10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2009

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: 000-51772

Cardica, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	94-3287832
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
900 Saginaw Drive
Redwood City, California	94063
(Address of Principal Executive Offices)	(Zip Code)

(650) 364-9975
(Registrant’s Telephone Number, Including Area Code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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.

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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

On February 3, 2010, there were 23,947,631 shares of common stock, par value $0.001 per share, of Cardica, Inc. outstanding.

CARDICA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009

INDEX

Item	Page
PART I. FINANCIAL INFORMATION
1. Condensed Financial Statements (unaudited)
a. Condensed Balance Sheets at December 31, 2009 and June 30, 2009		3
b. Condensed Statements of Operations for the three and six months ended December 31, 2009 and 2008		4
c. Condensed Statements of Cash Flows for the six months ended December 31, 2009 and 2008		5
d. Notes to Condensed Financial Statements		6
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
3. Quantitative and Qualitative Disclosures About Market Risk		21
4T. Controls and Procedures		21
PART II. OTHER INFORMATION
1A. Risk Factors		21
4. Submission of Matters to a Vote of Security Holders		41
6. Exhibits		42
SIGNATURES		43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARDICA, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)

	December 31,			June 30,
	2009			2009
	(unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	11,089		$	5,328
Accounts receivable		588			624
Inventories		1,965			1,895
Prepaid expenses and other current assets		222			321
Total current assets		13,864			8,168
Property and equipment, net		1,700			1,862
Restricted cash		154			310
Total assets	$	15,718		$	10,340
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	376		$	551
Accrued compensation		422			319
Other accrued liabilities		386			637
Deferred development revenue		403			527
Note payable		2,000			2,000
Total current liabilities		3,587			4,034
Other non-current liabilities		50			44
Total liabilities		3,637			4,078
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.001 par value, 45,000,000 shares authorized 23,947,631 and 15,825,549 shares issued and outstanding at December 31, 2009 and June 30, 2009, respectively		24			16
Additional paid-in capital		126,950			116,272
Treasury stock at cost (66,227 shares at December 31, 2009 and June 30, 2009)		(596	)		(596	)
Deferred stock compensation		—			(22	)
Accumulated deficit		(114,297	)		(109,408	)
Total stockholders’ equity		12,081			6,262
Total liabilities and stockholders’ equity	$	15,718		$	10,340

See accompanying notes to the condensed financial statements.

3

CARDICA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2009			2008			2009			2008
Net revenue:
Product sales, net	$	1,023		$	1,995		$	1,840		$	3,555
Development revenue		19			928			124			1,451
Royalty revenue		22			21			47			44
Total net revenue		1,064			2,944			2,011			5,050
Operating costs and expenses:
Cost of product sales		699			1,463			1,539			2,573
Research and development		1,221			2,079			2,364			4,404
Selling, general and administrative		1,361			4,109			2,965			8,001
Total operating costs and expenses		3,281			7,651			6,868			14,978
Loss from operations		(2,217	)		(4,707	)		(4,857	)		(9,928	)
Interest income		14			43			19			141
Interest expense		(30	)		(30	)		(60	)		(60	)
Other income (expense)		7			(3	)		8			(4	)
Net loss	$	(2,226	)	$	(4,697	)	$	(4,890	)	$	(9,851	)
Basic and diluted net loss per common share	$	(0.09	)	$	(0.30	)	$	(0.25	)	$	(0.63	)
Shares used in computing basic and diluted net loss per common share		23,947			15,781			19,874			15,761

See accompanying notes to the condensed financial statements.

4

CARDICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

	Six months ended
	December 31,
	2009			2008
Operating activities:
Net loss	$	(4,890	)	$	(9,851	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		431			436
Loss on disposal of property and equipment		53			11
Stock-based compensation expenses		791			1,128
Changes in assets and liabilities:
Accounts receivable		36			(191	)
Prepaid expenses and other current assets		99			120
Inventories		(70	)		(863	)
Restricted cash		156			—
Accounts payable and other accrued liabilities		(425	)		(897	)
Accrued compensation		103			(358	)
Deferred development revenue		(124	)		522
Deferred rent		6			2
Leasehold improvement obligation		—			(11	)
Net cash used in operating activities		(3,834	)		(9,952	)
Investing activities:
Purchases of property and equipment		(323	)		(370	)
Purchases of short-term investments		—			(4,971	)
Proceeds from maturities of short-term investments		—			16,030
Net cash provided by (used in) investing activities		(323	)		10,689
Financing activities:
Proceeds from issuance of common stock pursuant to the exercise of stock options for cash		—			128
Proceeds from sale of common stock, net of issuance costs		9,918			—
Net cash provided by financing activities		9,918			128
Net increase in cash and cash equivalents		5,761			865
Cash and cash equivalents at beginning of period		5,328			9,221
Cash and cash equivalents at end of period	$	11,089		$	10,086

See accompanying notes to the condensed financial statements.

5

CARDICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2009
(unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Cardica, Inc. (“Cardica”, the “Company”, “we”, “our” or “us”) was incorporated in the state of Delaware on October 15, 1997, as Vascular Innovations, Inc. On November 26, 2001, the Company changed its name to Cardica, Inc. The Company designs, manufactures and markets proprietary automated anastomotic systems used in surgical procedures. The Company also has recently expanded its business to include the development of an endoscopic microcutter intended for use by general, thoracic, gynecologic, bariatric and urologic surgeons.

Basis of Presentation

The accompanying unaudited condensed financial statements of Cardica have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period. In preparing these financial statements the Company evaluated subsequent events through February 9, 2010, the day the financial statements were issued.

The accompanying condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2009 filed on Form 10-K with the Securities and Exchange Commission on September 18, 2009.

Recent Accounting Pronouncements

Effective July 1, 2009, the Company adopted “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASC 105-10”), formerly Statement of Financial Accounting Standards (“SFAS No. 168”). ASC 105-10 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities which are presented in conformity with GAAP. It establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. The Company has updated all existing GAAP references in these condensed financial statements in accordance with the Codification. As the Codification was not intended to change or alter existing GAAP, the adoption of the Codification did not have any impact on the amounts included in Company’s condensed financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates.

6

Revenue Recognition

The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company includes shipping and handling costs in cost of product sales.

Each of the Company’s development contracts with Cook Incorporated is accounted for as a separate arrangement. Revenue generated from development contracts is recognized when it is earned and non-refundable upon receipt of milestone payments or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on a project are refundable and are recorded as deferred revenue until such time as the related development expenses plus overhead costs for certain project activities are incurred.

Inventories

Inventories are recorded at the lower of cost or market value on a first-in, first-out basis. The Company periodically assesses the recoverability of all inventories, including materials, work-in-process and finished goods, to determine whether adjustments for impairment are required. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Further reduced demand may result in the need for additional inventory write-downs in the near term. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory.

Clinical Trial Accounting

Clinical trial costs are a component of research and development expenses and include fees paid to participating hospitals and other service providers that conduct clinical trial activities with patients on our behalf and the cost of clinical trial insurance. The various costs of the trial are contractually based on the nature of the services, and we accrue the costs as the services are provided. Accrued costs are based on estimates of the work completed under the service agreements, patient enrollment and past experience with similar contracts. Our estimate of the work completed and associated costs to be accrued includes our assessment of information received from our third-party service providers and the overall status of our clinical trial activities. If we have incomplete or inaccurate information, we may underestimate costs associated with various trials at a given point in time. Although our experience in estimating these costs is limited, the difference between accrued expenses based on our estimates and actual expenses have not been material to date.

7

NOTE 2 — STOCKHOLDERS’ EQUITY

Common Stock

On September 30, 2009, institutional and individual investors, including existing stockholders, purchased approximately $10.2 million of the Company’s common stock and warrants to purchase the Company’s common stock in a private placement. The net proceeds were approximately $9.9 million after offering expenses. Under the terms of the purchase agreement with these investors, the Company sold 8,142,082 units at a purchase price of $1.2525 per unit, with each unit consisting of one share of common stock and one warrant to purchase 0.50 of a share of common stock, or warrants to purchase an aggregate of 4,071,046 shares of the Company’s common stock. The warrants are exercisable commencing on April 1, 2010 at $1.45 per share and will expire on September 30, 2014.

Stock Based Compensation

The Company accounts for employee and director share-based compensation plans, including stock options and restricted stock units, pursuant to ASC 718 “Compensation — Stock Compensation” (formerly SFAS No. 123R “Share-Based Payment”). Stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The Company recognizes compensation expense using the accelerated method.

The Company selected the Black-Scholes option pricing model for determining the estimated fair value for share-based awards. The use of the Black-Scholes model requires the use of assumptions including expected volatility, risk-free interest rate and expected dividends. The Company used the following assumptions:

	Three months ended				Six months ended
	December 31,				December 31,
	2009		2008		2009		2008
Risk-free interest rate		1.74% – 2.08%		1.72%		1.70% – 2.25%		2.57%
Dividend yield		—		—		—		—
Weighted-average expected term	3.77 – 4.52 years			4.51 years	3.50 – 4.52 years			4.53 years
Expected volatility		64.5% – 65.1%		58.5%		64.5% – 81.2%		55.7%

Since the Company has limited historical data on volatility of its stock, the expected volatility used in fiscal years 2010 and 2009 is based on volatility of similar entities (referred to as “guideline” companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size, and financial leverage.

The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate for the expected term of each option is based on a risk-free zero-coupon spot interest rate at the time of grant. The Company recognizes the stock compensation expense for option awards using the accelerated method over the requisite service period of the award, which generally equals the vesting period of each grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. The Company estimates forfeitures in calculating the expense related to stock-based compensation. The Company recorded fair-value stock-based compensation expenses of $224,000, or $0.01 per share, and $470,000, or $0.03 per share, for the three months ended December 31, 2009 and 2008, respectively and $791,000, or $0.04 per share, and $984,000, or $0.06 per share, for the six months ended December 31, 2009 and 2008, respectively. Total compensation expense related to unvested awards not yet recognized is approximately $1.5 million at December 31, 2009 and is expected to be recognized over a weighted average period of 2.5 years.

8

Included in the statement of operations are the following non-cash stock-based compensation amounts for the periods reported, including non-employee stock based compensation expense and the amortization of deferred compensation (in thousands).

	Three months ended				Six months ended
	December 31,				December 31,
	2009		2008		2009		2008
Cost of product sales	$	48	$	53	$	152	$	87
Research and development		81		143		249		334
Selling, general and administrative		95		345		390		707
Total	$	224	$	541	$	791	$	1,128

Activity in our Stock-Based Compensation Plans:

				Outstanding Options
	Shares						Weighted- Average Exercise
	Available for			Number of			Price Per
	Grant			Shares			Share
Balance at June 30, 2009		618,594			1,446,149		$	5.65
Additional shares reserved		1,750,000
Options granted		(2,021,785	)		2,021,785			1.25
Options forfeited		338,078			(338,078	)		4.44
Stock awards forfeited		115,500			—			—
Balance at December 31, 2009		800,387			3,129,856		$	2.84

The following table summarizes information about options outstanding and vested and exercisable at December 31, 2009:

			Weighted-
			Average
			Remaining		Number
	Number		Contractual		Vested and
Exercise Price	Outstanding		Life		Exercisable
$1.12		1,287,211		6.86		30,330
$1.21 – $1.55		706,396		6.57		348,572
$2.25 – $6.03		683,275		3.65		626,067
$6.75 – $9.00		191,062		4.37		163,863
$9.20		239,680		5.37		93,784
$9.75		22,232		4.11		22,232
Total outstanding		3,129,856		5.81		1,284,848
Options vested and expected to vest		2,767,147

Restricted Stock Units and Awards

The following table summarizes information about restricted stock activity for the six months ended December 31, 2009.

Non-vested restricted stock at June 30, 2009	228,850
Forfeited	(115,500	)
Non-vested restricted stock at December 31, 2009	113,350

9

The fair value of each restricted stock unit and award is estimated based upon the closing price of the Company’s common stock on the grant date. Share-based compensation expense related to restricted stock units and awards is recognized over the requisite service period as adjusted for estimated forfeitures.

NOTE 3 — NET LOSS PER SHARE

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period less the weighted average non-vested common shares subject to repurchase and without consideration for potential common shares. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period less the weighted average non-vested common shares subject to repurchase plus dilutive potential common shares for the period determined using the treasury-stock method. For purposes of this calculation, options and warrants to purchase stock and non-vested restricted stock awards are considered to be potential common shares and are only included in the calculation of diluted net loss per common share when their effect is dilutive (in thousands, except per share data):

	Three months ended						Six months ended
	December 31,						December 31,
	2009			2008			2009			2008
Numerator:
Net loss	$	(2,226	)	$	(4,697	)	$	(4,890	)	$	(9,851	)
Denominator:
Weighted-average common shares outstanding		23,950			15,817			19,888			15,806
Less: Weighted-average non-vested restricted shares		(3	)		(36	)		(14	)		(45	)
Denominator for basic and diluted net loss per common share		23,947			15,781			19,874			15,761
Basic and diluted net loss per common share	$	(0.09	)	$	(0.30	)	$	(0.25	)	$	(0.63	)

Outstanding securities not included in historical diluted net loss per common share calculation because their effect would be antidilutive (in thousands):

	December 31,
	2009		2008
Options to purchase common stock		3,160		1,793
Non-vested restricted stock units and awards		148		35
Warrants		4,719		680
Total		8,027		2,508

NOTE 4 — COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and unrealized gains/losses on available-for-sale securities.

Comprehensive loss and its components for the three and six month periods ended December 31, 2009 and 2008 were as follows (in thousands):

	Three months ended						Six months ended
	December 31,						December 31,
	2009			2008			2009			2008
Net loss	$	(2,226	)	$	(4,697	)	$	(4,890	)	$	(9,851	)
Change in unrealized loss on investments		—			6			—			15
Comprehensive loss	$	(2,226	)	$	(4,691	)	$	(4,890	)	$	(9,836	)

10

NOTE 5 — FAIR VALUE MEASUREMENTS

ASC 820 (formerly SFAS No. 157) “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1 —	Quoted prices in active markets for identical assets or liabilities.
Level 2 —	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 —	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

All assets that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. These assets measured at fair value are summarized below (in thousands):

	As of December 31, 2009
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	511	$	—	$	—	$	511
Total assets at fair value	$	511	$	—	$	—	$	511

	As of June 30, 2009
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	510	$	—	$	—	$	510
Total assets at fair value	$	510	$	—	$	—	$	510

Cash equivalents, consisting of funds held in money market instruments, are reported at their current carrying value which approximates fair value due to the short-term nature of these instruments. Cash equivalents are included in Level 1 as their fair value is based on market prices/quotes for identical assets in active markets.

As of December 31, 2009, the Company’s material financial assets and liabilities not carried at fair value, including its trade accounts receivable, accounts payable, deferred development revenue and note payable, are reported at their current carrying values.

11

NOTE 6 — INVENTORIES

The Company recorded a lower of cost or market inventory write-down of $384,000 (an increase of $86,000 from the amount recorded at September 30, 2009 which was $298,000) primarily on its PAS-Port inventory due to higher product cost of units manufactured for the three month period ended December 31, 2009. In the fourth quarter of the fiscal year ended June 30, 2009, the Company recorded a $248,000 write-down for excess and obsolete C-Port system inventory. In addition, for the three months ended December 31, 2009 a $29,000 write-down was recorded for excess and obsolete inventory.

Inventories consisted of the following (in thousands):

	December 31,		June 30,
	2009		2009
Raw materials	$	249	$	256
Work in progress		113		404
Finished goods		1,603		1,235
	$	1,965	$	1,895

NOTE 7 — LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

In June 2007, the Company entered into, and in September 2007 and in June 2009 amended, a license, development and commercialization agreement with Cook Incorporated (“Cook”), to develop and commercialize a specialized device, referred to as the patent foramen ovales, or “PFO” device, designed to close holes in the heart from genetic heart defects. Under the agreement, Cook funds certain development activities and the Company and Cook jointly develop the device. Once developed, Cook receives an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO device. Under this agreement, the Company received payments totaling approximately $3.2 million. The Company recorded as development revenue under the agreement a total of $19,000 and $928,000 for the three month periods ended December 31, 2009 and 2008, respectively and $124,000 and $1.5 million for the six month periods ended December 31, 2009 and 2008, respectively. A total of $403,000 under this agreement has been recorded as deferred development revenue on the balance sheet as of December 31, 2009. The Company is entitled to receive from Cook up to a total of an additional $275,000 in future payments if development milestones under the agreement are achieved. Amounts paid but not yet earned on the project are refundable and are recorded as deferred revenue until such time as the related development expenses for certain project activities are incurred. The Company would also be entitled to receive a royalty based on Cook’s annual worldwide sales of the PFO device, if any. During the quarter ending December 31, 2009, the Company and Cook mutually agreed to temporarily suspend work on the PFO project.

On December 9, 2005, the Company entered into, and in September 2007 amended and in July 2009 amended and partially terminated, an agreement with Cook to develop the Cook Vascular Closure Device. Under the agreement, Cook funded certain development activities, and the Company and Cook jointly developed the device, under the direction of a Development Committee that included representatives from each party. Under the original agreement and the first amendment in September 2007, Cook received an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the Cook Vascular Closure Device for medical procedures in any part of the body. Under this agreement, the Company received payments totaling approximately $5.3 million. The Company recorded as development revenue under the agreement a total of $0 and $497,000 for the three month periods ended December 31, 2009 and 2008, respectively and $0 and $727,000 for the six month periods ended December 31, 2009 and 2008, respectively. In July 2009, the Company entered into a partial termination and second amendment of this agreement to terminate Cook’s participation in the project and to provide to Cook a royalty on net sales of the Cook Vascular Closure Device if Cardica successfully commercializes the product. The remaining deferred revenue balance related to this project was recognized as revenue in the fourth quarter of fiscal 2009 as the Company had completed all of its activities under the agreement and no amounts are refundable to Cook under the partial termination agreement.

12

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth in Item 1A below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

Overview

Historically, our business focused on the design, manufacture and marketing of proprietary automated anastomotic systems used by cardiac surgeons to perform coronary bypass surgery. Recently, we have expanded our business to include the development of an endoscopic microcutter intended for use by general, thoracic, gynecologic, bariatric and urologic surgeons. Unless and until this product is developed and cleared for marketing in the United States or elsewhere, or we enter into an arrangement with a development and commercialization partner that provides us with development revenue, we will have ongoing costs related thereto without related revenue.

We currently sell our C-Port^® Distal Anastomosis Systems, or C-Port systems, in the United States and Europe. As of December 31, 2009, more than 10,000 C-Port systems have been sold in the United States and Europe. We also currently sell our PAS-Port^® Proximal Anastomosis System, or “PAS-Port system”, in the United States and in Europe and Japan through distributors. The PAS-Port system is used to perform a proximal anastomosis, which is the connection of a bypass graft vessel to the aorta or other source of blood. We received 510(k) clearance to market our PAS-Port system in the United States in September 2008. As of December 31, 2009, more than 17,000 PAS-Port systems had been sold in the United States, Europe and Japan. In addition to our commercialized cardiac surgery products, we have commenced development of the Cardica Microcutter ES8, a multi-fire endolinear microcutter device based on our proprietary “staple-on-a-strip” technology, which would expand our commercial opportunity into additional surgical markets. We are in discussions with multiple potential development and commercialization partners to advance further development of the Cardica Microcutter ES8 and other potential products in this product line, and we may enter into an arrangement to pursue further development of this product with a partner.

We have added independent distributors and manufacturers’ representatives to support a small core direct sales team for our C-Port systems and PAS-Port system in the United States to contain sales costs while continuing to serve our customers and potential customers for our automated anastomosis product line. We have shifted our development efforts to focus on the Cardica Microcutter ES8.

13

We manufacture our cardiac products, our C-Port and PAS-Port systems, with parts we manufacture and components supplied by vendors, which we then assemble, test and package. For the fiscal year 2009, we generated net revenue of $9.9 million, including $3.0 million of development revenue, and incurred a net loss of $17.2 million. For the three month period ended December 31, 2009, we generated net revenue of $1.1 million, including $19,000 of development revenue, and incurred a net loss of $2.2 million and for the six month period ended December 31, 2009, we generated net revenue of $2.0 million, including $124,000 of development revenue, and incurred a net loss of $4.9 million.

Since our inception, we have incurred significant net losses, and we expect to continue to incur net losses for the foreseeable future. To date, our C-Port and PAS-Port systems have had limited commercial adoption, and sales have not met the levels that we had anticipated. Revenues from product sales and milestone payments were not sufficient to support the operation of our business as we had planned. As a result, in order to reduce our operating expenses, in January, April and May 2009, we reduced our costs by eliminating 13, 22 and 15 positions, respectively, which impacted all functional areas, including research and development, sales and marketing, clinical, regulatory and quality, operations and general and administrative. We expect these reductions in force to impair our ability to generate sales at the levels attained prior to the reduction in force or increased levels. We are continuing to evaluate potential additional steps to reduce our operating expenses. If revenues from product sales do not increase, we may be required to delay, further reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs.

As of December 31, 2009, we had cash and cash equivalents of $11.1 million and total short-term debt of $2.0 million. The increase in cash as of December 31, 2009, compared to June 30, 2009, was primarily due to the $9.9 million net proceeds from a private placement of our common stock and warrants to purchase our common stock. We believe that our existing cash and cash equivalents, along with the cash that we expect to generate from operations, will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through December 31, 2010, including repayment of the remaining $2.0 million principal amount, plus interest, under our note to Century Medical, Inc., our distributor in Japan, or Century Medical. Our estimates and our future capital requirements depend upon numerous factors. In addition, we have based our estimates on assumptions that may prove to be wrong, including assumptions with respect to the level of revenues from product sales, and we could exhaust our available financial resources sooner than we currently expect. While our cash resources would permit us to continue through December 31, 2010, we would need to further reduce expenses in advance of that date in the event that we are unable to complete a financing, strategic or commercial transaction to ensure that we have sufficient capital to meet our obligations and continue on a path designed to create and preserve stockholder value. The sufficiency of our current cash resources and our need for additional capital, and the timing thereof, will depend on many factors, including primarily the extent of our sales and marketing efforts related to our commercialized products and the amount of revenues that we receive from product sales, as well as other factors described in the “Liquidity and Capital Resources” section below.

We may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one of or more of our commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights superior to our existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders.

14

Agreements with Cook Incorporated

In June 2007, we entered into, and in September 2007 and in June 2009 amended, a license, development and commercialization agreement with Cook to develop and commercialize a specialized PFO device, designed to close holes in the heart from genetic heart defects. Under the agreement, Cook funds certain development activities and we and Cook jointly develop the device. Once developed, Cook receives an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO device. Under this agreement, we received payments totaling approximately $3.2 million. We recorded as development revenue under the agreement a total of $19,000 and $928,000 for the three month periods ended December 31, 2009 and 2008, respectively and $124,000 and $1.5 million for the six month periods ended December 31, 2009 and 2008, respectively. A total of $403,000 under this agreement has been recorded as deferred development revenue on the balance sheet as of December 31, 2009. We are entitled to receive from Cook up to a total of an additional $275,000 in future payments if development milestones under the agreement are achieved. Amounts paid but not yet earned on the project are refundable and are recorded as deferred revenue until such time as the related development expenses for certain project activities are incurred. We would also be entitled to receive a royalty based on Cook’s annual worldwide sales of the PFO device, if any. During the quarter ending December 31, 2009, we and Cook mutually agreed to temporarily suspend work on the PFO project.

On December 9, 2005, we entered into, and in September 2007 amended and in July 2009 amended and partially terminated, an agreement with Cook to develop the Cook Vascular Closure Device. Under the agreement, Cook funded certain development activities, and we and Cook jointly developed the device, under the direction of a Development Committee that included representatives from each party. Under the original agreement and the first amendment in September 2007, Cook received an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the Cook Vascular Closure Device for medical procedures in any part of the body. Under this agreement, we received payments totaling approximately $5.3 million. We recorded as development revenue under the agreement a total of $0 and $497,000 for the three month periods ended December 31, 2009 and 2008, respectively and $0 and $727,000 for the six month periods ended December 31, 2009 and 2008, respectively. In July 2009, we entered into a partial termination and second amendment of this agreement to terminate Cook’s participation in the project and to provide to Cook a royalty on net sales of the Cook Vascular Closure Device if we successfully commercialize the product. The remaining deferred revenue balance related to this project was recognized as revenue in the fourth quarter of fiscal 2009 as we had completed all of our activities under the agreement and no amounts are refundable to Cook under the partial termination agreement.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.

We believe the following critical accounting policies to be the most critical to an understanding of our financial statements because they require us to make significant judgments and estimates that are used in the preparation of our financial statements.

Revenue Recognition. We recognize revenue when four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. We generally use contracts and customer purchase orders to determine the existence of an arrangement. We use shipping documents and third-party proof of delivery to verify that title has transferred. We assess whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

15

We record product sales net of estimated product returns and discounts from the list prices for our products. The amounts of product returns and the discount amounts have not been material to date.

Revenue generated from development contracts is recognized when it is earned and non-refundable upon receipt of milestone payments or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on the project are refundable and are recorded as deferred revenue until such time as the related development expenses are incurred.

Inventories. We state our inventories at the lower of cost or market value on a first-in, first-out basis. Inventory write-downs are established when conditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand or reductions in selling prices. Inventory write-downs are measured as the difference between the cost of inventory and estimated market value. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology and the risk of lower customer demand levels. While we believe the current value of inventories represents all known and estimated changes in demand, we have recently experienced reduced demand for our C-Port systems and further unfavorable changes in market conditions may result in a need for additional inventory write-downs that could adversely impact our financial results.

Clinical Trial Accounting. Clinical trial costs are a component of research and development expenses and include fees paid to participating hospitals and other service providers that conduct clinical trial activities with patients on our behalf and the cost of clinical trial insurance. The various costs of the trial are contractually based on the nature of the services, and we accrue the costs as the services are provided. Accrued costs are based on estimates of the work completed under the service agreements, patient enrollment and past experience with similar contracts. Our estimate of the work completed and associated costs to be accrued includes our assessment of information received from our third-party service providers and the overall status of our clinical trial activities. If we have incomplete or inaccurate information, we may underestimate costs associated with various trials at a given point in time. Although our experience in estimating these costs is limited, the difference between accrued expenses based on our estimates and actual expenses have not been material to date.

Stock-Based Compensation. We account for employee and director share-based compensation plans, including stock options and restricted stock units, or RSUs, pursuant to ASC 718 “Compensation — Stock Compensation” (formerly FAS 123R). Stock-based compensation cost is measured on the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. We recognize compensation expense using the accelerated method.

The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. Since the Company has limited historical data on volatility of its stock, the expected volatility is based on volatility of similar entities (referred to as “guideline” companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size, and financial leverage. The risk-free interest rate for the expected term of each option is based on a risk-free zero-coupon spot interest rate at the time of grant. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. We estimate forfeitures in calculating the expense related to stock-based compensation. We recognize stock-based compensation expense for options and restricted stock awards using the accelerated method over the requisite service period of the award, which generally equals the vesting period of each grant. We recorded fair value stock-based compensation expense of $224,000, or $0.01 per share and $470,000, or $0.03 per share, for the three month periods ended December 31, 2009 and 2008, respectively, and $791,000, or $0.04 per share, and $984,000 or $0.06 per share for the six month periods ended December 31, 2009 and 2008, respectively.

16

Results of Operations

Comparison of the three month periods ended December 31, 2009 and 2008

Net Revenue. Total net revenue decreased by $1.9 million, or 64%, to $1.1 million for the three months ended December 31, 2009 compared to $2.9 million for the same period in 2008. Product sales decreased by $1.0 million, or 49%, to $1.0 million for the three months ended December 31, 2009 compared to $2.0 million for the same period in 2008. The decrease of $1.0 million in product sales for the three months ended December 31, 2009 was primarily attributable to both lower PAS-Port and C-Port systems sales in the United States as we transition from a direct sales force approach to third party manufacturers’ representatives and distributors.

For the three month periods ended December 31, 2009 and 2008, sales to Century Medical accounted for approximately 20% and 11%, respectively, of our total product sales.

Development revenue was $19,000 and $928,000 for the three month periods ended December 31, 2009 and 2008, respectively. The development revenue for the three month period ended December 31, 2009 was for development activities on the PFO project under our development agreement with Cook.

The development revenue for the three month period ended December 31, 2008 was comprised of $497,000 for development activities for the Cook Vascular Access Closure Device under our development agreement with Cook and $431,000 for development activities on the PFO project with Cook. Our revenue-generating development activities related to the Cook Vascular Closure Device were terminated upon the partial termination of our development agreement with Cook related to this project in June 2009 and there was no revenue recognized for the three month period ended December 31, 2009. In addition, during the quarter ending December 31, 2009, we and Cook mutually agreed to temporarily suspend work on the PFO project.

Cost of Product Sales. Cost of product sales consists primarily of material, labor and overhead costs. Cost of product sales decreased $764,000, or 52%, to $699,000 for the three months ended December 31, 2009 compared to $1.5 million for the same period in 2008. The decrease in cost of product sales resulted primarily from decreased headcount and product sales. The Company recorded a lower of cost or market inventory write-down of $384,000 (an increase of $86,000 from the amount recorded at September 30, 2009 which was $298,000) primarily on its PAS-Port inventory due to higher product cost of units manufactured for the three month period ended December 31, 2009. The Company did not record a lower of cost or market inventory write-down for the three month period ended December 31, 2008. In addition, the Company recorded a $29,000 and $19,000 reserve for excess and obsolete inventory for the three month periods ended December 31, 2009 and 2008, respectively.

Research and Development Expense. Research and development expense consists primarily of personnel costs within our product development, regulatory and clinical groups and the costs of clinical trials. Research and development expense decreased by $858,000, or 41%, to $1.2 million for the three months ended December 31, 2009 compared to $2.1 million for the same period in 2008. The decrease in expenses for the three month period ended December 31, 2009 was attributable to a decrease in salaries and benefits of $543,000 due primarily to a net decrease in the number of personnel, decreased prototype project materials for the C-Port xV and Cook projects of $73,000, lower clinical trial expense of $162,000 as a result of completing the PAS-Port trials and European trials, and lower molds and tooling expenses of $118,000 related to the termination of our revenue-generating development activities under the Cook development agreement related to the Cook Vascular Closure Device.

We anticipate that research and development expenses will increase slightly in absolute terms in future periods as we begin to develop new applications of our technology, including the Cardica Microcutter ES8, continue to enhance our existing product lines and conduct new clinical trials.

Selling, General and Administrative Expense. Selling, general and administrative expense decreased $2.7 million, or 67%, to $1.4 million for the three months ended December 31, 2009 compared to $4.1 million for the same period in 2008. The decrease in selling, general and administrative expense in the three month period ended December 31, 2009 was primarily attributable to lower personnel, recruiting and travel expenses of $1.9 million primarily due to a net decrease in personnel, a decrease in marketing activities of $58,000 in the United States, a decrease in demonstration product expenses of $287,000 for training of physicians in the United States, and a decrease in investor relations and professional expenses of $208,000.

17

We expect selling, general and administrative expense to increase slightly in absolute terms in future periods as we increase the number of manufacturers’ representatives and distributors that sell our products.

Interest Income. Interest income decreased $29,000, or 67%, to $14,000 for the three months ended December 31, 2009 compared to $43,000 for the same period in 2008. The decrease in interest income for the three months ended December 31, 2009 was primarily due to lower cash and cash equivalents balances available for investing during the period and lower overall market interest rates.

Interest Expense. Interest expense for the three months ended December 31, 2009 and 2008 reflects a 6% per annum interest rate payable on our $2.0 million debt to Century Medical.

Comparison of the six month periods ended December 31, 2009 and 2008

Net Revenue. Total net revenue decreased by $3.0 million, or 60%, to $2.0 million for the six months ended December 31, 2009 compared to $5.1 million for the same period in 2008. Product revenue decreased by $1.7 million, or 48%, to $1.8 million for the six months ended December 31, 2009 compared to $3.6 million for the same period in 2008. The decrease of $1.7 million in product sales for the six months ended December 31, 2009 was primarily attributable to lower C-Port systems sales in the United States and to a lesser extent lower PAS-Port sales as we transition from a direct sales force approach to manufacturer’ representatives and distributors partially offset by increased International sales of PAS-Port systems. In addition, $251,000 for product sales of the Cook Vascular Closure Device to Cook was reflected in product sales for the six month period ended December 31, 2008. The six month period ended December 31, 2009 did not include any product sales of the Cook Vascular Closure Device.

For the six month periods ended December 31, 2009 and 2008, sales to Century Medical accounted for approximately 24% and 13%, respectively, of our total product sales.

Development revenue was $124,000 and $1.5 million for the six month periods ended December 31, 2009 and 2008, respectively. The development revenue for the six month period ended December 31, 2009 was for development activities on the PFO project under our development agreement with Cook. The development revenue for the six month period ended December 31, 2008 was comprised of $727,000 for development activities for the Cook Vascular Closure Device under our development agreement with Cook and $724,000 for development activities on the PFO project with Cook. Our revenue-generating development activities related to the Cook Vascular Closure Device were terminated upon the partial termination of our development agreement with Cook related to this project in June 2009 and there was no revenue recognized for the six month period ended December 31, 2009. In addition, during the quarter ending December 31, 2009, we and Cook mutually agreed to temporarily suspend work on the PFO project.

Cost of Product Sales. Cost of product sales decreased $1.0 million, or 40%, to $1.5 million for the six months ended December 31, 2009 compared to $2.6 million for the same period in 2008. The decrease in cost of product sales in the six months ended December 31, 2009 was primarily attributable to decreased headcount and product sales. The Company recorded a lower of cost or market inventory write-down of $384,000 (an increase of $378,000 from the amount recorded at June 30, 2009 which was $6,000) primarily on its PAS-Port inventory due to higher product cost of units manufactured for the three month period ended December 31, 2009. The Company did not record a lower of cost or market inventory write-down for the three month period ended December 31, 2008. In addition, the Company recorded a $29,000 and $11,000 reserve for excess and obsolete inventory for the six month periods ended December 31, 2009 and 2008, respectively.

Research and Development Expense. Research and development expense decreased by $2.0 million, or 46%, to $2.4 million for the six months ended December 31, 2009 compared to $4.4 million for the same period in 2008. The decrease in expenses for the six month period ended December 31, 2009 was attributable to a decrease in salaries and benefits of $1.0 million due primarily to a net decrease in the number of personnel, decreased prototype project materials for the C-Port xV and Cook projects of $339,000, lower clinical trial expense of $427,000 as a result of completing the PAS-Port trials and European trials, and lower molds and tooling expenses of $227,000 related to the termination of our revenue-generating development activities under the Cook Vascular Closure Device development agreement.

18

Selling, General and Administrative Expense. Selling, general and administrative expense decreased $5.0 million, or 63%, to $3.0 million for the six months ended December 31, 2009 compared to $8.0 million for the same period in 2008. The decrease in selling, general and administrative expense in the six month period ended December 31, 2009 was primarily attributable to lower personnel, recruiting and travel expenses of $3.2 million primarily due to a net decrease in personnel, a decrease in marketing activities of $324,000 in the United States, a decrease in demonstration product expenses of $585,000 for training of physicians in the United States, and a decrease in investor relations and professional expenses of $396,000.

Interest Income. Interest income decreased $122,000, or 87%, to $19,000 for the six months ended December 31, 2009 compared to $141,000 for the same period in 2008. The decrease in interest income for the six months ended December 31, 2009 was primarily due to lower cash and cash equivalents balances available for investing during the period and lower overall market interest rates.

Interest Expense. Interest expense for the six months ended December 31, 2009 and 2008 reflects a 6% per annum interest rate payable on our $2.0 million debt to Century Medical.

Off Balance Sheet Arrangements

As of December 31, 2009, except for a real estate operating lease for our headquarters in Redwood City, California expiring in August 2011, we did not have any off-balance sheet arrangements.

Liquidity and Capital Resources

As of December 31, 2009, our accumulated deficit was $114.3 million and we had cash and cash equivalents of $11.1 million and total short-term debt of $2.0 million. We currently invest some of our cash and cash equivalents in money market funds. Since inception, we have financed our operations primarily through private sales of convertible preferred stock, long-term notes payable and public and private sales of common stock and warrants to purchase common stock. We believe that our existing cash and cash equivalents, along with the cash that we expect to generate from operations, will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through December 31, 2010, including repayment of the remaining $2.0 million principal amount, plus interest, under our note to Century Medical. Until we can generate significant continuing revenue, if ever, we expect to satisfy our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements, as well as through interest income earned on cash balances. We cannot be certain that additional funding of any kind will be available on acceptable terms, or at all. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any licensing or strategic agreements we enter into may require us to relinquish valuable rights. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our commercialization efforts or one or more of our research and development programs, cease operations, or cease to be publicly traded.

In June 2007, we received approximately $10.9 million in net proceeds from the sale of 2,301,337 shares of our common stock and warrants to purchase up to 575,347 shares of common stock in a private placement. In November 2007, we received $11.5 million in net proceeds from the sale of 1,500,000 shares of our common stock in a public offering. In December 2007, we received $3.8 million in net proceeds from the sale of an additional 481,170 shares of our common stock upon exercise of the over-allotment option. In September 2009, we received approximately $9.9 million in net proceeds from the sale of 8,142,082 shares of our common stock and warrants to purchase up to 4,071,046 shares of common stock in a private placement.

19

We have a note payable that was originally issued in connection with our Japan Distribution Agreement with Century Medical, in June 2003. We extended the distribution agreement and restructured the $3.0 million note payable in March 2007, whereby $1.0 million of the note payable was paid in April 2007 and the remaining $2.0 million is due in June 2010. The notes bore interest at 5% per annum through June 2008 then increased to 6% per annum until maturity in June 2010. All interest due is payable quarterly. Century Medical has a continuing security interest in all of our personal property and assets, including intellectual property, until the note is repaid. There are no covenants associated with this debt.

Under the operating lease for our facility in Redwood City, California, we are required to maintain a letter of credit with a restricted cash balance at our bank. A certificate of deposit of $150,000 has been recorded as restricted cash in our balance sheet at December 31, 2009 related to the letter of credit.

Summary cash flow data is as follows (in thousands):

	Six months ended
	December 31,
	2009			2008
Net cash used in operating activities	$	(3,834	)	$	(9,952	)
Net cash provided by (used in) investing activities		(323	)		10,689
Net cash provided by financing activities		9,918			128

Net cash used in operating activities for the six month periods ended December 31, 2009 and 2008 was $3.8 million and $10.0 million, respectively. The use of cash for the six months ended December 31, 2009 was primarily attributable to our net loss adjusted for non-cash stock-based compensation charges and depreciation and a decrease in accounts payable and other accrued liabilities resulting from payments made during the period. The use of cash for the six months ended December 31, 2008 was primarily attributable to our net loss adjusted for non-cash stock-based compensation charges and depreciation, an increase in inventories and a decrease in accounts payable and accrued liabilities resulting from payments made during the period, offset in part by an increase in deferred development revenue.

Net cash used in investing activities for the six month period ended December 31, 2009 was $323,000 and net cash provided by investing activities for the six month period ended December 31, 2008 was $10.7 million. Net cash used or provided by investing activities represent the net purchases and maturities of investments and purchases of property and equipment. Purchases of property and equipment were $323,000 and $370,000 in the six month periods ended December 31, 2009 and 2008, respectively.

Net cash provided by financing activities for the six month periods ended December 31, 2009 and 2008 was $9.9 million and $128,000, respectively. Net cash provided by financing activities for the six month period ended December 31, 2009 consisted of the net proceeds received from the sale of shares of common stock and warrants to purchase shares of common stock in September 2009. The net cash provided by financing activities for the six month period ended December 31, 2008 consists of proceeds received from the exercise of stock options.

Our future capital requirements depend upon numerous factors. These factors include but are not limited to the following:

• the extent of our ongoing research and development programs;

• market acceptance and adoption of our products;

• our revenue growth;

• costs associated with our sales and marketing initiatives and manufacturing activities;

• costs of obtaining and maintaining FDA and other regulatory clearances and approvals for our products;

• securing, maintaining and enforcing intellectual property rights and the costs thereof;

• the progress of clinical trials; and

• the effects of competing technological and market developments.

20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the six months ended December 31, 2009, there were no material changes to our market risk disclosures as set forth in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC on September 18, 2009.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2009.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

We have identified the following additional risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. The risks described below that are marked with an asterisk (*) are those risks that contain substantive changes from the risks described in Cardica’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

21

Risks Related to Our Finances and Capital Requirements

* We need to generate higher product sales to become and remain profitable.

Our ability to become and remain profitable depends upon our ability to generate higher product sales. Our ability to generate significantly higher revenue depends upon a number of factors, including:

• achievement of broad acceptance for our products;

• achievement of U.S. regulatory clearance or approval for additional products;

• successful completion of ongoing clinical trials for our products; and

• successful sales, manufacturing, marketing and distribution of our products.

Sales of our products and development activities generated only $2.0 million and $5.1 million for the six month periods ended December 31, 2009 and 2008, respectively. For fiscal years 2009, 2008, and 2007, sales of our products and development activities generated only $9.9 million, $7.6 million and $3.5 million of revenue, respectively. We do not anticipate that we will generate significantly higher product sales for the foreseeable future. Sales of our C-Port and PAS-Port systems have not met the levels that we had anticipated, and to date our systems have had limited commercial adoption. Our sales capability may be further impaired by our reductions in force in January, April and May 2009. Failure to obtain broader commercial adoption of our systems will continue to negatively impact our financial results and financial position and may require us to delay, further reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development projects.

We need substantial additional funding and may be unable to raise capital, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts and could cause us to cease operations.

Our development efforts have consumed substantial capital to date. We believe that our existing cash and cash equivalents along with the cash that we expect to generate from operations, will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through December 31, 2010, including repayment of the remaining $2.0 million principal amount, plus interest, under our note to Century Medical. Due to recurring losses from operations and our cash balance at the end of our last fiscal year, the audit opinion of our independent registered public accounting firm on our financial statements for the fiscal year ended June 30, 2009, included in our annual report on Form 10-K includes a going concern explanatory paragraph. Our estimates and our future capital requirements depend upon numerous factors. These factors include, but are not limited to, the following:

• the extent of our ongoing research and development programs;

• market acceptance and adoption of our products;

• our revenue growth;

• costs associated with our sales and marketing initiatives and manufacturing activities;

• costs of obtaining and maintaining FDA and other regulatory clearances and approvals for our products;

• securing, maintaining and enforcing intellectual property rights and the costs thereof;

• the progress of clinical trials; and

• the effects of competing technological and market developments.

22

Because we do not anticipate that we will generate sufficient product sales to achieve profitability for the foreseeable future, if at all, we need to raise substantial additional capital to finance our operations in the future. To raise capital, we may seek to sell additional equity or debt securities, obtain a credit facility or enter into product development, license or distribution agreements with third parties or divest one or more of our commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to our stockholders, particularly in light of the prices at which our common stock has been recently trading. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We may not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders. If adequate funds are not available or revenues from product sales do not increase, we may be required to further reduce our workforce, delay, reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs in advance of December 31, 2010, to ensure that we have sufficient capital to meet our obligations and continue on a path designed to create and preserve stockholder value. Failure to raise additional capital may result in our ceasing to be publicly traded or ceasing operations.

We have a history of net losses, which we expect to continue for the foreseeable future, and we are unable to predict the extent of future losses or when we will become profitable, if at all.

We have incurred net losses since our inception in October 1997. As of December 31, 2009, our accumulated deficit was approximately $114.3 million. We expect to incur substantial additional losses until we can achieve significant commercial sales of our products, which depend upon a number of factors, including increased commercial sales of our C-Port and PAS-Port systems in the United States and receipt of regulatory clearance or approval and market adoption of our additional products in the United States. We commenced commercial sales of the C-Port systems in Europe in 2004 and in the United States in 2006 and of the PAS-Port system in Europe in 2003, in Japan in 2004 and in the United States in September 2008.

Our cost of product sales was 84% and 72% of our net product sales for the six month periods ended December 31, 2009 and 2008, respectively. Our cost of product sales was 79% and 97% of our net product sales for fiscal years 2009 and 2008, respectively. We expect high cost of product sales to continue for the foreseeable future. If, over the long term, we are unable to reduce our cost of producing goods and expenses relative to our net revenue, we may not achieve profitability even if we are able to generate significant sales of the our products. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.

Existing creditors have rights to our assets that are senior to our stockholders.

An existing arrangement with our current lender Century Medical, as well as future arrangements with other creditors, allow or may allow these creditors to liquidate our assets, which may include our intellectual property rights, if we are in default or breach of our debt obligations for a continued period of time. The proceeds of any sale or liquidation of our assets under these circumstances would be applied first to any of our debt obligations that would have priority over any of our capital stock. After satisfaction of our debt obligations, we may have little or no proceeds left under these circumstances to distribute to the holders of our capital stock.

23

Our quarterly operating results and stock price may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. The revenue we generate, if any, and our operating results will be affected by numerous factors, many of which are beyond our control, including:

• the extent of our ongoing research and development programs;

• market acceptance and adoption of our products;

• our revenue growth;

• costs associated with our sales and marketing initiatives and manufacturing activities;

• costs of obtaining and maintaining FDA and other regulatory clearances and approvals for our products;

• securing, maintaining and enforcing intellectual property rights and the costs thereof;

• the progress of clinical trials;

• the effects of competing technological and market developments.

Quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

Risks Related to Our Business

We are dependent upon the success of our current products to generate revenue in the near term, and we have U.S. regulatory clearance for our C-Port and PAS-Port systems only. We cannot be certain that the C-Port and PAS-Port systems will be successfully commercialized in the United States. If we are unable to successfully commercialize our products in the United States, our ability to generate higher revenue will be significantly delayed or halted, and our business will be harmed.

We have expended significant time, money and effort in the development of our current commercial products, the C-Port systems and the PAS-Port system. If we are not successful in commercializing our C-Port and PAS-Port systems, we may never generate substantial revenue, our business, financial condition and results of operations would be materially and adversely affected, and we may be forced to cease operations. We commenced sales of our C-Port xA system in December 2006 (after introduction of our original C-Port system in January 2006), our C-Port Flex A in April 2007 and our C-Port X-CHANGE in December 2007. We commenced U.S. sales of our PAS-Port system in September 2008. We anticipate that our ability to increase our revenue significantly will depend on the successful commercialization of the PAS-Port system in the United States and elsewhere and the continued adoption of our current C-Port systems and later generations of the C-Port systems in the United States.

A prior automated proximal anastomosis device was introduced by another manufacturer in the United States in 2001. The FDA received reports of apparently device-related adverse events, and in 2004, the device was voluntarily withdrawn from the market by the manufacturer. Moreover, physicians who have experience with or knowledge of prior anastomosis devices may be predisposed against using our C-Port or PAS-Port systems, which could limit market acceptance. If we fail to achieve significant market adoption, our business, financial condition and results of operations would be materially harmed.

We may not be successful in our efforts to expand our product portfolio, and our failure to do so could cause our business and prospects to suffer.

We intend to use our knowledge and expertise in anastomotic technologies to discover, develop and commercialize new applications in additional markets. In particular, we are at an early stage of development of the Cardica Microcutter ES8, an endoscopic microcutter intended for use by general, thoracic, gynecologic, bariatric and urologic surgeons. We have not yet commenced animal or human testing of this device. Significant additional research and development and financial resources will be required to develop the Cardica Microcutter ES8 into a commercially viable product and to obtain necessary regulatory approvals to commercialize the device. We cannot assure you that our development efforts will be successful or that they will be completed within our publicly stated anticipated timelines, and we may never be successful in developing a viable product for the markets intended to be addressed by the Cardica Microcutter ES8. Our failure to successfully develop the Cardica Microcutter ES8 would have a material adverse effect on our business, growth prospects and ability to raise additional capital.

24

Our products may never gain any significant degree of market acceptance, and a lack of market acceptance would have a material adverse effect on our business.

To date, our products have not gained, and we cannot assure you that our products will gain, any significant degree of market acceptance among physicians or patients. We believe that recommendations by physicians will be essential for market acceptance of our products; however, we cannot assure you that significant recommendations will be obtained. Physicians will not recommend our products unless they conclude, based on clinical data and other factors, that the products represent a safe and acceptable alternative to other available options. In particular, physicians may elect not to recommend using our products in surgical procedures until such time, if ever, as we successfully demonstrate with long-term data that our products result in patency rates comparable to or better than those achieved with hand-sewn anastomoses, and we resolve any technical limitations that may arise.

We believe graft patency is a significant factor for physician recommendation of our products. Although we have not experienced low patency rates in our clinical trials, graft patency determined during the clinical trials conducted by us or other investigators may not be representative of the graft patency actually encountered during commercial use of our products. The surgical skill sets of investigators in our clinical trials and early adopters of our products may not be representative of the skills of future product users, which could negatively affect graft patency. In addition there may have been a selection bias in the patients, grafts and target vessels used during the clinical trials that positively affected graft patency. The patients included in the clinical trials may not be representative of the general patient population in the United States, which may have resulted in improved graft patency in patients enrolled in the clinical trials. Finally, patient compliance in terms of use of prescribed anti-clotting medicines may have been higher in clinical trials than may occur during commercial use, thereby negatively affecting graft patency during commercial use.

Market acceptance of our products also depends on our ability to demonstrate consistent quality and safety of our products. Any future recalls may impact physicians’ and hospitals’ perception of our products.

Widespread use of our products will require the training of numerous physicians, and the time required to complete training could result in a delay or dampening of market acceptance. Even if the safety and efficacy of our products is established, physicians may elect not to use our products for a number of reasons beyond our control, including inadequate or no reimbursement from health care payors, physicians’ reluctance to perform anastomoses with an automated device, the introduction of competing devices by our competitors and pricing for our products. Failure of our products to achieve any significant market acceptance would have a material adverse effect on our business, financial condition and results of operations.

* Our PAS-Port and C-Port systems, as well as our other and future products, may still face future development and regulatory difficulties.

Even though the current generations of the C-Port and PAS-Port systems have received U.S. regulatory clearance, the FDA may still impose significant restrictions on the indicated uses or marketing of these products or ongoing requirements for potentially costly post-clearance studies. Any of our other products, including the Cardica Microcutter ES8 and future generations of the C-Port systems, may either not obtain regulatory approvals required for marketing or may face these types of restrictions or requirements. The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of most new medical devices only after the device has received 510(k) clearance or is the subject of an approved pre-market approval application, or PMA. The FDA will clear the marketing of a medical device through the 510(k) process if it is demonstrated that the new product has the same

25

intended use, is substantially equivalent to another legally marketed device, including a 510(k)-cleared product, and otherwise meets the FDA’s requirements. We intend to seek 510(k) clearance for the Cardica Microcutter ES8. The PMA approval process is more costly, lengthy and uncertain than the 510(k) clearance process and requires the development and submission of clinical studies supporting the safety and effectiveness of the device. Product modifications may also require the submission of a new 510(k) clearance, or the approval of a PMA before the modified product can be marketed. Any products that we develop that require regulatory clearance or approval, including the Cardica Microcutter ES8, may be delayed, if approved at all. We cannot assure that any new products or any product enhancements that we develop will be subject to the shorter 510(k) clearance process instead of the more lengthy PMA requirements. Regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review, regulation and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, our collaborators or us, including requiring withdrawal of the product from the market. Our products will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the product. If our products fail to comply with applicable regulatory requirements, a regulatory agency may impose any of the following sanctions:

• warning letters, fines, injunctions, consent decrees and civil penalties;

• customer notifications, repair, replacement, refunds, recall or seizure of our products;

• operating restrictions, partial suspension or total shutdown of production;

• delay in processing marketing applications for new products or modifications to existing products;

• withdrawing approvals that have already been granted; and

• criminal prosecution.

To market any products internationally, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA clearance or approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA clearance or approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA clearance or approval in the United States, including the risk that our products may not be approved for use under all of the circumstances requested, which could limit the uses of our products and adversely impact potential product sales, and that such clearance or approval may require costly, post-marketing follow-up studies. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our product candidates may be delayed and, as a result, our stock price may decline.

From time to time, we may estimate and publicly announce the timing anticipated for the accomplishment of various clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include commencement of animal studies for a new product, submission of an Investigational Device Exemption application to commence enrollment of patients in clinical trials, the commencement of animal testing or human feasibility testing of a new product, the release of data from clinical trials, receipt of clearances or approvals from regulatory authorities or other clinical and regulatory events. These estimates are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

26

Our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory requirements. Failure to obtain or maintain regulatory approval of our manufacturing facilities would harm our business and our results of operations.

Our manufacturing facilities and processes are subject to periodic inspections and audits by various U.S. federal, U.S. state and foreign regulatory agencies. For example, our facilities have been inspected by State of California regulatory authorities pursuant to granting a California Device Manufacturing License and by the FDA. Additionally, to market products in Europe, we are required to maintain ISO 13485:2003 certification and are subject to periodic surveillance audits. We are currently ISO 13485:2003 certified; however, our failure to maintain necessary regulatory approvals for our manufacturing facilities could prevent us from manufacturing and selling our products.

Additionally, our manufacturing processes and, in some cases, those of our suppliers are required to comply with FDA’s Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products, including the PAS-Port and C-Port systems. We are also subject to similar state requirements and licenses. In addition, we must engage in extensive record keeping and reporting and must make available our manufacturing facilities and records for periodic inspections by governmental agencies, including FDA, state authorities and comparable agencies in other countries. If we fail a QSR inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse QSR inspection could result in, among other things, a shut-down of our manufacturing operations, significant fines, and suspension of product distribution or other operating restrictions, seizures or recalls of our devices and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our products and cause our revenue to decline.

We may also be required to recall our products due to manufacturing supply defects. If we issue recalls of our products in the future, our revenue and business could be harmed.

If we are unable to establish sales and marketing capabilities or enter into and maintain arrangements with third parties to market and sell our products, our business may be harmed.

We are in the beginning stages of changing our U.S. sales and marketing organization to one based primarily on manufacturers’ representatives and distributors, and we have limited experience as a company in the sales, marketing and distribution of our products. Century is responsible for marketing and commercialization of the PAS-Port system in Japan. To promote our current and future products in the United States and Europe, we must develop our sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. Competition for qualified sales personnel is intense. In January, April and May 2009, we made reductions in force to reduce our expenses, which we expect will impair our sales capabilities. We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force we do establish may not be capable of generating sufficient demand for our products. To the extent that we enter into arrangements with third parties to perform sales and marketing services, our product sales may be lower than if we directly marketed and sold our products. We expect to rely on third-party distributors for substantially all of our international sales. If we are unable to establish adequate sales and marketing capabilities, independently or with others, we may not be able to generate significantly higher revenue and may not become profitable.

27

Lack of third-party coverage and reimbursement for our products could delay or limit their adoption.

We may experience limited sales growth resulting from limitations on reimbursements made to purchasers of our products by third-party payors, and we cannot assure you that our sales will not be impeded and our business harmed if third-party payors fail to provide reimbursement that hospitals view as adequate.

In the United States, our products will be purchased primarily by medical institutions, which then bill various third-party payors, such as the Centers for Medicare & Medicaid Services, or CMS, which administer the Medicare program, and other government programs and private insurance plans, for the health care services provided to their patients. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Under current CMS reimbursement policies, CMS offers a process to obtain add-on payment for a new medical technology when the existing Diagnosis-Related Group, or DRG, prospective payment rate is inadequate. To obtain add-on payment, a technology must be considered “new,” demonstrate substantial improvement in care and exceed certain payment thresholds. Add-on payments are made for no less than two years and no more than three years. We must demonstrate the safety and effectiveness of our technology to the FDA in addition to CMS requirements before add-on payments can be made. Further, Medicare coverage is based on our ability to demonstrate the treatment is “reasonable and necessary” for Medicare beneficiaries. In November 2006, CMS denied our request for an add-on payment with respect to our C-Port systems. According to CMS, we met the “new” criteria and exceeded the payment threshold but did not in their view demonstrate substantial improvement in care. Even if our products receive FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement in the foreseeable future, if at all. Moreover, many private payors look to CMS in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.

We cannot assure you that CMS will provide coverage and reimbursement for our products. If a medical device does not receive incremental reimbursement from CMS, then a medical institution would have to absorb the cost of our products as part of the cost of the procedure in which the products are used. Acute care hospitals are now generally reimbursed by CMS for inpatient operating costs under a Medicare hospital inpatient prospective payment system. Under the Medicare hospital inpatient prospective payment system, acute care hospitals receive a fixed payment amount for each covered hospitalized patient based upon the DRG to which the inpatient stay is assigned, regardless of the actual cost of the services provided. At this time, we do not know the extent to which medical institutions would consider insurers’ payment levels adequate to cover the cost of our products. Failure by hospitals and physicians to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing our products and limit our revenue growth. In addition, pre-determined DRG payments may decline over time, which could deter medical institutions from purchasing our products. If medical institutions are unable to justify the costs of our products, they may refuse to purchase them, which would significantly harm our business.

We have limited data regarding the safety and efficacy of the PAS-Port and C-Port systems. Any data that is generated in the future may not be positive or consistent with our existing data, which would affect market acceptance and the rate at which our devices are adopted.

The C-Port and PAS-Port systems are innovative products, and our success depends upon their acceptance by the medical community as safe and effective. An important factor upon which the efficacy of the C-Port and PAS-Port systems will be measured is long-term data regarding the duration of patency, or openness, of the artery or the graft vessel. Equally important will be physicians’ perceptions of the safety of our products. Our technology is relatively new in cardiac bypass surgery, and the results of short-term clinical experience of the C-Port and PAS-Port systems do not necessarily predict long-term clinical benefit. We believe that physicians will compare long-term patency for the C-Port and PAS-Port devices against alternative procedures, such as hand-sewn anastomoses. If the long-term rates of patency do not meet physicians’ expectations, or if physicians find our devices unsafe, the C-Port and PAS-Port systems may not become widely adopted and physicians may recommend alternative treatments for their patients. In addition, we have recently commenced U.S. commercialization of our C-Port and PAS-Port systems. Any adverse experiences of physicians using the C-Port and PAS-Port systems, or adverse outcomes to patients, may deter physicians from using our products and negatively impact product adoption.

28

Our C-Port and PAS-Port systems were designed for use with venous grafts. Additionally, while our indications for use of the C-Port systems cleared by the FDA refer broadly to grafts, we have studied the use of the C-Port systems only with venous grafts and not with arterial grafts. Using the C-Port systems with arterial grafts may not yield patency rates or material adverse cardiac event rates comparable to those found in our clinical trials using venous grafts, which could negatively affect market acceptance of our C-Port systems. In addition, the clips and staples deployed by our products are made of 316L medical-grade stainless steel, to which some patients are allergic. These allergies may result in adverse reactions that negatively affect the patency of the anastomoses or the healing of the implants and may therefore adversely affect outcomes, particularly when compared to anastomoses performed with other materials, such as sutures. Additionally, in the event a surgeon, during the course of surgery, determines that it is necessary to convert to a hand-sewn anastomosis and to remove an anastomosis created by one of our products, the removal of the implants may result in more damage to the target vessel (such as the aorta or coronary artery) than would typically be encountered during removal of a hand-sewn anastomosis. Moreover, the removal may damage the target vessel to an extent that could further complicate construction of a replacement hand-sewn or automated anastomosis, which could be detrimental to patient outcome. These or other issues, if experienced, could limit physician adoption of our products.

Even if the data collected from future clinical studies or clinical experience indicates positive results, each physician’s actual experience with our devices outside the clinical study setting may vary. Clinical studies conducted with the C-Port and PAS-Port systems have involved procedures performed by physicians who are technically proficient, high-volume users of the C-Port and PAS-Port systems. Consequently, both short- and long-term results reported in these studies may be significantly more favorable than typical results of practicing physicians, which could negatively impact rates of adoption of the C-Port and PAS-Port systems.

Our current and planned clinical trials may not begin on time, or at all, and may not be completed on schedule, or at all.

The commencement or completion of any of our clinical trials may be delayed or halted for numerous reasons, including, but not limited to, the following:

• the FDA or other regulatory authorities suspend or place on hold a clinical trial, or do not approve a clinical trial protocol or a clinical trial;

• the data and safety monitoring committee of a clinical trial recommends that a trial be placed on hold or suspended;

• patients do not enroll in clinical trials at the rate we expect;

• patients are not followed-up at the rate we expect;

• clinical trial sites decide not to participate or cease participation in a clinical trial;

• patients experience adverse side effects or events related to our products;

• patients die or suffer adverse medical effects during a clinical trial for a variety of reasons, which may not be related to our product candidates, including the advanced stage of their disease and other medical problems;

• third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner;

• regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with regulatory requirements;

• third-party suppliers fail to provide us with critical components that conform to design and performance specifications;

29

• the failure of our manufacturing processes to produce finished products that conform to design and performance specifications;

• changes in governmental regulations or administrative actions;

• the interim results of the clinical trial are inconclusive or negative;

• pre-clinical or clinical data is interpreted by third parties in different ways; or

• our trial design, although approved, is inadequate to demonstrate safety and/or efficacy.

Clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient follow-up in clinical trials depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures to assess the safety and effectiveness of our product candidates, or they may be persuaded to participate in contemporaneous trials of competitive products. Delays in patient enrollment or failure of patients to continue to participate in a study may cause an increase in costs and delays or result in the failure of the trial.

Our clinical trial costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned. Adverse events during a clinical trial could cause us to repeat a trial, terminate a trial or cancel an entire program.

If the third parties on whom we rely to conduct our clinical trials do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We do not have the ability to independently conduct clinical trials for our product candidates, and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct our clinical trials. In addition, we rely on third parties to assist with our pre-clinical development of product candidates. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control, such as changes in regulations, delays in enrollment, and the like. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates on a timely basis, if at all.

Because one customer accounts for a substantial portion of our product sales, the loss of this significant customer would cause a substantial decline in our revenue.

We derive a substantial portion of our revenue from sales to Century Medical, our distributor in Japan. The loss of Century Medical as a customer would cause a decrease in revenue and, consequently, an increase in net loss. For the six month periods ended December 31, 2009 and 2008, sales to Century Medical accounted for approximately 24% and 13%, respectively, of our total product sales. For fiscal years 2009 and 2008, sales to Century Medical accounted for approximately 15% and 20%, respectively, of our total product sales. We expect that Century Medical will continue to account for a substantial portion of our sales in the near term. As a result, if we lose Century Medical as a customer, our revenue and net loss would be adversely affected. In addition, other customers that have accounted for significant revenue in the past may not generate revenue in any future period. The failure to obtain new significant customers or additional orders from existing customers will materially affect our operating results.

30

If our competitors have products that are approved in advance of ours, marketed more effectively or demonstrated to be more effective than ours, our commercial opportunity will be reduced or eliminated and our business will be harmed.

The market for anastomotic solutions and cardiac bypass products is competitive. Competitors include a variety of public and private companies that currently offer or are developing cardiac surgery products generally and automated anastomotic systems specifically that would compete directly with ours.

We believe that the primary competitive factors in the market for medical devices used in the treatment of coronary artery disease include:

• improved patient outcomes;

• access to and acceptance by leading physicians;

• product quality and reliability;

• ease of use;

• device cost-effectiveness;

• training and support;

• novelty;

• physician relationships; and

• sales and marketing capabilities.

We may be unable to compete successfully on the basis of any one or more of these factors, which could have a material adverse affect on our business, financial condition and results of operations.

A number of different technologies exist or are under development for performing anastomoses, including sutures, mechanical anastomotic devices, suture-based anastomotic devices and shunting devices. Currently, substantially all anastomoses are performed with sutures and, for the foreseeable future we believe that sutures will continue to be the principal alternative to our anastomotic products. Sutures are far less expensive than our automated anastomotic products, and other anastomotic devices may be less expensive than our own. Surgeons, who have been using sutures for their entire careers, may be reluctant to consider alternative technologies, despite potential advantages. Any resistance to change among practitioners could delay or hinder market acceptance of our products, which would have a material adverse effect on our business.

Cardiovascular diseases may also be treated by other methods that do not require anastomoses, including, interventional techniques such as balloon angioplasty with or without the use of stents, pharmaceuticals, atherectomy catheters and lasers. Several of these alternative treatments are widely accepted in the medical community and have a long history of use. In addition, technological advances with other therapies for cardiovascular disease, such as drugs, or future innovations in cardiac surgery techniques could make other methods of treating these diseases more effective or lower cost than bypass procedures. For example, the number of bypass procedures in the United States and other major markets has declined in recent years and is expected to decline in the years ahead because competing treatments are, in many cases, far less invasive and provide acceptable clinical outcomes. Many companies working on treatments that do not require anastomoses may have significantly greater financial, manufacturing, marketing, distribution and technical resources and experience than we have. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, clinical trials, obtaining regulatory clearance or approval and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our competitors may succeed in developing technologies and therapies that are more effective, better tolerated or less costly than any that we are developing or that would render our product candidates obsolete and noncompetitive. Our competitors may succeed in obtaining clearance or approval from the FDA and foreign regulatory authorities for their products sooner than we do for ours. We will also face competition from these third parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient enrollment for clinical trials and in acquiring and in-licensing technologies and products complementary to our programs or advantageous to our business.

31

The Cardica Microcutter ES8, if it is successfully launched, would compete in the market for stapling and cutting devices within laparoscopic stapling and sealing devices currently marketed in the United States. We believe the principal competitive factors in the market for laparascopic staplers include:

• product size;

• ease of use;

• product quality and reliability;

• multi-fire capability;

• device cost-effectiveness;

• degree of articulation;

• physician relationships; and

• sales and marketing capabilities.

Two large competitors, Ethicon Endo-Surgery, part of Johnson & Johnson, and Covidien currently control over 80% of this market. Other large competitors in the laparoscopic device market include Stryker Endoscopy and Olympus which acquired another competitor, Gyrus Medical. Ethicon Endo-Surgery and Covidien, which recently acquired a small competitor, Power Medical, each have large direct sales forces in the U.S. and have been the largest participants in the market for single use disposable laparoscopic stapling devices for many years. Competing against large established competitors with significant resources may make establishing a market for our products difficult.

We are dependent upon a number of key suppliers, including single source suppliers, the loss of which would materially harm our business.

We use or rely upon sole source suppliers for certain components and services used in manufacturing our products, and we utilize materials and components supplied by third parties with which we do not have any long-term contracts. In recent years, many suppliers have ceased supplying materials for use in implantable medical devices. We cannot assure you that materials required by us will not be restricted or that we will be able to obtain sufficient quantities of such materials or services in the future. Moreover, the continued use by us of materials manufactured by third parties could subject us to liability exposure. Because we do not have long-term contracts, none of our suppliers is required to provide us with any guaranteed minimum production levels.

We cannot quickly replace suppliers or establish additional new suppliers for some of our components, particularly due to both the complex nature of the manufacturing process used by our suppliers and the time and effort that may be required to obtain FDA clearance or approval or other regulatory approval to use materials from alternative suppliers. Any significant supply interruption or capacity constraints affecting our facilities or those of our suppliers would have a material adverse effect on our ability to manufacture our products and, therefore, a material adverse effect on our business, financial condition and results of operations.

32

We have limited manufacturing experience and may encounter difficulties in increasing production to provide an adequate supply to customers.

To date, our manufacturing activities have consisted primarily of producing moderate quantities of our marketed products for commercial sales in Japan, Europe and the United States. Production in increased commercial quantities will require us to expand our manufacturing capabilities and to hire and train additional personnel. We may encounter difficulties in increasing our manufacturing capacity and in manufacturing larger commercial quantities, including:

• maintaining product yields;

• maintaining quality control and assurance;

• providing component and service availability;

• maintaining adequate control policies and procedures; and

• hiring and retaining qualified personnel.

Difficulties encountered in increasing our manufacturing could have a material adverse effect on our business, financial condition and results of operations.

The manufacture of our products is a complex and costly operation involving a number of separate processes and components. Shipment delays may impact physicians’ and hospitals’ perception of our products and have a material adverse impact on our results of operations.

In addition, the current unit costs for our products, based on limited manufacturing volumes, are very high, and it will be necessary to achieve economies of scale to become profitable. Certain of our manufacturing processes are labor intensive, and achieving significant cost reductions will depend in part upon reducing the time required to complete these processes. We cannot assure you that we will be able to achieve cost reductions in the manufacture of our products and, without these cost reductions, our business may never achieve profitability.

We have considered, and will continue to consider as appropriate, manufacturing in-house certain components currently provided by third parties, as well as implementing new production processes. Manufacturing yields or costs may be adversely affected by the transition to in-house production or to new production processes, when and if these efforts are undertaken, which would materially and adversely affect our business, financial condition and results of operations.

If we fail to retain key personnel including our executive management team, we may be unable to successfully develop or commercialize our products.

As of December 31, 2009, we had 37 employees. We will need to maintain an appropriate level of managerial, operational, financial and other resources to manage and fund our operations and clinical trials, continue our research and development activities and commercialize our products, and we expect our recent reductions in force will impair our ability to maintain or increase our product sales. It is possible that our management and scientific personnel, systems and facilities currently in place may not be adequate to maintain future operating activities, and we may be required to effect additional reductions in force. Our need to effectively manage our operations and programs requires that we continue to maintain our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale as and when needed and, accordingly, may not achieve our research, development and commercialization goals.

33

We may in the future be a party to patent litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

We are aware of patents issued to third parties that contain subject matter related to our technology. We cannot assure you that these or other third parties will not assert that our products and systems infringe the claims in their patents or seek to expand their patent claims to cover aspects of our products and systems. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities or require us to seek licenses. In addition, if we are found to willfully infringe third-party patents, we could be required to pay treble damages in addition to other penalties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may be required to redesign our products to avoid infringement, and it may not be possible to do so effectively. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling the C-Port or PAS-Port systems or any other product we may develop, which would have a significant adverse impact on our business.

Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.

We rely upon patents, trade secret laws and confidentiality agreements to protect our technology and products. Our pending patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain in the future might be invalidated or circumvented by third parties. If any challenges are successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. To the extent that our intellectual property protection is inadequate, we are exposed to a greater risk of direct competition. In addition, competitors could purchase any of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our protected technology. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees, consultants and advisors to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific circumstances and that all inventions arising out of the individual’s relationship with us shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology.

34

Our products face the risk of technological obsolescence, which, if realized, could have a material adverse effect on our business.

The medical device industry is characterized by rapid and significant technological change. There can be no assurance that third parties will not succeed in developing or marketing technologies and products that are more effective than ours or that would render our technology and products obsolete or noncompetitive. Additionally, new, less invasive surgical procedures and medications could be developed that replace or reduce the importance of current procedures that use our products. Accordingly, our success will depend in part upon our ability to respond quickly to medical and technological changes through the development and introduction of new products. The relative speed with which we can develop products, complete clinical testing and regulatory clearance or approval processes, train physicians in the use of our products, gain reimbursement acceptance, and supply commercial quantities of products to the market are expected to be important competitive factors. Product development involves a high degree of risk, and we cannot assure you that our new product development efforts will result in any commercially successful products. We have experienced delays in completing the development and commercialization of our planned products, and there can be no assurance that these delays will not continue or recur in the future. Any delays could result in a loss of market acceptance and market share.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.

Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the federal healthcare program Anti-Kickback Statute, which prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing or arranging for an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. Foreign sales of our products are also subject to similar fraud and abuse laws, including application of the U.S. Foreign Corrupt Practices Act. If our operations, including any consulting arrangements we may enter into with physicians who use our products, are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. If enforcement action were to occur, our business and financial condition would be harmed.

We could be exposed to significant product liability claims, which could be time consuming and costly to defend, divert management attention, and adversely impact our ability to obtain and maintain insurance coverage. The expense and potential unavailability of insurance coverage for our company or our customers could adversely affect our ability to sell our products, which would adversely affect our business.

The testing, manufacture, marketing, and sale of our products involve an inherent risk that product liability claims will be asserted against us. Additionally, we are currently training physicians in the United States on the use of our C-Port and PAS-Port systems. During training, patients may be harmed, which could also lead to product liability claims. Product liability claims or other claims related to our products, or their off-label use, regardless of their merits or outcomes, could harm our reputation in the industry, reduce our product sales, lead to significant legal fees, and result in the diversion of management’s attention from managing our business. As of January 31, 2010, we were not aware of any existing product liability claims.

Although we maintain product liability insurance in the amount of $5,000,000, we may not have sufficient insurance coverage to fully cover the costs of any claim or any ultimate damages we might be required to pay. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and adversely affecting our operating results.

Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operations and use of the C-Port or PAS-Port systems. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using the C-Port or PAS-Port systems and potential customers may opt against purchasing the C-Port or PAS-Port systems due to the cost or inability to procure insurance coverage.

35

We sell our systems internationally and are subject to various risks relating to these international activities, which could adversely affect our revenue.

To date, a substantial portion of our product sales has been attributable to sales in international markets. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations. Our international business may be adversely affected by changing economic conditions in foreign countries. Because most of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international customer and, therefore, less competitive in international markets, which could affect our results of operations. Engaging in international business inherently involves a number of other difficulties and risks, including:

• export restrictions and controls relating to technology;

• the availability and level of reimbursement within prevailing foreign healthcare payment systems;

• pricing pressure that we may experience internationally;

• required compliance with existing and changing foreign regulatory requirements and laws;

• laws and business practices favoring local companies;

• longer payment cycles;

• difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

• political and economic instability;

• potentially adverse tax consequences, tariffs and other trade barriers;

• international terrorism and anti-American sentiment;

• difficulties and costs of staffing and managing foreign operations; and

• difficulties in enforcing intellectual property rights.

Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention. We cannot assure you that one or more of these factors will not harm our business.

We are dependent upon key personnel, the loss of any of which could have a material adverse affect on our business.

Our business and future operating results depend significantly on the continued contributions of our key technical personnel and senior management, including those of our co-founder, CEO and President, Bernard Hausen, M.D., Ph.D. These services and individuals would be difficult or impossible to replace and none of these individuals is subject to a post-employment non-competition agreement. While we are subject to certain severance obligations to Dr. Hausen, either he or we may terminate his employment at any time and for any lawful reason or for no reason. Our business and future operating results also depend significantly on our ability to attract and retain qualified management, manufacturing, technical, marketing, sales and support personnel for our operations. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel. Additionally, although we have key-person life insurance in the amount of $3.0 million on the life of Dr. Hausen, we cannot assure you that this amount would fully compensate us for the loss of Dr. Hausen’s services. The loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled employees, as needed, could materially adversely affect our business, financial condition and results of operations.

36

Our operations are currently conducted at a single location that may be at risk from earthquakes, terror attacks or other disasters.

We currently conduct all of our manufacturing, development and management activities at a single location in Redwood City, California, near known earthquake fault zones. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site storage of computer data. However, any future natural disaster, such as an earthquake, or a terrorist attack, could cause substantial delays in our operations, damage or destroy our equipment or inventory and cause us to incur additional expenses. A disaster could seriously harm our business and results of operations. Our insurance does not cover earthquakes and floods and may not be adequate to cover our losses in any particular case.

If we use hazardous materials in a manner that causes injury, we may be liable for damages.

Our research and development and manufacturing activities involve the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of these materials. We do not carry specific hazardous waste insurance coverage, and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory clearances or approvals could be suspended or terminated.

We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses.

In relation to our products that have received FDA clearance or approval, our promotional materials and training methods regarding physicians will need to comply with FDA and other applicable laws and regulations. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and/or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of our products would be impaired.

Risks Related to Our Common Stock

We may not be able to maintain our listing on The NASDAQ Global Market, which would adversely affect the price and liquidity of our common stock.

On May 22, 2009, we announced that we received a letter, dated May 19, 2009, from the Listing Qualifications Department of The NASDAQ Stock Market notifying us that we did not comply with the $10.0 million minimum stockholders’ equity requirement for continued listing on The NASDAQ Global Market set forth in NASDAQ Marketplace Rule 5450(b)(1)(A). NASDAQ’s determination was based on a review of our Quarterly Report on Form 10-Q for the period ended March 31, 2009. As provided in the NASDAQ rules, we timely submitted to the NASDAQ Staff a plan to continue listing on The NASDAQ Global Market. NASDAQ granted us an extension until September 1, 2009 to regain compliance with the listing standards.

37

On September 2, 2009, we received a second letter from the Listing Qualifications Department of The NASDAQ Stock Market notifying us of its determination that we had failed to meet the terms of the extension because we failed to publicly disclose a compliant stockholders’ equity balance by September 1, 2009. Pursuant to the NASDAQ rules we appealed the decision to a NASDAQ Listing Qualifications Panel and requested a hearing. The hearing was scheduled for October 15, 2009.

Based on the completion on September 30, 2009 of our private placement of 8,142,082 shares of common stock and 4,071,046 warrants to purchase our common stock for gross proceeds of $10.2 million, the hearing originally scheduled for October 15, 2009 was not necessary, and we now satisfy the continued listing criteria of The NASDAQ Global Market. Even though we were able to regain compliance with the listing requirements of The NASDAQ Global Market, there is no assurance that in the future we will continue to satisfy such listing requirements, with the result that our common stock may be delisted from that market.

If our stock is delisted from The NASDAQ Global Market, we may still meet the listing requirements for the NASDAQ Capital Market, including the requirement to have a minimum of $1.0 million in stockholders’ equity. If we are unable to list on The NASDAQ Capital Market, it would likely be more difficult to trade in or obtain accurate quotations as to the market price of our common stock. Delisting of our common stock would materially and adversely affect the market price and market liquidity of our common stock and our ability to raise necessary capital.

The price of our common stock may continue to be volatile, and the value of an investment in our common stock may decline.

An active and liquid trading market for our common stock may not develop or be sustained. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

• market acceptance and adoption of our products;

• regulatory clearance or approvals of our products;

• volume and timing of orders for our products;

• changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earning estimates;

• quarterly variations in our or our competitors’ results of operations;

• general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;

• the announcement of new products or product enhancements by us or our competitors;

• announcements related to patents issued to us or our competitors and to litigation; and

• developments in our industry.

In addition, the stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market price of our common stock.

38

* The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Our executive officers and directors and their affiliates, together with our current significant stockholders, beneficially owned approximately 26% of our outstanding common stock as of December 31, 2009. Accordingly, these stockholders have significant influence over the outcome of corporate actions requiring stockholder approval and continue to have significant influence over our operations. The interests of these stockholders may be different than the interests of other stockholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

Evolving regulation of corporate governance and public disclosure will result in additional expenses and continuing uncertainty.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The Nasdaq Stock Market rules are creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliance costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by courts and regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Maintaining appropriate standards of corporate governance and public disclosure will result in increased general and administrative expenses and a diversion of management time and attention from product-generating and revenue-generating activities to compliance activities. For example, in fiscal year 2008, we incurred increased accounting and consultant expenses to comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to comply with new or changed laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business and reputation may be harmed.

Our future operating results may be below securities analysts’ or investors’ expectations, which could cause our stock price to decline.

The revenue and income potential of our products and our business model are unproven, and we may be unable to generate significant revenue or grow at the rate expected by securities analysts or investors. In addition, our costs may be higher than we, securities analysts or investors expect. If we fail to generate sufficient revenue or our costs are higher than we expect, our results of operations will suffer, which in turn could cause our stock price to decline. Our results of operations will depend upon numerous factors, including:

• FDA or other regulatory clearance or approval of future generations of our C-Port system or other products;

• demand for our products;

• the performance of third-party contract manufacturers and component suppliers;

• our ability to develop sales and marketing capabilities;

• our ability to develop, introduce and market new or enhanced versions of our products on a timely basis; and

• our ability to obtain and protect proprietary rights.

Our operating results in any particular period may not be a reliable indication of our future performance. In some future quarters, our operating results may be below the expectations of securities analysts or investors. If this occurs, the price of our common stock will likely decline.

39

Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

• limit who may call a special meeting of stockholders;

• establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

• prohibit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;

• prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

• provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock without stockholder approval.

In addition, Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirors at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock market in general, the Nasdaq Global Market and the market for medical device companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of medical device companies have been particularly volatile. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could materially harm our financial condition and results of operations.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain to our stockholders for the foreseeable future.

40

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On November 11, 2009, our Annual Meeting of Stockholders was held at our corporate offices located at 900 Saginaw Drive, Redwood City, California. During this meeting, our stockholders voted on the following three proposals:

(a) To elect directors to hold office until our 2010 Annual Meeting of Stockholders and until their successors are elected and have qualified, or until such director’s death, resignation or removal. The votes regarding the election of the director were as follows:

	Votes
Nominee	For		Withheld
Bernard Hausen		19,342,197		581,453
Kevin Larkin		18,823,794		1,099,856
Richard Powers		19,310,736		612,914
Jeffrey Purvin		18,823,394		1,100,256
John Simon		19,327,186		596,464
William Younger		18,797,488		1,126,162

(b) To approve an amendment to our 2005 Equity Incentive Plan, as amended, to increase the aggregate number of shares of common stock authorized for issuance under the 2005 Plan by 1,750,000 shares.

Votes For	Votes against	Abstain
11,794,609	549,017	459,582

(c) To ratify the selection by the Audit Committee of our Board of Directors of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending June 30, 2010:

Votes For	Votes against	Abstain
19,449,438	83,550	390,662

41

ITEM 6. EXHIBITS.

Exhibit
No.			Description.
	3.1		Amended and Restated Certificate of Incorporation of Cardica, Inc. †
	3.2		Amended and Restated Bylaws of Cardica, Inc. (1)
	4.1		Warrant dated March 17, 2000 exercisable for 12,270 shares of common stock. †
	4.2		Warrant dated October 31, 2002 exercisable for 60,017 shares of common stock. †
	4.3		Form of Warrant dated June 2007. (2)
	4.4		Registration Rights Agreement, dated June 7, 2007, by and among Cardica, Inc., and the investors set forth therein. (2)
	4.5		Amended and Restated Investor Rights Agreement, dated August 19, 2003, by and among Cardica, Inc., and certain stockholders. †
	4.6		Amendment of Registration Rights Agreement, dated October 15, 2007. (3)
	4.7		Form of Warrant dated September 30, 2009. (4)
	4.8		Registration Rights Agreement, dated September 25, 2009, by and among Cardica, Inc. and the investors set forth therein. (4)
	10.2		Cardica, Inc. 2005 Equity Incentive Plan, as amended. (5)
	31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
	31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
	32.1	*	Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

†	Filed as exhibits to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on November 4, 2005, as amended, and incorporated herein by reference.
*	The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cardica, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such filing.
(1)	Filed pursuant to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2008, and incorporated herein by reference.
(2)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2007, excluding Item 3.02 and incorporated herein by reference.
(3)	Filed as an exhibit to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on October 15, 2007 and incorporated herein by reference.
(4)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2009.
(5)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 11, 2009.

42

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Cardica, Inc.
Date: February 9, 2010	/s/ Bernard A. Hausen
	Bernard A. Hausen, M.D., Ph.D
	President, Chief Executive Officer, Chief Medical Officer and Director (Principal Executive Officer)
Date: February 9, 2010	/s/ Robert Y. Newell
	Robert Y. Newell
	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

43

Exhibit Index

Exhibit
No.			Description.
	3.1		Amended and Restated Certificate of Incorporation of Cardica, Inc. †
	3.2		Amended and Restated Bylaws of Cardica, Inc. (1)
	4.1		Warrant dated March 17, 2000 exercisable for 12,270 shares of common stock. †
	4.2		Warrant dated October 31, 2002 exercisable for 60,017 shares of common stock. †
	4.3		Form of Warrant dated June 2007. (2)
	4.4		Registration Rights Agreement, dated June 7, 2007, by and among Cardica, Inc., and the investors set forth therein. (2)
	4.5		Amended and Restated Investor Rights Agreement, dated August 19, 2003, by and among Cardica, Inc., and certain stockholders. †
	4.6		Amendment of Registration Rights Agreement, dated October 15, 2007. (3)
	4.7		Form of Warrant dated September 30, 2009. (4)
	4.8		Registration Rights Agreement, dated September 25, 2009, by and among Cardica, Inc. and the investors set forth therein. (4)
	10.2		Cardica, Inc. 2005 Equity Incentive Plan, as amended. (5)
	31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
	31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
	32.1	*	Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

†	Filed as exhibits to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on November 4, 2005, as amended, and incorporated herein by reference.
*	The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cardica, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such filing.
(1)	Filed pursuant to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2008, and incorporated herein by reference.
(2)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2007, excluding Item 3.02 and incorporated herein by reference.
(3)	Filed as an exhibit to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on October 15, 2007 and incorporated herein by reference.
(4)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2009.
(5)	Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 11, 2009.

44

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Bernard A. Hausen, M.D., Ph.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cardica, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 9, 2010	/s/ Bernard A. Hausen
	Bernard A. Hausen, M.D., Ph.D
	President, Chief Executive Officer, Chief Medical Officer and Director (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Robert Y. Newell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cardica, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 9, 2010	/s/ Robert Y. Newell
	Robert Y. Newell
	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Bernard A. Hausen, M.D., Ph.D., Chief Executive Officer of Cardica, Inc. (the “Company”), and Robert Y. Newell, Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2009, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 9th day of February, 2010.

/s/ Bernard A. Hausen, M.D., Ph.D. Bernard A. Hausen, M.D., Ph.D.	/s/ Robert Y. Newell Robert Y. Newell
Chief Executive Officer	Chief Financial Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cardica, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.