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REVA MEDICAL, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes thereto that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties, and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" elsewhere in this Annual Report on Form 10-K. See also "Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K. Overview We are a development stage medical device company working toward commercialization of our proprietary technologies to provide minimally invasive medical devices for the treatment of conditions in the human body. We are in the later stages of developing and clinically testing bioresorbable drug-eluting coronary stents. We refer to bioresorbable stents as "scaffolds" because they are not permanent devices like metal stents that are commonly used today. In clinical use, a scaffold is guided by x-ray by an interventional cardiologist during a minimally invasive surgery to a coronary artery location with a delivery catheter system, whereupon it is deployed to restore blood flow to the artery and medicate the artery to prevent further blocking, or restenosis. Our products are designed to offer full x-ray visibility, clinically relevant sizing, and a controlled and safe resorption rate. The scaffolds we are studying in clinical trials combine our proprietary scaffold design with a proprietary polymer that is metabolized and cleared from the body over time. Our clinical studies are designed to evaluate the safety and performance of our scaffolds, with primary patient evaluations at one, nine, and/or 12 months; annual follow-ups are performed thereafter until five years after implant. Our current plan is to apply for regulatory approval to sell commercially outside the United States when we have gathered and analyzed the initial set of 12-month data from our current clinical studies, which we expect to be late in 2014 or early 2015. We will commercialize our first product(s) when, and if, we receive the CE Mark and any other required regulatory approvals. We believe that due to the risks and limitations associated with commercially available metal stents, bioresorbable scaffolds will be the next major advance in coronary stent technology. Because we have designed our scaffolds to provide the same benefits as traditional metal stents, but with the additional benefit of eliminating the need for a permanently implanted device, we believe that if we are able to complete development and clinical testing of our scaffolds, if we are able to successfully implement manufacturing processes and procedures, if we receive approval to sell commercially by the relevant regulatory authorities, and if we are able to execute our sales and marketing strategies effectively, we believe our products would enable us to compete effectively in the worldwide stent market. Worldwide revenues from coronary stent sales approximated $4.4 billion in 2013. 45 -------------------------------------------------------------------------------- Table of Contents We have invested significant time and funds in the development of our bioresorbable scaffolds and have performed significant scientific research, engineering development, and testing in laboratory and preclinical studies. We have developed, tested, and selected the polymer formulation, tested and selected the anti-restenotic drug and coating process, created and iterated the device design, and identified and implemented methods and processes to produce and test the scaffold. We designed and performed extensive preclinical tests that ranged from bench and engineering studies to in vitro and in vivo laboratory studies. As part of the development, in 2007 we enrolled patients in a small clinical study that proved the viability of our technology while confirming the areas needing further development and we have been advancing the product design and features since. We believe the results of these and subsequent tests and studies show the technology to be safe and effective and that it is suitable for human clinical studies. We began clinically testing the ReZolve family of scaffolds with the initiation of a pilot study that enrolled 26 patients between December 2011 and July 2012 in Brazil and Europe. During the period March 2013 through December 2013 we enrolled an additional 111 patients in a clinical study of our ReZolve2 scaffold in Australia, Brazil, Europe, and New Zealand. Data from the ReZolve2 patients will be gathered, evaluated, and, if acceptable, used to apply for European CE Marking. When, and if, we receive CE Mark approval we will evaluate how best to implement our sales and marketing strategies for commercialization in Europe and various other countries that rely on the CE Mark. While our ReZolve2 scaffold could be approved for sale in 2015, our efforts to generate substantial revenue from our scaffold products and achieve positive cash flows from our operations will take several years, even if our clinical results are favorable. Following initiation of clinical trials with our ReZolve2 scaffolds in 2013, we researched and performed feasibility work on our "next" generation of scaffolds. We expect these follow-on scaffolds to contain all the beneficial features of our ReZolve scaffolds, while providing advancements in deliverability, profile and hoop strength, and reduced manufacturing costs. As a result of our extensive experience developing and testing bioresorbable scaffolds, we began preclinical testing of this next generation device in early 2014 and aim to possibly initiate clinical studies later in 2014. When, and if, this next generation scaffold is fully developed and tested, and we have acceptable clinical data, we plan to apply for its CE Marking. Following regulatory approval to commercialize the next generation scaffold, if and when such approval is received, we would evaluate our sales and marketing strategies, including the markets, sales volumes, and selling prices of ReZolve2, if any, and distribute and sell our products to maximize revenues and profits. In order to produce quantities of our scaffold large enough to accommodate commercial needs, when that time arrives, we will need to scale up our manufacturing processes and expand our capabilities to allow for such things as additional scaffold sizes. We developed plans and began implementation of the methods and processes for such manufacturing scale-up, including work on the product sizes in 2013. We will continue implementation of manufacturing preparedness as we approach commercialization. During the course of our product development and testing, we have invented, co-invented, and licensed a portfolio of proprietary technologies. Our design-related technologies have been invented by our employees and consultants and our materials-related technologies have been either invented by our employees or licensed from, or co-invented with, Rutgers, The State University of New Jersey. We consider our patent portfolio to be significant and have invested considerable time and funds to develop and maintain it. Our goal is to continue to perform feasibility tests on additional technologies in our patent portfolio as our resources allow and, if feasibility is proven, determine a course of development for additional products. During our development efforts, we have also pursued, tested, and abandoned development programs that we determined would not lead to feasible products or for which a product could not be developed in a timeframe that would allow for reasonable commercialization. The largest of these abandoned programs centered on development of a thin metal stent technology for use in small blood vessels. Although abandoned in 2002 after approximately $13 million had been invested and used, this technology became the basis for the "slide & lock" mechanism we are currently using. Additionally, we licensed a potential anti-restenotic drug in 2001 with the intent to develop it for use as a stand-alone drug or as a complement to our scaffold. Although the drug's development was abandoned in 2004 after we had invested approximately $6 million, the knowledge we gained from that program was used in our development of the drug coating for the ReZolve scaffolds. We also formed a wholly owned subsidiary in Germany in 2007 to facilitate our clinical trials and our planned commercialization of products; we have not used this subsidiary yet for any operating activities. 46 -------------------------------------------------------------------------------- Table of Contents We have performed all of our research and development activities from one location in San Diego, California. As of December 31, 2013, we had 84 employees, a majority of which are degreed professionals and seven of whom are PhDs. We leverage our internal expertise with contract research and preclinical laboratories, outside catheter manufacturing, and other outside services as needed. We have three clean rooms and multiple engineering and chemistry labs at our facility, in addition to our corporate and administrative office. We are ISO certified to the medical device standard 13485:2012 and intend to maintain the certification to support our commercialization plans. We have not yet developed a product to a saleable stage and we have not, therefore, generated any product or other revenues. Our development efforts have been funded with a variety of capital received from angel investors, venture capitalists, strategic partners, hedge funds, and the proceeds from our IPO. Since our inception, we have received approximately $153.9 million in equity proceeds and $28.5 million from issuance of notes payable (such notes payable were converted to common stock upon our IPO in December 2010). As of December 31, 2013, we had approximately $20.7 million in cash and investments available for operations. We have incurred substantial losses since our inception; as of December 31, 2013, we had accumulated a deficit of approximately $201.5 million. The above circumstances raise substantial doubt about our ability to continue as a going concern. We are placing significant effort into completing a financing during the first half of 2014 that would provide adequate capital resources to allow us to obtain data from our clinical trials, apply for the CE Marking, and begin commercial product sales, assuming we receive the regulatory approval to do so. There can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital expenditures or sell certain assets, including intellectual property assets. We expect our losses to continue for the next several years as we continue our development work, clinical studies, and preparations for commercialization and, if these efforts are successful and we are able to obtain approval to sell our products, we expect to commence product sales thereafter. In order to successfully transition to profitable operations, we will need to achieve a level of revenues and product margins to support the Company's cost structure. Until such time as we generate positive cash flow, we plan to continue to fund our losses from operations and capital needs by utilizing our current cash and investments and by raising additional capital through equity or debt financings. Key Components of our Results of Operations Since we are still in a pre-revenue stage and our activities are focused on further developing and testing our bioresorbable coronary scaffold with the goal of commercially selling it, as well as performing minimal research and tests to determine the feasibility of other product possibilities, our operating results primarily consist of research and development expenses, including costs to perform clinical trials, and general and administrative expenses. Research and Development Expenses: Our research and development expenses arise from a combination of internal and external costs. Our internal costs primarily consist of employee salaries and benefits, facility and other overhead expenses, and engineering and other supplies that we use in our labs for prototyping, testing, and producing our scaffolds and other product possibilities. Our external costs primarily consist of contract research, engineering consulting, polymer consulting and certain production costs, polymer lasing costs, catheter system and anti-restenotic drug purchases, preclinical and clinical study expenses, and license fees paid for the technology underlying our polymer materials. All research and development costs are expensed when incurred. Through December 31, 2013, we have incurred approximately $122.8 million in research and development expenses since our inception, which represents approximately 73 percent of our cumulative operating expenses. We increased the level of our research and development activities in 2013 as we continued human clinical trials, increasing the number of patients enrolled. We expect to increase our research and development expense in 2014 as we continue development of our next generation scaffolds and incur clinical costs on previously enrolled and newly enrolled patients in our clinical studies. We also expect to incur increasing expenses in the future for development of final manufacturing processes and equipment as we prepare for commercialization and the development and roll-out of our sales and marketing strategies as we near commercialization. 47 -------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses: Our general and administrative expenses consist primarily of salaries and benefits for our executive officers and administrative staff, corporate office and other overhead expenses, legal expenses including patent filing and maintenance costs, audit and tax fees, investor relations and other public company costs, and travel expenses. Although our patent portfolio is one of our most valuable assets, we record legal costs related to patent development, filing, and maintenance as expense when the costs are incurred since the underlying technology associated with these assets is purchased or incurred in connection with our research and development efforts and the future realizable value cannot be determined. Through December 31, 2013, we have incurred approximately $44.7 million in general and administrative expenses since our inception, which represents approximately 27 percent of our cumulative operating expenses. We anticipate that we will continue to invest in patents at similar levels as we have in the past. Upon completion of our initial public offering ("IPO") in December 2010, we began to expand our corporate infrastructure including the addition of personnel and reporting systems, and also began to incur public company reporting and other costs. We anticipate that we will continue to expand our corporate infrastructure to support the needs of being a public company and to prepare for commercial sales of our products, which will increase our general and administrative expenses accordingly. We also expect to begin to incur sales and marketing expenses toward the end of 2014 as we prepare for product sales in the event we receive CE Marking. Other Expense and Income: Historically, a majority of our non-operating expenses arose from our notes payable. All the notes, along with the accumulated accrued interest, converted into common stock upon our IPO in December 2010. Through December 31, 2010, we recorded approximately $9.6 million of interest, $11.1 million in repayment premiums, $13.3 million in loss on extinguishment, and $2.3 million in interest income from note premium amortization, all in accordance with accounting requirements. In conjunction with our notes payable, we issued warrants to purchase preferred stock; these warrants were exercised for cash and on a net issuance basis upon our IPO and none remained outstanding thereafter. We recorded non-cash interest expense for the initial value of the warrants and recorded gains and losses for subsequent changes in fair value of the warrants for a total of $1.8 million in net expense through December 31, 2010. Concurrent with the completion of our IPO, all of our outstanding convertible preferred stock and non-voting common stock converted to common stock. We also issued common stock for cumulative dividends on our Series H convertible preferred stock. A total of 22,419,771 shares of common stock were issued from all the conversions, exercises, and dividends. Since our inception, when we have had excess cash on hand we have invested in short- and long-term high-quality marketable securities such as certificates of deposit and U.S. Treasury Bills. Earnings from these investments are recorded as interest income; through December 31, 2013, we have recorded a total of approximately $1.4 million in such interest income. Critical Accounting Policies and Significant Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, stockholders' equity, expenses, and the presentation and disclosures related to those items. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis; changes in our estimates and assumptions are reasonably likely to occur from period to period. Additionally, actual results could differ significantly from the estimates we make. To the extent there are material changes in our estimates or material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. While our significant accounting policies are described in more detail in Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies involve a greater degree of judgment and complexity than our other accounting policies and, therefore, are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Research and Development Costs: We expense research and development costs as incurred. Our preclinical and clinical study costs are incurred on a contract basis and generally span a period from a few months to longer than a year. We record costs incurred under these contracts as the work occurs and make payments according to contractual terms. Until a contract is completed, we estimate the amount of work performed and accrue for estimated costs that have been incurred but not paid. As actual costs become known, we adjust our accruals. We expect our clinical expense accruals to increase as we continue to initiate and enroll patients in clinical trials. We expect to make estimates as to the work performed throughout the term of these trials, each of which is expected to be five years or longer. As these costs increase, if our estimates are inaccurate, possible material changes to our accruals could be required, which could materially affect our results of operations within any fiscal period. To date, there have been no material changes in our research and development expense estimates, including our estimates for accrued clinical costs. 48 -------------------------------------------------------------------------------- Table of Contents Stock-Based Compensation: We have granted stock options to employees and consultants for the purchase of common stock. These options generally have a ten-year life during which the option holder can exercise at any time, they generally vest over a four- or five-year service period, and their exercise price equals the fair market value of our common stock on the date they are granted. For options granted to employees, we determine the amount of compensation expense by estimating the fair value of each option on its date of grant and then we amortize that fair value on a straight-line basis over the period the employee provides service, which generally is four or five years, and record the expense in our statement of operations as either research and development expense or general and administrative expense based on the employee's work classification. We estimate the fair value by using the Black-Scholes option pricing model, which requires use of assumptions. The assumptions used represent our best estimates, but these estimates involve inherent uncertainties. For the model inputs, we use the market value of the underlying common stock, a risk-free interest rate that corresponds to the vesting period of the option, an expected life of the option ranging from 6.25 to 6.5 years, and an estimate of volatility based on the market trading prices of comparative peer companies. Additionally, we reduce the amount of recorded compensation expense to allow for potential forfeitures of the options; the forfeiture rate is based on our actual historical forfeitures and has ranged from approximately 2.4 percent to 5.3 percent. For options granted to consultants, we estimate the fair value at each vesting and reporting date and record compensation expense in our statement of operations based on the fair value during the service period of the consultant, which is generally the four- or five-year vesting period. We estimate the fair value by using the Black-Scholes option pricing model with the same approach to inputs and assumptions as we use to estimate the fair value of options granted to employees. For the model inputs, we used the market value of the underlying common stock, a risk-free interest rate that corresponds to the remaining option life, an expected option life equal to the remaining life of the option, and an estimate of volatility based on the market trading prices of comparative peer companies. As a result of our use of estimates, if factors change and we use different assumptions, the amount of our stock-based compensation expense could be materially different in the future. During the past five years, we have granted options to purchase common stock to our employees, members of our board of directors, and outside consultants and have awarded restricted stock to our employees. We granted options to purchase 589,500 shares and awarded 87,500 shares of restricted stock in 2013. During 2012, we granted options to purchase 544,000 shares and awarded 33,000 shares of restricted stock. During the years ended December 31, 2009, 2010, and 2011 we granted options to purchase 50,000, 1,467,500, and 401,000 shares, respectively, and awarded 5,000 shares of restricted stock in 2011. We expect to continue granting options and awarding restricted stock at levels similar to 2013 and 2012. Accordingly, we expect our stock-based compensation to continue to increase modestly in the future. Results of Operations Comparison of the Years Ended December 31, 2012 and 2013 Year Ended December 31, Change 2012 2013 $ % (dollars in thousands) Research and development expense $ 15,822 $ 19,212 $ 3,390 21 % General and administrative expense $ 8,043 $ 8,731 $ 688 9 % Interest income $ 92 $ 30 $ (62 ) (67 )% Research and development expense increased $3,390,000, or 21 percent, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase was due to several factors. Personnel costs, including benefits, bonuses, and stock-based compensation, increased $934,000 primarily due to an approximate 11 percent increase in headcount for engineering, operations, and quality assurance employees, combined with increases of $228,000 for stock-based compensation and $65,000 for bonuses. Clinical costs increased $1,453,000 as we enrolled 111 patients in our ReZolve2 clinical trial during the year ended December 31, 2013 and monitored patients in our prior clinical study. Material costs, including polymer, lasing, and catheter delivery systems, increased $684,000 and outside engineering costs increased $606,000 as we produced supplies for clinical enrollment, refined our 49 -------------------------------------------------------------------------------- Table of Contents manufacturing processes and equipment in advance of commercialization, and performed feasibility work on our next generation scaffold. Depreciation increased $205,000 due to the addition of lab equipment and significant leasehold improvements completed in 2012. During 2013, we also paid a one-time licensing fee of $100,000 for technology in our product pipeline. Offsetting these increases, preclinical study costs decreased $620,000 due to the timing of such work; numerous studies undertaken to test and validate the ReZolve2 device in 2012 were not repeated in 2013. The remainder of the change in research and development expenses between years resulted from individually immaterial changes in lab supplies, quality control, facilities, and outside research expenses. General and administrative expense increased $688,000, or nine percent, for the year ended December 31, 2013 compared to the year ended December 31, 2012. A combination of items contributed to this increase. Personnel costs, including benefits, bonuses, and stock-based compensation expense, increased $450,000 primarily due to an increase of $365,000 in stock compensation from ongoing option grants and restricted stock awards and $57,000 in year-end bonuses to officers under our bonus program. We incurred $268,000 in compensation to our European-based sales and marketing consultant in 2013 following his engagement in May 2013. Our audit and tax fees increased $155,000 in 2013 primarily as a result of a non-recurring tax analysis related to our tax losses. Travel costs increased $101,000 primarily due to our clinical activities. Offsetting these increases, legal fees decreased $156,000 in 2013 primarily due to the timing of intellectual property filings and office actions. The remainder of the change in general and administrative expenses between periods was due to individually immaterial changes in investor relations costs, office supplies, depreciation, insurance, franchise taxes, and other overhead expenses. Interest income decreased $62,000 for the year ended December 31, 2013 compared to the year ended December 31, 2012, as a result of lower cash and investment balances. Comparison of the Years Ended December 31, 2011 and 2012 Year Ended December 31, Change 2011 2012 $ % (dollars in thousands) Research and development expense $ 13,401 $ 15,822 $ 2,421 18 % General and administrative expense $ 7,695 $ 8,043 $ 348 5 % Interest income $ 188 $ 92 $ (96 ) (51 )% Research and development expense increased $2,421,000, or 18 percent, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase was due to several factors. Personnel costs, including benefits, bonuses, and stock-based compensation, increased $768,000 primarily due to an approximate 30 percent increase in headcount for engineering, operations, and quality assurance employees. Clinical costs increased $605,000 as we enrolled and monitored patients in our pilot clinical study and prepared and submitted applications for our next clinical study. Preclinical study costs increased $479,000 as a result of continuing costs on our long-term studies and the addition of new applied studies undertaken to test and validate the ReZolve2 device. Facilities costs increased $347,000 due to rent, utility, and related expenses from the addition of lab and operating space. Depreciation increased $259,000 due to the addition of lab equipment and leasehold improvements. Material costs, including scaffold components and catheter delivery systems, increased $117,000 as we produced supplies for clinical enrollment and continued advanced design and delivery system work. Offsetting these increases, engineering consulting services decreased $59,000 between years due to the timing of process and design work. The remainder of the change in research and development expenses between years resulted from individually immaterial changes in lab supplies and quality control expenses. General and administrative expense increased $348,000, or five percent, for the year ended December 31, 2012 compared to the year ended December 31, 2011. A combination of items contributed to this increase. Personnel costs, including benefits, bonuses, and stock-based compensation expense, increased $604,000 due to headcount additions for accounting and IT personnel, an increase of $222,000 in year-end bonuses to officers under our bonus program, and an increase of $195,000 in stock compensation from ongoing option grants and restricted stock awards. Travel costs increased $84,000 primarily due to our clinical activities. Marketing costs decreased $289,000 between years because non-recurring product and corporate branding activities in 2011 were not repeated in 2012. The remainder of the change in general and administrative expenses between periods was due to individually immaterial changes in legal and patent fees, investor relations costs, office supplies, depreciation, and other overhead expenses. 50 -------------------------------------------------------------------------------- Table of Contents Interest income decreased $96,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011, as a result of lower cash and investment balances combined with lower rates at which we earned interest due to general economic conditions. Liquidity and Capital Resources, Going Concern and Management Plans Sources of Liquidity We are considered a "development stage" enterprise, as we have not yet generated revenues from the sale of products. Although we have been researching and developing new technologies and product applications and we have conducted human clinical trials of our bioresorbable scaffold, we do not anticipate having a product available for sale until 2015 at the earliest. Until we generate revenue from a saleable product, we expect to continue to incur substantial operating losses and experience significant net cash outflows. We have incurred losses since our inception in June 1998 and, through December 31, 2013, we had an accumulated deficit of approximately $201.5 million. In December 2010 we completed an IPO of our common stock on the Australian Securities Exchange in the form of CHESS Depositary Interests, or CDIs, primarily to investors in Australia, the United States, Hong Kong, and London. We issued 7,727,273 shares of common stock for net proceeds of $75.8 million. As of December 31, 2013, we had cash and investments of $20.7 million, which represents the remaining proceeds from our IPO. In order to meet our capital and operating needs through 2014 and beyond, we will need to raise additional capital through equity or debt financings. There can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital expenditures or sell certain assets, including intellectual property assets. During 2013, we developed our current capital raising strategy and plan to put significant effort into completing a financing during 2014 that would provide adequate capital resources to allow us to obtain data from our clinical trials, apply for the CE Marking, and begin commercial product sales, assuming we receive the approval to do so. Cash Flows Below is a summary of our cash flows from operating activities, investing activities, and financing activities for the periods indicated. Year Ended December 31, 2011 2012 2013 (in thousands) Net cash used for operating activities $ (16,938 ) $ (18,661 ) $ (21,943 ) Net cash provided by (used for) investing activities $ (6,103 ) $ (1,946 ) $ 2,265 Net cash provided by financing activities $ 455 $ 322 $ 31 Net decrease in cash and cash equivalents $ (22,586 ) $ (20,285 ) $ (19,647 ) Net Cash Flow from Operating Activities Net cash used for operating activities during 2011 primarily reflects the net loss of $20,908,000, offset by non-cash expenses of $3,089,000 for stock-based compensation, $452,000 of depreciation and amortization, $402,000 from changes in operating assets and liabilities, and $27,000 of other non-cash expense. Net cash used for operating activities during 2012 primarily reflects the net loss of $23,776,000, offset by non-cash expenses of $3,497,000 for stock-based compensation, $860,000 from changes in operating assets and liabilities, $677,000 of depreciation and amortization, and $81,000 of other non-cash expense. Net cash used for operating activities during 2013 primarily reflects the net loss of $27,922,000, offset by non-cash expenses of $4,090,000 for stock-based compensation, $978,000 from changes in operating assets and liabilities, $892,000 of depreciation and amortization, and $19,000 of other non-cash expense. 51 -------------------------------------------------------------------------------- Table of Contents Net Cash Flow from Investing Activities Net cash used for investing activities during 2011 primarily consisted of $5,226,000 for purchases of investments and $883,000 for purchases of property and equipment. Net cash used for investing activities during 2012 primarily consisted of the purchase of property and equipment. Net cash was provided by investing activities during 2013, which consisted of $3,731,000 in net maturities of investments offset by $1,466,000 in purchases of property and equipment. Net Cash Flow from Financing Activities Net cash provided by financing activities during 2011 comprises the refund of $422,000 for taxes withheld from our IPO proceeds in the prior year and $33,000 in proceeds from the issuance of common stock upon exercise of employee stock options. Net cash provided by financing activities in 2012 and 2013 consists of proceeds from the issuance of common stock upon exercise of employee stock options. Operating Capital and Capital Expenditure Requirements To date, we have not commercialized any products. We do not anticipate generating any revenue unless and until we successfully obtain CE Mark or FDA marketing approval for, and begin selling, the ReZolve2 scaffold or one of our other product possibilities. We anticipate that we will continue to incur substantial net losses and cash outflows for the next several years as we continue our development work, conduct and complete preclinical and clinical trials, apply for regulatory approval to sell our products, expand our corporate infrastructure, prepare to commercially manufacture and sell our products, and collect cash from sales of our product(s). We have incurred losses and negative cash flows from operating activities since our inception and, as of December 31, 2013, we had a deficit accumulated during the development stage of $201,509,000. Until we generate a level of revenue to support our cost structure, we expect to continue to incur substantial operating losses and net cash outflows. While we had cash and investments totaling $20,721,000 as of December 31, 2013, we do not believe these resources will be sufficient to meet our operating and capital needs through 2014. The above circumstances raise substantial doubt about our ability to continue as a going concern. We are placing significant effort into completing a financing during the first half of 2014 that would provide adequate capital resources to allow us to obtain data from our clinical trials, apply for the CE Marking, and begin commercial product sales, assuming we receive the regulatory approval to do so. While we are actively engaged in discussions with potential parties to a financing, there can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us and are not overly dilutive to our current security holders. We have developed contingency plans that we would implement in the absence of a financing or in the event a financing were not sufficient to cover our planned needs. These contingency plans primarily include reductions in costs, narrower product development efforts, and reductions in headcount. We would implement our contingency plans in the second quarter of 2014 if our financing efforts have not progressed as we envision. In addition, our forecasts and contingency plans for the period of time through which our financial resources will be adequate to support our operations or reduced operations are based on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. If we are unable to raise sufficient additional capital on the timeline that we plan, in addition to implementing our contingency plans, we may be compelled to sell certain assets, including intellectual property assets. Even if we are able to raise additional capital, we may never become profitable, or if we do attain profitable operations, we may not be able to sustain profitability and positive cash flows on a recurring basis. Because of the numerous risks and uncertainties associated with the development of medical devices, such as our bioresorbable scaffolds, we are unable to estimate the exact amounts of, or timing of, capital outlays and operating expenditures necessary to complete development, continue ongoing preclinical studies, conduct human clinical trials, successfully deliver a commercial product to market, and collect on our trade receivables. Our future funding requirements will depend on many factors, including, but not limited to: † the time and effort it will take to successfully complete testing of the ReZolve2 scaffold and our next generation scaffold; † the scope, enrollment rate, and costs of our human clinical trials; † the time and effort it will take to identify, develop, and scale-up manufacturing processes; † the scope of research and development for any of our other product opportunities; † the cost of filing and prosecuting patentable technologies and defending and enforcing our patent and other intellectual property rights; † the terms and timing of any collaborative, licensing, or other arrangements that we may establish; 52 -------------------------------------------------------------------------------- Table of Contents † the requirements, cost, and timing of regulatory approvals; † the cost and timing of establishing sales, marketing, and distribution capabilities; † the cost of establishing clinical and commercial supplies of our products and products that we may develop; † the effect of competing technological and market developments; and † the cost and ability to license technologies for future development. Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products, and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. Contractual Obligations, Commitments, and Contingencies The following table summarizes our outstanding contractual obligations as of December 31, 2013: Payments Due by Period Less than 1 Year 1-3 Years 3-5 Years Total (in thousands) Operating lease obligations $ 625 $ 1,334 $ 772 $ 2,731 Purchase obligations 222 5 - 227 Total contractual obligations $ 847 $ 1,339 $ 772 $ 2,958 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Recent Accounting Pronouncements None |