internal Revenue Service and the Commonwealth of Massachusetts. However, since the Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, all years that include carryforwards are subject to review by relevant taxing authorities to the extent of the carryforward utilized.
13. Savings Plan
In January 1995, the Company adopted a retirement savings plan for all employees pursuant to Section 401(k) of the Internal Revenue Code. Employees become eligible to participate on the first day of the calendar quarter following their hire date. Employees may contribute any whole percentage of their salary, up to a maximum annual statutory limit. The Company is not required to contribute to this plan. The Company made no contributions to this plan in 2008 or 2009.
14. Commitments and Contingencies
Guarantor Arrangements
The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company maintains a products liability insurance policy that limits its exposure. Based on the Company’s historical activity in combination with its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2008 and 2009.
The Company warrants all of its non-disposable products as to compliance with their specifications and that the products are free from defects in material and workmanship for a period of 13 months from the date of delivery. The Company maintains a reserve for the estimated costs of potential future repair of our products during this warranty period. The amount of reserve is based on the Company’s actual return and repair cost experience. The Company has $39,076 and $29,384 of accrued warranties at December 31, 2008 and 2009, respectively.
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Balance at beginning of period |
$ | 99,800 | $ | 39,076 | ||||
| Provision for warranty for units sold |
57,125 | 55,575 | ||||||
| Cost of warranty incurred |
(117,849 | ) | (65,267 | ) | ||||
| Balance at end of period |
$ | 39,076 | $ | 29,384 | ||||
For the years ended December 31, 2008 and 2009, the Company incurred product warranty expenses of $57,125 and $55,575, respectively.
Operating Leases
The Company has a five-year operating lease for office space, expiring in 2013, with a renewal option for an additional five years. Total rent expense under all operating leases was approximately $342,189 and $347,400 for the years ended December 31, 2008 and 2009, respectively. At December 31, 2009, future minimum rental payments under the non-cancelable leases are $374,587, $384,803, $395,019, and $132,808 for fiscal years 2010, 2011, 2012 and 2013, respectively.
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Contingencies
The Company has certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
License Maintenance Fees
Under the terms of certain license, consulting and technology agreements, the Company is required to pay royalties on sales of its products. Minimum license maintenance fees under the license agreement, which can be credited against royalties otherwise payable for each year, are $10,000 per year through 2013. The Company is committed to pay an aggregate of $40,000 of such minimum license maintenance fees subsequent to December 31, 2009 as the technology is used. License maintenance fees paid during 2008 and 2009 amounted to $10,000 each year. The future minimum license maintenance fee commitments at December 31, 2009 are approximately as follows:
| 2010 |
$ | 10,000 | ||
| 2011 |
10,000 | |||
| 2012 |
10,000 | |||
| 2013 |
10,000 | |||
| Total |
$ | 40,000 | ||
During the term of these license agreements, the Company is obligated to pay a 1.5% royalty based on net sales of any products developed from the licensed technologies. The license maintenance fees described above are creditable against royalties otherwise payable for such year.
15. Related Party Transactions, Including Royalty Obligations
License Agreement/Consulting and Technology Agreement
On May 14, 2007, the Company entered into an Amended and Restated Consulting and Technology Agreement with Dr. Richard J. Cohen, M.D. Ph.D. (the “Consulting Agreement”) who serves as the Chairman of the Company’s Scientific Advisory Board, and until December 30, 2009, served as a member of the Company’s Board of Directors and continues to serve as Chairman of the Company’s Scientific Advisory Board. The Consulting Agreement amended and restated the terms of a Consulting and Technology Agreement dated as of February 8, 1993, as amended, between Dr. Cohen and the Company.
Under the terms of the Consulting Agreement, Dr. Cohen agrees to be available to the Company for consultation for a minimum of 18 days per year (the “Base Consulting Services”) until the expiration of the consulting period on December 31, 2015 (the “Consulting Period”). During the period beginning January 1, 2007 and ending on December 31, 2009 (the “Interim Consulting Period”), Dr. Cohen agreed to be available for consultation for up to 42 days per year. On March 11, 2010, the Company and Dr. Cohen entered into Amendment No. 1 to the Consulting Agreement (“Amendment No. 1”) which extended the Interim Consulting Period to December 31, 2010.
Under the Consulting Agreement, the Company will pay Dr. Cohen royalties on net sales related to certain technologies (including the sale of the Company’s HearTwave II System and other Microvolt T-Wave Alternans products) equal to 1.5% of such net sales until December 31, 2015. Additionally, if the Company sublicenses, or grants rights to any sublicense with respect to, such technologies to an unrelated company, Dr. Cohen will receive royalties equal to 7% of gross revenue to the Company from the sublicense. Pursuant to the terms of the Consulting Agreement, the Company will pay Dr. Cohen monthly royalties of $10,000 per month during the Interim Consulting Period, subject to an annual percentage increase equal to the annual percentage increase in the National Consumer Price Index for the prior year (the “Monthly Royalty”). Pursuant to Amendment No. 1, Dr. Cohen will receive a reduced Monthly Royalty payment of $5,811.17 per month for the period beginning on January 1, 2010 and ending on December 31, 2010. Dr. Cohen will not receive any additional compensation for the Base Consulting Services.
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Under the Consulting Agreement, the Company will have the right, but not the obligation, to terminate the Consulting Agreement within the 30-day period immediately following a Change in Control (as defined in the Consulting Agreement) of the Company, in which case the Company shall pay Dr. Cohen a termination royalty equal to a percentage of the consideration paid or deemed paid to the Company or its security holders in the Change in Control transaction (the “Termination Percentage”). The Termination Percentage decreases over the term of the Consulting Agreement from 2.67%, in case of a January 2007 transaction, to zero, in the case of a December 2015 transaction. Either party may terminate the Consulting Agreement for material breach or default by the other party of the other party’s obligations under the Amended Agreement upon 90 days notice.
Under the Consulting Agreement, Dr. Cohen also received an aggregate of 175,000 shares of restricted common stock of the Company (the “Restricted Shares”) subject to the terms and conditions of the Company’s 2001 Stock Incentive Plan. The Restricted Shares vested on January 1, 2010. Pursuant to Amendment No. 1, in consideration for the reduction in Monthly Royalty payments noted above, Dr. Cohen received a stock option to purchase 561,982 shares of common stock of the Company, which becomes exercisable in nine equal monthly installments beginning on April 11, 2010 and which was granted outside of the Company’s 2001 Stock Incentive Plan, but nevertheless subject to the terms and conditions of the 2001 Stock Incentive Plan. Pursuant to Amendment No. 1, in recognition of his service as Chairman of the Scientific Advisory Committee, Dr. Cohen received a stock option, under the Company’s 2001 Stock Incentive Plan, to purchase 100,000 shares of the common stock of the Company, which becomes exercisable in full on March 11, 2010. Additionally, in consideration for his services as Chairman of the Company’s Scientific Advisory Board during 2010, Dr. Cohen received a stock option to purchase 43,407 shares of common stock of the Company, which becomes exercisable in nine equal monthly installments beginning on April 11, 2010 and which was granted outside of the Company’s 2001 Stock Incentive Plan, but nevertheless subject to the terms and conditions of the 2001 Stock Incentive Plan, and will be paid a total cash fee of $5,000, payable monthly for the fiscal year 2010.
The Company recognized royalty expense in connection with the Consulting Agreement of $171,951 and $178,202 during fiscal 2008 and 2009, respectively.
Voting Agreement
On October 29, 2007, the Company entered into a Voting Agreement with Robert P. Khederian, who at the time served as the Chairman of the Board of Directors. The Voting Agreement was executed by the parties in connection with the election of two independent directors to the Board of Directors. On December 14, 2007, the parties entered into an Amended and Restated Voting Agreement (the “Amended Voting Agreement”) in connection with the appointment of Ali Haghighi-Mood as the Company’s new President and Chief Executive Officer and the election of Mr. Haghighi-Mood to the Board of Directors.
The Certificate of Designations of the Preferred Stock of Cambridge Heart, Inc. to be Designated Series A Convertible Preferred Stock (the “Series A Certificate of Designations”) provides that the holders of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), voting as a separate class, are entitled to elect up to four members of the Board and that at such time the total number of directors may not exceed nine. At the time, there were 154 shares of Series A Preferred Stock outstanding, all of which were held by Mr. Khederian. There also were an aggregate of 115,229 Series A warrants outstanding. Mr. Khederian was the holder of record of 77,900 Series A warrants, which together with his Series A Preferred Stock, represented approximately 67.6% of the outstanding Series A Preferred Stock and Series A warrants.
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Under the Amended Voting Agreement, Mr. Khederian agreed to hold and not transfer or otherwise dispose of any of the Series A warrants registered in his name or any shares of Series A Preferred Stock that he may acquire upon exercise of his Series A warrants if, as a result of such transfer or disposition, he will not hold a majority of the Series A Preferred Stock (assuming the exercise of all outstanding Series A warrants). Mr. Khederian also agreed that upon the request of the Board he would exercise that number of Series A warrants so that he holds at least a majority of the shares of Series A Preferred Stock then outstanding and entitled to vote. Mr. Khederian further agreed to vote all of his shares of Series A Preferred Stock so as to elect up to three individuals that are nominated or recommended for election as Series A stock directors by a majority of the Board, provided that, in the case of each such director, the Board has determined that such individual qualifies as an independent director under the Nasdaq Marketplace Rules then in effect or such director is serving at the time of the election as the Chief Executive Officer of the Company.
The Amended Voting Agreement terminates on the earliest of the following dates: (i) the date as of which there are no shares of Series A Stock or Series A Warrants outstanding; (ii) the date as of which the Certificate of Incorporation (including the Series A Certificate of Designations) has been amended so that holders of Series A Stock are no longer entitled, voting as a separate class, to elect any members of the Board; and (iii) the date as of which the Company and Mr. Khederian agree to terminate the Amended Voting Agreement with the approval of a majority of the Board.
On May 14, 2008, the Company and Mr. Khederian entered into Amendment No. 1 to the Amended Voting Agreement (“Amendment No. 1”). Under Amendment No. 1, Mr. Khederian agreed that, upon the request of the Board of Directors, Mr. Khederian would vote all of his shares of Common Stock and all of his shares of Series A Preferred Stock in favor of any amendment to the Company’s certificate of incorporation in order to eliminate the staggered Board of Directors and any amendment to the certificate of incorporation to eliminate the rights of the holders of Series A Preferred Stock, as a separate class, to elect any members of the Board of Directors.
Effective May 31, 2008, the Company and Mr. Khederian entered into Amendment No. 2 to the Amended Voting Agreement (“Amendment No. 2”). Under Amendment No. 2, Mr. Khederian agrees to vote all of his shares of Series A Preferred Stock so as to elect up to four individuals (increased from three under the Amended Voting Agreement) who are nominated or recommended for election as Series A Preferred directors by a majority of the Board, provided that, in the case of each such director, the Board has determined that such individual qualifies as an independent director under the Nasdaq Marketplace Rules then in effect or such director is serving at the time of the election as the Chief Executive Officer of the Company.
On June 29, 2009, the Company’s stockholders approved amendments to the Company’s Certificate of Incorporation to eliminate the provisions allowing for the election of directors by the holders of the Series A Convertible Preferred Stock, voting separately as a class. The amendment was made effective for elections taking place after the 2009 Annual Meeting.
Series A Convertible Preferred Stock Redemption
On December 21, 2009, the Company purchased and redeemed 154 shares of Series A Preferred Stock, representing 100% of the issued and outstanding shares of Series A Preferred Stock, from Mr. Khederian for an aggregate purchase price of $681.
Series D Financing
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”) and common stock warrants to new and current institutional and private investors pursuant to the terms of a Securities Purchase Agreement dated December 23, 2009 between the Company and the purchasers of Series D Preferred (the “Series D Financing”). The aggregate proceeds from the Series D Financing were $1.8 million, net of issuance costs. The Company intends to use the proceeds of the Series D Financing to fund its ongoing operations. See Note 9 of the notes to these financial statements.
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The terms and conditions of the Series D Financing were approved by a special committee comprised of three independent directors that was formed by the Company’s Board of Directors in connection with the transaction. The members of the special committee of the Board did not participate in the Series D Financing. Three directors of the Company purchased an aggregate of 385 shares of Series D Preferred for a total purchase price of $385,000. Specifically, Roderick de Greef, who serves as Chairman of the Board, Richard J. Cohen and Jeffery Wiggins purchased 50, 35 and 300 shares of Series D Preferred, respectively, and were issued Short-Term Warrants to purchase 304,878, 213,415 and 1,829,269 shares of common stock, respectively, and Long-Term Warrants to purchase 182,927, 128,049 and 1,097,561 shares of common stock, respectively.
16. Major Customers, Export Sales and Concentration of Credit Risk
No customer accounted for 10% or higher of total revenue and accounts receivable as of December 31, 2008 and 2009. During the years ended December 31, 2008 and 2009, international sales accounted for 15.8% and 14.3% of the total revenue, respectively. Company policy does not require collateral on accounts receivable balances.
17. Subsequent Event
In February 2010, Bailard Emerging Life Sciences Fund I, L.P., an institutional investor who participated in the Series D Financing, exercised their short-term and long-term warrants to purchase 609,756 and 365,854, respectively, of the Company’s common stock resulting in aggregate proceeds of $117,195.
On March 11, 2010, the Compensation Committee of the Board of Directors of the Company approved the grant of stock option awards to certain employees, directors and consultants of the Company to purchase an aggregate of 7,028,512 shares of common stock of the Company. Of the option awards granted, 4,988,858 shares were granted outside of the Company’s stock option plans. The remaining 2,039,654 options were granted under the Company’s 2001 Stock Incentive Plan. Each of the option awards has a term of ten years and an exercise price of $0.16, which was the closing price of the Company’s common stock on the date of grant. In connection with the approval of certain option awards granted outside of the Company’s stock option plans, stock options to purchase an aggregate of 2,983,333 shares of common stock of the Company previously granted to members of senior management were cancelled.
We have assessed and reported on subsequent events through the date of issuance of these financial statements.
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INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution
The following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities being registered hereby (except any underwriting discounts and commissions), all of which will be borne by the Company. All amounts shown are estimates except the SEC registration fee.
| Filing Fee – Securities and Exchange Commission |
$ | 910 | ||
| Legal fees and expenses |
$ | 30,000 | ||
| Accounting fees and expenses |
$ | 15,000 | ||
| Printing fees |
$ | 15,000 | ||
| Miscellaneous expenses |
$ | 0 | ||
| Total expenses |
$ | 60,910 | ||
Item 14. Indemnification Of Directors And Officers
Article EIGHTH of the Company’s Restated Certificate of Incorporation provides that no director of the Company shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty.
Article NINTH of the Company’s Restated Certificate of Incorporation provides that a director or officer of the Company (a) shall be indemnified by the Company against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Company) brought against him by virtue of his position as a director or officer of the Company if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful and (b) shall be indemnified by the Company against all expense (including attorneys’ fees) and amounts paid in settlement incurred in connection with any action by or in the right of the Company brought against him by virtue of his position as a director or officer of the Company if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Company, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he is required to be indemnified by the Company against all expenses (including attorneys’ fees) incurred in connection therewith. Expenses shall be advanced to a director or officer at his request, provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses.
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Indemnification is required to be made unless the Company determines that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Company that the director or officer did not meet the applicable standard of conduct required for indemnification, or if the Company fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether such person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Company notice of the action for which indemnity is sought and the Company has the right to participate in such action or assume the defense thereof.
Article NINTH of the Company’s Restated Certificate of Incorporation further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers the Company must indemnify those persons to the full extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expense incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances.
The Company has obtained directors and officers insurance for the benefit of its directors and its officers.
Item 15. Recent Sales of Unregistered Securities
Set forth below is information regarding shares of common stock and preferred stock issued, and options and warrants granted, by us within the past three years that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by us for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.
Series C and Series C-1 Convertible Preferred Stock
On March 21, 2007, the Company and St. Jude Medical entered into an agreement for the sale of $12.5 million of the Company’s Series C Convertible Preferred Stock (the “Series C Preferred”) to St. Jude Medical resulting in $11.7 million net of issuance costs. Under the terms of the financing, the Company issued and sold 5,000 shares of its Series C Preferred at a purchase price of $2,500 per share. We subsequently filed a registration statement with the Securities and Exchange Commission to register for resale all of the shares of common stock issuable upon conversion of the Series C Preferred. This registration statement was declared effective in June 2007.
The sale of the Series C shares to St. Jude Medical was made in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The Company used the proceeds from the sale of the Series C Preferred Shares for working capital purposes.
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In order to be able to issue securities in the Series D Financing, described below, that are senior to the Series C Preferred previously issued by the Company, the Company entered into a Share Exchange Agreement with St. Jude Medical, dated as of December 23, 2009, pursuant to which St. Jude Medical exchanged 5,000 shares of the Company’s Series C Preferred, representing 100% of the issued and outstanding Series C Preferred, for 5,000 newly issued shares of the Company’s Series C-1 Convertible Preferred Stock (the “Series C-1 Preferred”). The issuance of the Series C-1 Preferred to St. Jude Medical was made in reliance upon the exemption from registration under Section 3(a)(9) of the Securities Act.
Series D Convertible Preferred Stock
On December 23, 2009, the Company issued and sold 1,852 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”), at a purchase price of $1,000 per share, and common stock warrants to purchase up to 18,068,297 shares of common stock to new and current institutional and private investors, each of whom qualified as an accredited investor pursuant Regulation D under the Securities Act. Each share of Series D Preferred is currently convertible into approximately 12,195 shares of common stock. The total number of shares of common stock initially issuable upon conversion of the 1,852 shares of Series D Preferred issued and sold in the financing is 22,585,366. The aggregate proceeds from the Series D Financing were $1.8 million, net of issuance costs.
The sale of the Series D Preferred and common stock warrants was made in reliance upon the exemption from registration under Rule 506 of Regulation D, under the Securities Act. The Company used the proceeds from the sale of the Series D Preferred and common stock warrants for working capital purposes. The Series D Preferred and common stock issuable upon exercise of the warrants issued in connection with the Series D Preferred are deemed restricted securities for purposes of the Securities Act.
2010 Private Placement of Common Stock and Warrants
On December 20, 2010, the Company issued and sold 14,500,000 units (the “Units”) for an aggregate purchase price of $2,900,000 (less fees and commissions), each Unit consisting of (i) one share of the Company’s Common Stock and (ii) one five-year warrant to purchase one share of Common Stock, pursuant to the terms and conditions of a Securities Purchase Agreement, dated as of December 20, 2010, by and among the Company and certain accredited investors (the “2010 Private Placement”). Additionally, in connection with the 2010 Private Placement, we issued a warrant to purchase 1,160,000 shares of common stock to Dawson James Securities, Inc., which served as placement agent in connection with the 2010 Private Placement.
The sale of the common stock and common stock warrants was made in reliance upon the exemption from registration under Rule 506 of Regulation D, under the Securities Act. The Company used the proceeds from the sale of the common stock and warrants for working capital purposes. The common stock and the common stock issuable upon exercise of the warrants are deemed restricted securities for purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Registration Statement on Form S-1.
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Item 17. Undertakings
The undersigned registrant hereby undertakes:
| 1. | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| i. | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement. |
| iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| 2. | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| 3. | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| 4. | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
| i. | If the registrant is relying on Rule 430B: |
| A. | Each prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| B. | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made |
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| in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or |
| ii. | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| 5. | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| i. | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| ii. | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| iii. | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| iv. | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registration has duly cause this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Tewksbury, Commonwealth of Massachusetts, on January 31, 2011.
| CAMBRIDGE HEART, INC. | ||
| By: | /S/ ALI HAGHIGHI-MOOD | |
| Ali Haghighi-Mood | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /S/ ALI HAGHIGHI-MOOD Ali Haghighi-Mood |
President and Chief Executive Officer; Director (Principal Executive Officer) |
January 31, 2011 | ||
| /S/ VINCENZO LICAUSI Vincenzo LiCausi |
Vice President, Chief Financial Officer, Treasurer, Corporate Secretary |
January 31, 2011 | ||
| /S/ RODERICK DE GREEF Roderick de Greef |
Chairman of the Board of Directors |
January 31, 2011 | ||
| /S/ PAUL MCCORMICK Paul McCormick |
Director |
January 31, 2011 | ||
| /S/ JOHN MCGUIRE John McGuire |
Director |
January 31, 2011 | ||
| /S/ JEFFREY WIGGINS Jeffrey Wiggins |
Director |
January 31, 2011 | ||
II-6
Table of Contents
EXHIBIT INDEX
| Exhibit No. |
Description | |
| 3.1 | Restated Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 3.2 | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 0-20991). | |
| 3.3 | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant is incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2003 (File No. 0-20991). | |
| 3.4 | Certificate of Designations of the Preferred Stock of the Registrant to be Designated Series A Convertible Preferred Stock, dated as of May 12, 2003 is incorporated herein by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K dated May 13, 2003 (File No. 0-20991). | |
| 3.5 | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, dated as of December 6, 2004 is incorporated herein by reference to Exhibit 3.5 to the Registrant’s Current Report on Form 8-K dated December 7, 2004 (File No. 0-20991). | |
| 3.6 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant is incorporated by reference to Exhibit 3.6 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-20991). | |
| 3.7 | Certificate of Designation Preferences and Rights of Series C Convertible Preferred Stock of the Registrant, dated as of March 21, 2007 is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated March 27, 2007 (File No. 0-20991). | |
| 3.8 | By-Laws of the Registrant, as amended are incorporated herein by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 4.1 | Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 4.2 | See Exhibits 3.1, 3.2, 3.3, 3.4. 3.5, 3.6, 3.7 and 3.8 for provisions of the Registrant’s certificate of incorporation, certificate of designations and by-laws defining the rights of holders of common stock. | |
| 5.1 | Opinion of Nutter, McClennen & Fish, LLP. | |
| 10.1# | 1993 Incentive and Non-Qualified Stock Option Plan, as amended is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 10.2# | 1996 Equity Incentive Plan, as amended is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 10.3# | 1996 Director Stock Option Plan is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 10.4# | 2001 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.5 to Appendix A to the Registrant’s Definitive Proxy Statement as filed on May 9, 2005 (File No. 0-20991). | |
| 10.5# | Summary of Amendments to Certain of the Registrant’s Equity Plans is incorporated herein by reference to Exhibit 10.7 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 0-20991). | |
| 10.6# | Form of Exchange Agreement between the Registrant and Certain Executive Officers dated August 15, 2005 is incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-20991). | |
| 10.7# | Form of Exchange Agreement between the Registrant and Certain Non-Employee Directors dated September 19, 2005 is incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-20991). | |
Table of Contents
| Exhibit No. |
Description | |
| 10.8# | Amended and Restated Consulting and Technology Agreement between the Registrant and Dr. Richard J. Cohen, dated May 14, 2007 is incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-3 (File No. 333-143091). | |
| 10.9# | License Agreement By and Between the Registrant and Dr. Richard J. Cohen, dated February 8, 1993 is incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-04879). | |
| 10.10 | License Agreement by and between the Registrant and the Massachusetts Institute of Technology, dated September 28, 1993, relating to the technology of “Assessing Myocardial Electrical Stability” is incorporated herein by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-20991). | |
| 10.11 | First Amendment to the License Agreement by and between the Registrant and the Massachusetts Institute of Technology dated May 21, 1998, relating to the technology of “Assessing Myocardial Electrical Stability” is incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended June 30, 1998 (File No. 0-20991). | |
| 10.12 | Summary of terms of Revolving Credit Line with Citigroup Global Markets, Inc. is incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 0-20991). | |
| 10.13# | Severance Agreement dated September 17, 2003 between the Registrant and Ali Haghighi-Mood is incorporated herein by reference to Exhibit 10.20 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 0-20991). | |
| 10.14# | Summary of Amendment dated December 14, 2006 to Severance Agreement dated September 17, 2003 between the Registrant and Ali Haghighi Mood is incorporated by reference to Exhibit 10.16 to the Registrants Form 10-K for the fiscal year ended December 31, 2006 (File No. 0-20991). | |
| 10.15# | Employment Agreement dated December 14, 2007 between the Registrant and Ali Haghighi-Mood incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | |
| 10.16# | Severance Agreement dated May 18, 2007 between the Registrant and Vincenzo LiCausi is incorporated by reference to Exhibit 10.16 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20991). | |
| 10.17# | Non-Statutory Stock Option Agreement Granted Under 2001 Stock Incentive Plan dated December 11, 2007 between the Registrant and Ali Haghighi-Mood is incorporated by reference to Exhibit 10.29 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20991). | |
| 10.18# | Employment Agreement dated November 28, 2008 between the Registrant and Roderick de Greef is incorporated herein by reference to Exhibit 10.18 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2009 (File No. 0-20991). | |
| 10.19 | Securities Purchase Agreement among the Registrant and The Tail Wind Fund, Ltd. and Robert P. Khederian dated December 21, 2001 is incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 0-20991). | |
| 10.20 | Amendment to Registration Rights Agreement and Waiver, dated May 12, 2003, by and among the Registrant, The Tail Wind Fund, Ltd. and Robert P. Khederian is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2003 (File No. 0-20991). | |
| 10.21 | Amendment No. 1, dated May 12, 2003, to the Warrant issued as of September 14, 2000 to the Tail Wind Fund Ltd. by and between the Registrant and the Tail Wind Fund Ltd. is incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 2003 (File No. 0-20991). | |
| 10.22 | Securities Purchase Agreement among the Registrant and the Purchasers dated May 12, 2003 is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 13, 2003 (File No. 0-20991). | |
Table of Contents
| Exhibit No. |
Description | |
| 10.23 | Registration Rights Agreement, dated as of May 12, 2003, by and among the Registrant and the signatories thereto is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated May 13, 2003 (File No. 0-20991). | |
| 10.24 | Form of Long-Term Warrant to purchase shares of Series A Preferred Convertible Stock of the Registrant issued on May 12, 2003 in connection with the sale of the Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated May 13, 2003 (File No. 0-20991). | |
| 10.25 | Securities Purchase Agreement, dated as of December 6, 2004 by and among the Registrant and the signatories thereto is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 7, 2004 (File No. 0-20991). | |
| 10.26 | Registration Rights Agreement, dated as of December 6, 2004 by and among the Registrant and the signatories thereto is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December 7, 2004 (File No. 0-20991). | |
| 10.27 | Form of Warrant to purchase shares of common stock, dated as of December 6, 2004 issued to placement agent in connection with the sale of shares of Series B Convertible Preferred Stock is incorporated by reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-2, as amended (File No. 333-121915). | |
| 10.28 | Securities Purchase Agreement, dated as of March 21, 2007 between the Registrant and St. Jude Medical, Inc. is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 27, 2007 (File No. 0-20991). | |
| 10.29 | Registration Rights Agreement, dated as of March 21, 2007 between the Registrant and St. Jude Medical, Inc. is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated March 27, 2007 (File No. 0-20991). | |
| 10.30 | Restated Co-Marketing Agreement dated July 8, 2008 between the Registrant and St. Jude Medical, Inc. is incorporated by reference to Exhibit 10.4 to the Registrant’s 10-Q for the quarter ended June 30, 2008 (File No. 0-20991). | |
| 10.31# | Form of Memorandum to Board of Directors dated October 1, 2007 Confirming Amendment of Non-Employee Director Stock Options is incorporated by reference to Exhibit 10.43 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20991). | |
| 10.32 | Amended and Restated Voting Agreement dated December 14, 2007 between the Registrant and Robert Khederian is incorporated by reference to Exhibit 10.44 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20991). | |
| 10.33 | Amendment No 1 to Amended and Restated Voting Agreement dated May 19, 2008 between the Registrant and Robert Khederian is incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed dated May 23, 2008 (File No. 0-20991). | |
| 10.34 | Amendment No. 2 to Amended and Restated Voting Agreement dated May 31, 2008 between the Registrant and Robert Khederian is incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed dated June 5, 2008 (File No. 0-20991). | |
| 10.35 | Settlement Agreement dated May 19, 2008 between the Registrant, AFB Fund, LLC, Louis Blumberg and Laurence Blumberg is incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed dated May 23, 2008 (File No. 0-20991). | |
| 10.36+ | Lease Agreement dated November 21, 2007 by and between the Registrant and Farley White Management Company, LLC. is incorporated by reference to Exhibit 10.45 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20991). | |
| 10.37# | Summary of Non-Employee Director Fees is incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 0-20991). | |
Table of Contents
| Exhibit No. |
Description | |
| 10.38# | Form of Management Incentive Stock Option Award under 2001 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | |
| 10.39 | Form of Director Non-Qualified Stock Option Award under 2001 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | |
| 10.40+ | Development, Supply and Distribution Agreement, dated June 22, 2009 between the Registrant and Cardiac Science Corporation is incorporate by reference to Exhibit 10.1 of Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, as filed on February 22, 2010 (File No. 0-20991). | |
| 10.41 | Securities Purchase Agreement, dated as of December 23, 2009 by and among the Registrant and the signatories thereto is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 30, 2009 (File No. 0-20991). | |
| 10.42 | Form of Short-Term Warrant to purchase Common Stock of the Registrant issued on December 23, 2009 in connection with the sale of the Series D Convertible Preferred Stock is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December 30, 2009 (File No. 0-20991). | |
| 10.43 | Form of Long-Term Warrant to purchase Common Stock of the Registrant issued on December 23, 2009 in connection with the sale of the Series D Convertible Preferred Stock is incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated December 23, 2009 (File No. 0-20991). | |
| 10.44 | Share Exchange Agreement between the Registrant and St. Jude Medical, Inc. is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated December 23, 2009 (File No. 0-20991). | |
| 10.45# | Summary of Stock Option Awards for Certain Executive Officers, Non-Employee Directors and Consultants and Exchange Agreement with Certain Executive Officers is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. | |
| 10.46# | Form of Incentive Stock Option Agreement in Lieu of Cash Bonus Granted Under 2001 Stock Incentive Plan dated March 11, 2010 between the Registrant and certain Executive Officers is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. | |
| 10.47# | Form of Stock Option Agreement Granted Outside 2001 Stock Incentive Plan (Monthly Vesting) dated March 11, 2010 is incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-165410). | |
| 10.48# | Form of Stock Option Agreement for Non-Employee Directors and Consultants Granted Outside 2001 Stock Incentive Plan (Monthly Vesting) dated March 11, 2010 is incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-165410). | |
| 10.49# | Form of Stock Option Agreement Granted Outside 2001 Stock Incentive Plan (Annual Vesting) dated March 11, 2010 is incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-165410). | |
| 10.50# | Form of Stock Option Agreement for Non-Employee Directors and Consultants Granted Under the 2001 Stock Incentive Plan dated March 11, 2010 between the Registrant and certain Non-Employee Directors and Consultants is incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. | |
| 10.51# | Form of Exchange Agreement, between the Registrant and certain Executive Officers dated March 11, 2010 is incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. | |
| 10.52# | Summary of Senior Management Bonus Plan for 2010 is incorporated herein by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. | |
Table of Contents
| Exhibit No. |
Description | |
| 10.53 | Form of Warrant to purchase shares of common stock of the Company issued on December 20, 2010 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2010. | |
| 10.54 | Form of Selling Agent Warrant to purchase shares of common stock of the Company issued on December 20, 2010 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2010. | |
| 10.55 | Securities Purchase Agreement, dated as of December 20, 2010, by and among the Company and the signatories thereto is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2010. | |
| 10.56 | Registration Rights Agreement, dated as of December 20, 2010, by and among the Company and the signatories thereto is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2010. | |
| 14.1 | Code of Business Conduct and Ethics is incorporated by reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 0-20991). | |
| 16.1 | Letter from Caturano and Company, Inc. dated October 7, 2010 is incorporated by reference to Exhibit 16.1 to the Registrant’s Current Report on Form 8-K dated October 7, 2010. | |
| 23.1 | Consent of Caturano and Company, Inc. (formerly Caturano and Company, P.C.) | |
| 24.1 | Power of Attorney (contained on signature page) | |
| # | Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 15(a) and 15(b) of Form 10-K. |
| + | Confidential treatment has been requested as to certain portions of this Exhibit. Such portions have been omitted and filed separately with the Securities and Exchange Commission. |