United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Or

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission File Number 0-19467

Enpath Medical, Inc.

(Exact name of registrant as specified in its charter)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x

The number of shares of Registrant’s common stock outstanding on August 3, 2006 was 6,238,140.

 

Index

 

		PART I — FINANCIAL INFORMATION
Item 1		Condensed Financial Statements
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3		Quantitative and Qualitative Disclosures About Market Risk
Item 4		Controls and Procedures
		PART II — OTHER INFORMATION
Item 1		Legal Proceedings
Item 1A		Risk Factors
Item 2		Unregistered Sale of Equity Securities and Use of Proceeds
Item 3		Defaults Upon Senior Securities
Item 4		Submission of Matters to a Vote of Security Holders
Item 5		Other Information
Item 6		Exhibits
Signatures
Exhibits

 

 

2

 

Item 1. Condensed Financial Statements

Balance Sheets

		June 30, 2006			December 31, 2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,700,867		$	—
Accounts receivable, less allowance for doubtful accounts of $57,000		4,521,052			3,862,199
Inventories, less allowance for slow-moving inventory of $308,000 and
$258,000, respectively		5,622,443			4,539,265
Prepaid expenses and other assets		252,315			164,790
Income taxes receivable		—			69,887
Notes receivable		90,000			90,000
Deferred income taxes		155,831			234,315
Total current assets		12,342,508			8,960,456
Property and equipment:
Equipment		7,844,897			6,978,553
Office furniture, fixtures and computers		1,902,113			1,870,422
Leasehold improvements		1,728,371			1,708,254
		11,475,381			10,557,229
Less accumulated depreciation and amortization		(6,743,990		)	(5,871,108		)
Net property and equipment		4,731,391			4,686,121
Other non-current assets:
Goodwill		9,487,975			9,487,975
Intangible assets with finite lives, net		4,981,314			5,322,666
Notes receivable		—			45,000
Deferred income taxes		1,467,262			1,548,740
Total other non-current assets		15,936,551			16,404,381
TOTAL ASSETS		$	33,010,450		$	30,050,958
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of note payable to bank		$	1,000,000		$	1,000,000
Current installments of capital lease obligations		—			4,714
Accounts payable		1,946,830			928,807
Accrued compensation		1,038,451			713,903
Other accruals		525,524			263,259
Income taxes payable		110,407			—
Deferred revenue		56,250			56,250
Total current liabilities		4,677,462			2,966,933
Long-term liabilities:
Notes payable to bank, less current maturities		1,233,312			1,833,316
Deferred revenue		196,875			225,000
Total long-term liabilities		1,430,187			2,058,316
Total liabilities		6,107,649			5,025,249
Shareholders’ equity:
Preferred stock-undesignated, authorized 1,000,000 shares		—			—
Common stock-$.01 par value, authorized 20,000,000 shares; issued and
outstanding 6,229,315 and 6,035,380 shares, respectively		62,293			60,353
Additional paid-in capital		23,062,603			22,200,269
Retained earnings		3,777,905			2,765,087
Total shareholders’ equity		26,902,801			25,025,709
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	33,010,450		$	30,050,958

See accompanying notes to condensed financial statements

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Income Statements (Unaudited)

		Three Months Ended						Six Months Ended
		June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Net sales		$	9,530,112		$	7,193,659		$	18,952,801		$	13,810,411
Cost of sales		5,555,814			4,413,522			11,265,484			8,663,749
Gross profit		3,974,298			2,780,137			7,687,317			5,146,662
Operating expenses:
Research and development		1,739,243			1,592,166			2,942,331			2,970,139
Selling, general and administrative		1,634,933			1,466,142			3,094,342			2,922,711
Total operating expenses		3,374,176			3,058,308			6,036,673			5,892,850
Operating income (loss)		600,122			(278,171		)	1,650,644			(746,188		)
Other income (expense):
Interest expense		(48,139		)	(61,151		)	(98,738		)	(124,153		)
Interest income		3,620			—			3,851			—
Other		(1,374		)	(6,392		)	2,424			(13,953		)
Total other income (expense)		(45,893		)	(67,543		)	(92,463		)	(138,106		)
Income (loss) before income taxes		554,229			(345,714		)	1,558,181			(884,294		)
Income tax (expense) benefit		(193,980		)	121,000			(545,363		)	309,503
Net income (loss)		$	360,249		$	(224,714	)	$	1,012,818		$	(574,791	)
Net income (loss) per common share:
Basic		$	0.06		$	(0.04	)	$	0.16		$	(0.10	)
Diluted		$	0.06		$	(0.04	)	$	0.16		$	(0.10	)
Weighted average common and common equivalent shares outstanding
Basic		6,178,509			5,948,430			6,147,895			5,924,135
Diluted		6,324,141			5,948,430			6,282,691			5,924,135

See accompanying notes to condensed financial statements

Statement of Shareholders’ Equity (Unaudited)

							Additional
		Common Stock					Paid-In			Retained
		Shares		Amount			Capital			Earnings			Total
Balances at December 31, 2005		6,035,380		$	60,353		$	22,200,269		$	2,765,087		$	25,025,709
Options exercised		167,155		1,672			618,596			—			620,268
Restricted stock grants		26,780		268			11,707			—			11,975
Stock-based compensation		—		—			153,674			—			153,674
Tax benefit from options exercised		—		—			78,357			—			78,357
Net income for the six months ended June 30, 2006		—		—			—			1,012,818			1,012,818
Balances at June 30, 2006		6,229,315		$	62,293		$	23,062,603		$	3,777,905		$	26,902,801

See accompanying notes to condensed financial statements

4

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Statements of Cash Flows (Unaudited)

		Six Months Ended
		June 30, 2006			June 30, 2005
Cash flows from operating activities:
Net income (loss)		$	1,012,818		$	(574,791	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,314,794			1,215,885
Non-cash consulting services		—			6,096
Non-cash stock-based compensation		165,649			—
Deferred income taxes		159,962			—
Changes in operating assets and liabilities:
Accounts receivable		(658,853		)	332,738
Inventories		(1,083,178		)	(128,095		)
Prepaid expenses and other assets		(87,525		)	(156,398		)
Income taxes receivable		69,887			(291,517		)
Accounts payable		1,018,023			256,189
Accrued expenses		586,813			303,538
Income taxes payable		110,407			—
Deferred revenue		(28,125		)	—
Net cash provided by operating activities		2,580,672			963,645
Cash flows from investing activities:
Purchase of property and equipment		(918,151		)	(691,858		)
Additions to intangible assets		(100,561		)	(149,323		)
Additional cash paid for acquisition		—			(97,771		)
Proceeds from notes receivable		45,000			—
Net cash used in investing activities		(973,712		)	(938,952		)
Cash flows from financing activities:
Principal payments on capital lease obligations		(4,714		)	(40,231		)
Principal payments on long-term debt		(600,004		)	(500,004		)
Borrowings on line of credit		—			118,348
Proceeds from exercise of options and warrants		620,268			34,569
Tax benefit from options exercised		78,357			—
Net cash provided by (used in) financing activities		93,907			(387,318		)
Net increase (decrease) in cash and cash equivalents		1,700,867			(362,625		)
Cash and cash equivalents, beginning of period		—			362,625
Cash and cash equivalents, end of period		$	1,700,867		$	—
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	98,738		$	124,152
Cash paid during the period for income taxes		$	126,750		$	—
Supplemental schedule of noncash investing activity:
Common stock issued in payment of contingent purchase price		$	—		$	391,085

See accompanying notes to condensed inancial statements

 

5

 

Notes to Condensed Financial Statements

Six Months Ended June 30, 2006

(Unaudited)

 

1.  Basis of presentation

The financial statements included in this Form 10-Q have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to these rules and regulations, although management believes the disclosures are adequate to make the information presented not misleading.  These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The financial statements presented herein as of June 30, 2006 and for the three and six month periods ended June 30, 2006 and 2005 reflect, in the opinion of management, all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for these interim periods.

2.  Inventories

Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market.  Inventories consist of the following:

		June 30, 2006			December 31, 2005
Purchased parts and subassemblies		$	3,644,242		$	3,176,993
Work in process		1,249,759			850,124
Finished goods		728,442			512,148
Total Inventory		$	5,622,443		$	4,539,265

 

3.  Finite Life Intangible Assets

Finite life intangible assets at June 30, 2006 and December 31, 2005 are as follows:

				June 30, 2006
		Estimated		Gross			Accumulated
		Lives (Years)		Carrying Amount			Amortization			Net Value
Licensed technology		2		$	115,000		$	115,000		$	—
Core technology		12		2,650,000			588,896			2,061,104
Developed technology		8		1,500,000			500,000			1,000,000
Customer relationships		6		615,000			273,344			341,656
Patents and inventions		5 to 9		1,748,925			720,746			1,028,179
Trade name		30		545,000			48,448			496,552
Other		5 to 10		99,175			45,352			53,823
Totals				$	7,273,100		$	2,291,786		$	4,981,314

 

				December 31, 2005
		Estimated		Gross			Accumulated
		Lives (Years)		Carrying Amount			Amortization			Net Value
Licensed technology		2		$	115,000		$	86,250		$	28,750
Core technology		12		2,650,000			478,478			2,171,522
Developed technology		8		1,500,000			406,250			1,093,750
Customer relationships		6		615,000			222,092			392,908
Patents and inventions		5 to 9		1,650,968			581,020			1,069,948
Trade name		30		545,000			39,364			505,636
Other		5 to 10		96,571			36,419			60,152
Totals				$	7,172,539		$	1,849,873		$	5,322,666

 

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Amortization expense related to these assets is as follows:

 

Amortization expense on these assets over the next five fiscal years is estimated to be as follows:

 

4.  Safety Needle Asset Impairment

On June 30, 2004, the Company recorded a one-time impairment charge of approximately $2.8 million related to its safety needle assets.  In addition, the Company re-evaluated the future estimated lives of the safety needle assets and began depreciating the new fair value of these assets using the straight-line method over the terms shown below.

		Preimpairment									Revised		Net Book
		Net Book Value			Impairment			Fair Value			Life		Value
Item		June 30, 2004			Write-Off			June 30, 2004			(Years)		June 30, 2006
License Agreement		$	1,379,280		$	1,264,280		$	115,000		2		$	—
Automation Equipment for Safety Needle		1,550,215			1,370,215			180,000			5		108,000
Safety Needle Molds and Tooling		194,704			174,704			20,000			2		—
Totals		$	3,124,199		$	2,809,199		$	315,000				$	108,000

 

While the Company continues to sell safety needles and is reducing inventory levels of these products, the Company has determined to phase out of this product line in the future.  The Company is currently looking at possible buyers for this product line and expects to fully realize the adjusted investment remaining in the safety needle inventory and equipment.  On June 30, 2006, in addition to a carrying value of $108,000 for its safety needle assets listed above, the Company had safety needle inventory consisting of components and finished goods totaling $177,000 which amounted to 3.1% of total Company inventory.  If the Company is not able to find a buyer for this product line and actual sales drop off dramatically, the adjusted investment in this product totaling approximately $285,000 (assets plus inventory) at June 30, 2006 may not be fully realizable in the future.

5.  Net Income (Loss) Per Common Share

Basic per-share amounts are computed, generally, by dividing net income (loss) by the weighted-average number of common shares outstanding.  Diluted per-share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless their effect is not dilutive which would be the case when the Company is in a loss situation.

6.  Income Taxes

Income tax expense for the three and six month periods ended June 30, 2006 and 2005, was computed using an estimated combined federal and state tax rate of 35%.  The overall tax rate for the remainder of 2006 is expected to remain at approximately 35% as management anticipates being able to continue to utilize available credits.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in our financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

7.  Stock-Based Compensation

We currently have two active stock-based compensations plans under which there are awards still available for grant:  The 1999 Incentive Stock Option Plan and the 1999 Non-Employee Director and Medical Advisory Board Stock Option Plan.  We have two additional plans that had stock option activity during 2006, including the exercise of stock options and forfeitures.  Summary information related to all plans is shown below.

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												Available
Plan		Reserved		Granted		Forfeited		Excercised		Outstanding		To Grant
1989 Incentive Plan		400,000		581,925		(342,325	)	(239,600	)	0		0
1991 Non-Qualified Plan		280,000		299,500		(19,500	)	(272,500	)	7,500		0
1999 Incentive Plan		1,100,000		1,197,660		(349,530	)	(171,948	)	676,182		251,870
1999 Non-Employee Director Plan		400,000		244,500		(25,000	)	(63,500	)	156,000		180,500
Totals		2,180,000		2,323,585		(736,355	)	(747,548	)	839,682		432,370

 

These plans are administered by the compensation committee of our Board of Directors, which selects persons eligible to receive awards and determines the number of shares and options subject to each award, the terms, conditions, performance measures and other provisions of the awards.  Readers should refer to Note 8 of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2005 for additional information related to these stock-based compensation plans.

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (FAS 123R) utilizing the modified prospective approach.  Prior to the adoption of FAS 123R, we accounted for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value method), and accordingly, recognized no compensation expense for stock option grants.

Under the modified prospective approach, FAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled.  Under the modified prospective approach, compensation cost recognized in the three and six month periods ended June 30, 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.  We incurred a total of $109,159 and $165,649 in compensation expense for the three and six month periods ended June 30, 2006 as a result of our adoption of FAS 123R.

As a result of adopting FAS 123R on January 1, 2006, our income before taxes, net income and basic and diluted earnings per share for the three and six months ended June 30, 2006 were lower than if we had continued to account for stock-based compensation under APB Opinion No. 25 for our stock option grants.  The “As Reported” column presents our results in accordance with generally accepted accounting principles.  The “Pro forma Under APB 25” column shows what our 2006 results would have been had we continued to report our results in accordance with APB 25, that is without the $109,159 and $165,649 of compensation expenses.  We intend to report results of our remaining 2006 quarters in a similar manner because we believe this presentation facilitates a quarter-to-quarter understanding of the effect of 123R on our 2006 results (see chart below).

 

		Three Months Ended						Six Months Ended
		June 30, 2006						June 30, 2006
					Pro forma						Pro forma
		As Reported			Under APB 25			As Reported			Under APB 25
Income before taxes		554,229			554,229			1,558,181			1,558,181
Add back compensation expense		0			109,159			0			165,649
Adjusted income before taxes		554,229			663,388			1,558,181			1,723,830
Income taxes		(193,980		)	(232,186		)	(545,363		)	(603,341		)
Net income		360,249			431,202			1,012,818			1,120,490
Net income (loss) per common share
Basic		$	0.06		$	0.07		$	0.16		$	0.18
Diluted		$	0.06		$	0.07		$	0.16		$	0.18
Weighted average common and common equivalent shares outstanding
Basic		6,178,509			6,178,509			6,147,895			6,147,895
Diluted		6,324,141			6,324,141			6,282,691			6,282,691

 

We receive a tax deduction for certain stock option exercises during the period in which options are exercised, generally for the excess of the prices at which the options are exercised or sold over the exercise prices of the options.  Prior to the

8

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adoption of FAS 123R, we reported all tax benefits resulting from the exercise of stock options as operating cash flows in our condensed consolidated statements of cash flows.  In accordance with FAS 123R, for the six months ended June 30, 2006, we changed our condensed statements of cash flows presentation to report the tax benefits from the exercise of stock options as financing cash flows.  Proceeds from the exercise of stock options were $620,268 for the six month periods ended June 30, 2006, while the actual income tax benefit realized from stock option exercises was $78,357 for the six months ended and was reported as financing cash flows rather than operating cash flows.

The following table illustrates the effect on operating results and per share information had the Company accounted for stock-based compensation in accordance with FAS 123R for the three and six months ended June 30, 2005.  We intend to show similar 2005 pro forma information in our future 2006 reports because we believe this presentation facilitates a quarter-to-quarter understanding of the effect of 123R on our 2006 results.

		Three Months			Six Months
		Ended			Ended
		June 30, 2005			June 30, 2005
Net loss as reported		(224,714		)	(574,791		)
Deduct: Total stock-based employee compensation (expense determined under the fair value based method for all awards) ***		(1,605,121		)	(1,765,854		)
Pro forma net loss		(1,829,835		)	(2,340,645		)
Net loss per share:
Basic net loss per share-as reported		$	(0.04	)	$	(0.10	)
Basic net loss per share-pro forma		$	(0.31	)	$	(0.40	)
Diluted net loss per share-as reported		$	(0.04	)	$	(0.10	)
Diluted net loss per share-pro forma		$	(0.31	)	$	(0.40	)
Weighted average common and common equivalent shares outstanding
Basic		5,948,430			5,924,135
Diluted		5,948,430			5,924,135

***      Large amounts are due to accelerated vesting of all outstanding incentive options on April 28, 2005 (see Critical Accounting Policies and Estimates - stock based compensation and accelerated vesting section of this Form 10-Q for further explanation).

Stock Options

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Expected dividend yield		0		%	0		%	0		%	0		%
Expected stock price volatility		64.4		%	74.3		%	73.9		%	46.4		%
Risk-free interest rate		4.9		%	4.0		%	4.4		%	3.8		%
Expected life of options (years)		6			7			6			6
Weighted average fair value of options granted		$	7.26		$	4.51		$	6.25		$	4.15

 

The assumptions above are based on multiple factors, including historical exercise patterns of employees in relatively homogenous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and the historical volatility of our stock price.

At June 30, 2006, there was approximately $1,045,000 of unrecognized compensation cost related to share-based payments that we expect to recognize over a weighted-average period of 3.5 years.

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The following table represents stock option activity for the six months ended June 30, 2006:

 

							Weighted Avg
				Weighted Avg			Remaining
		# Shares		Exercise Price			Contract Life
Options outstanding at beginning of period		828,407		$	8.55
Options granted		199,000		9.99
Options exercised		(167,155	)	3.71
Options surrendered		(47,350	)	11.49
Options outstanding at end of period		812,902		$	9.73		4.07
Options exercisable at end of period		613,067		$	9.69		3.48

 

At June 30, 2006, shares available under existing plans for future stock option grants or restricted stock grants to employees were 251,870 and shares available under existing plans for future stock option grants to directors were 180,500.

Restricted Stock

Our 1999 Incentive Stock Option plan and 1999 Non-Employee Director and Medical Advisory Board Stock Option plan allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed.  The unearned stock-based compensation related to these awards is being amortized to compensation expense over the period the restrictions lapse (generally five years).  The share based expense for these awards was determined based on the market price of our stock on the date of grant applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.  As of June 30, 2006, we have unearned stock-based compensation of approximately $160,000 associated with these awards.

The following table represents the compensation expense that was included in general and administrative expenses and cost of revenues in the accompanying condensed statements of operations related to these restricted stock grants for the periods indicated below:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2006			2005			2006			2005
Stock-based compensation expense		$	8,810		$	—		$	11,975		$	—

 

The following table presents the restricted shares that were granted and outstanding as of the six months ended June 30, 2006 and the twelve months ended December 31, 2005:

 

Restricted Stock		June 30, 2006		December 31, 2005
Beginning shares outstanding		4,215		0
Granted during and as of the period ended		22,945		4,215
Exercised during and as of the period ended		0		0
Forfeited during and as of the period ended		(380	)	0
Ending Shares Outstanding		26,780		4,215

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations and financial condition.  This discussion should be read in conjunction with the accompanying financial statements and footnotes.

Overview

We are a medical products company engaged in:

·              designing, developing, manufacturing and marketing of percutaneous vessel introducers, implantable stimulation leads, steerable catheter delivery products and accessories for the cardiac rhythm management (“CRM”), neuromodulation and interventional radiology markets, and;

·              manufacturing of medical devices and components for other medical product companies on a contract basis.

We manufacture and market a family of percutaneous venous vessel introducers with proprietary features, as well as our own proprietary valved introducer.  Vessel introducers enable physicians to create a conduit through which they can insert infusion catheters, implantable ports and pacemaker leads into a blood vessel.  These products make up our Introducer product line.

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We also develop and manufacture advanced delivery catheters that have a “fixed curve” or an articulating distal tip section that can be manipulated to enable the health care professional to access parts of the patient’s anatomy  (such as the left ventricle of the heart) that cannot be reached by traditional introducers. These sophisticated advanced delivery catheters are designed and manufactured to meet the unique needs of each procedure being performed.  These products make up our Advanced Delivery Catheter product line.

We also develop and manufacture proprietary and custom designed implantable stimulation leads, adapters and delivery systems for the cardiac and neuromodulation markets.  These products make up our Lead Technologies product line.

Through December 31, 2005, we combined the sales of the Introducer product line and the Advanced Delivery Catheter product line under the heading Delivery Systems because the products were being produced in our Plymouth facility and we listed the sales of the Lead Technologies product line under the heading Lead Technologies because the products were being produced in our Bloomington facility.

Because each of these three product lines have unique customer requirements, we have assigned general managers to each of the three product lines beginning in 2006 in order to provide more product line focus.  As part of this process, some of our product sales that were classified as Advanced Delivery in past periods have been moved into the Introducer product line due to product focus and we have adjusted the product line sales categories from 2005 in order to give a better product line comparison going forward.  Overall, the business is aggregated into one reportable segment: the manufacture and sale of medical devices.  We support all sales activities with one sales and marketing department and our general and administrative function has responsibility for the entire company.

Results of Operations

For the three and six month periods ended June 30, 2006 and 2005

A summary of our net sales by product line and overall gross profit is shown below:

 

 

 

Sales of our introducer products increased for both the three and six month periods ended June 30, 2006 when compared to the same periods in 2005.  This increase was primarily due to continued increased sales to both existing and new customers, including significant orders from our new Cardiac Rhythm Management (“CRM”) customer in Europe.  We expect introducer sales to remain strong in the second half of 2006 but with a run rate slightly lower than the first half of 2006.  We anticipate that our introducer product sales will increase when we launch our next generation valved introducer product to the pacing market in the fourth quarter of 2006.

Sales of our advanced delivery catheter products increased for both the three and six month periods ending June 30, 2006 when compared to the same periods in 2005.  This increase was primarily due to a large initial stocking order from one OEM customer in the first quarter of 2006 and continued inventory building orders from both this OEM customer and Bard

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EP.  Sales in the second half of 2006 will be primarily dependent on the success of these two customers in penetrating their respective markets.  We are continuing our development efforts with several other OEM customers on sophisticated delivery catheters that may have utility in the treatment of atrial fibrillation, percutaneous mitral valve repair, carotid stent placement, and a variety of renal and peripheral interventions.  We are also developing delivery catheters that could be used in conjunction with our stimulation lead products to more efficiently deliver an epicardial or a neurostimulation lead.

Sales of our lead technologies products decreased for both the three and six month periods ending June 30, 2006 when compared to the same periods in 2005.  The decrease in the second quarter was primarily due to decreased accessory and contract manufacturing product sales to several of our OEM customers, as well as decreased engineering service billings during the comparable periods.  This decrease was off-set for the six month period by increased sales of leads and adaptors from the first quarter.  One of our partners is successfully selling our steroid epicardial lead in Europe and we have continued to see increased orders for this product.  This partner also commenced selling the FasTac Flex delivery tool in Europe late in 2005 and plans to evaluate the potential launch of the FasTac Flex in the U.S.  We also experienced increased sales of our MyoPore epicardial lead in the United States to several other partners in the first six months of 2006.  We expect to see growth in our lead technologies product sales in 2006 primarily due to continued growth in sales of the steroid lead in Europe, as well as the potential launch in the U.S. of our FasTac Flex delivery tool for improved efficiency when placing the epicardial lead.

Gross profit, both as a dollar amount and as a percent of sales increased for both the three and six month periods ending June 30, 2006 when compared to the same periods in 2005.  This increase was primarily due to the higher volume of introducer sales and manufacturing activity which allowed us to utilize our existing overhead more effectively.  We expect our gross margins as a percent of sales to remain in the 38% to 40% range during 2006 as we continue to improve manufacturing yields and efficiencies on our advanced delivery catheter product line.

Combined Expenses for the three and six month periods ended June 30, 2006 and 2005

 

Combined Expenses		Q2 2006			Q2 2005			Change
Research and Development		$	1,739,000		$	1,592,000		$	147,000
Sales and Marketing		490,000			544,000			(54,000		)
General and Administrative		1,145,000			922,000			223,000
Interest Income		(4,000		)	0			(4,000		)
Interest Expense		48,000			61,000			(13,000		)
Other		2,000			7,000			(5,000		)
Total Shared Expenses		$	3,420,000		$	3,126,000		$	294,000
Total Sales		$	9,530,000		$	7,194,000

 

Percent of Sales		Q2 2006		Q2 2005
Research and Development		18.2	%	22.1	%
Sales and Marketing		5.1	%	7.6	%
General and Administrative		12.0	%	12.8	%
Interest Income		(0.0	%)	0.0	%
Interest Expense		0.5	%	0.8	%
Other		0.0	%	0.1	%

 

Combined Expenses		YTD 2006			YTD 2005			Change
Research and Development		$	2,942,000		$	2,970,000		$	(28,000	)
Sales and Marketing		870,000			980,000			(110,000		)
General and Administrative		2,224,000			1,943,000			281,000
Interest Income		(4,000		)	0			(4,000		)
Interest Expense		99,000			124,000			(25,000		)
Other		(2,000		)	14,000			(16,000		)
Total Shared Expenses		$	6,129,000		$	6,031,000		$	98,000
Total Sales		$	18,953,000		$	13,810,000

 

Percent of Sales		YTD 2006		YTD 2005
Research and Development		15.5	%	21.5	%
Sales and Marketing		4.6	%	7.1	%
General and Administrative		11.7	%	14.1	%
Interest Income		(0.0	)%	0.0	%
Interest Expense		0.5	%	0.9	%
Other		(0.0	)%	0.1	%

 

 

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