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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 30, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
000-52082
CARDIOVASCULAR SYSTEMS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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41-1698056
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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651 Campus Drive
St. Paul, Minnesota
(Address of principal
executive offices)
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55112-3495
(Zip Code)
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Registrants telephone number, including area code:
(651) 259-1600
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, One-tenth of One Cent ($0.001)
Par Value Per Share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
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
As of December 31, 2008, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $9,236,344 based on the closing sale price as
reported on the NASDAQ Global Market.
The number of shares of the registrants common stock
outstanding as of September 24, 2009 was 14,598,226.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrants 2009
Annual Meeting of Stockholders are incorporated by reference
into Items 10, 11, 12, 13 and 14 of Part III of this
report.
Table of
Contents
We make available, free of charge, copies of our annual report
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act on
our web site,
http://www.csi360.com,
as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC. We are not
including the information on our web site as a part of, or
incorporating it by reference into, our
Form 10-K.
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PART I
Special
Note Regarding Forward Looking Statements
This report contains plans, intentions, objectives, estimates
and expectations that constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act),
which are subject to the safe harbor created by
those sections. Forward-looking statements are based on our
managements beliefs and assumptions and on information
currently available to our management. In some cases, you can
identify forward-looking statements by terms such as
may, will, should,
could, would, expect,
plans, anticipates,
believes, estimates,
projects, predicts,
potential and similar expressions intended to
identify forward-looking statements. Examples of these
statements include, but are not limited to, any statements
regarding our future financial performance, results of
operations or sufficiency of capital resources to fund our
operating requirements, and other statements that are other than
statements of historical fact. Our actual results could differ
materially from those discussed in these forward-looking
statements due to a number of factors, including the risks and
uncertainties are described more fully by us in Part I,
Item 1A and Part II, Item 7 of this report and in
our other filings with the SEC. You should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this report. You should read this report
completely and with the understanding that our actual future
results may be materially different from what we expect. Except
as required by law, we assume no obligation to update these
forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in
these forward-looking statements, even if new information
becomes available in the future.
Corporate
Information
We were incorporated as Replidyne, Inc. in Delaware in 2000. On
February 25, 2009, Replidyne, Inc. completed its business
combination with Cardiovascular Systems, Inc., a Minnesota
corporation (CSI-MN), in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as
of November 3, 2008, by and among Replidyne, Responder
Merger Sub, Inc., a wholly-owned subsidiary of Replidyne
(Merger Sub), and CSI-MN (the Merger
Agreement). Pursuant to the Merger Agreement, Merger Sub
merged with and into CSI-MN, with CSI-MN continuing after the
merger as the surviving corporation and a wholly-owned
subsidiary of Replidyne. At the effective time of the merger,
Replidyne changed its name to Cardiovascular Systems, Inc.
(CSI) and CSI-MN changed its name to CSI Minnesota,
Inc. As of immediately following the effective time of the
merger, former CSI-MN stockholders owned approximately 80.2% of
the outstanding common stock of the combined company, and
Replidyne stockholders owned approximately 19.8% of the
outstanding common stock of the combined company. Following the
merger of Merger Sub with CSI-MN, CSI-MN merged with and into
CSI, with CSI continuing after the merger as the surviving
corporation. These transactions are referred to herein as the
merger. Unless the context otherwise requires, all
references herein to the Company, CSI,
we, us and our refer to
CSI-MN prior to the completion of the merger and to CSI
following the completion of the merger and the name change, and
all references to Replidyne refer to Replidyne prior
to the completion of the merger and the name change.
Replidyne was a biopharmaceutical company focused on
discovering, developing, in-licensing and commercializing
anti-infective products.
CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997,
we engaged in research and development on several different
product concepts that were later abandoned. Since 1997, we have
devoted substantially all of our resources to the development of
the Diamondback 360° and our Viper line of ancillary
products.
Our principal executive office is located at 651 Campus Drive,
St. Paul, Minnesota 55112. Our telephone number is
(651) 259-2800,
and our website is www.csi360.com. The information contained in
or connected to our website is not incorporated by reference
into, and should not be considered part of, this Annual Report
on
Form 10-K.
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We have received federal registration of certain marks including
Diamondback 360° and CSI. We have
applied for federal registration of certain marks, including
ViperWire, ViperWire Advance,
ViperSheath, ViperSlide,
ViperTrack, and ViperCaddy. All other
trademarks, trade names and service marks appearing in this
Form 10-K
are the property of their respective owners.
Business
Overview
We are a medical device company focused on developing and
commercializing minimally invasive treatment solutions for
vascular disease. Interventional endovascular treatment of
peripheral artery disease, or PAD, was our initial area of
focus. PAD is caused by the accumulation of plaque in peripheral
arteries, most commonly occurring in the pelvis and legs, and
affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. However, as reported in an article published in Podiatry
Today in 2006, only approximately 2.5 million of those
eight to 12 million people are treated. PAD is a
progressive disease, and, if left untreated, can lead to limb
amputation or death.
Our primary product, the Diamondback
360®
PAD System, is a catheter-based platform capable of treating a
broad range of plaque types in leg arteries both above and below
the knee and addresses many of the limitations associated with
existing treatment alternatives. In August 2007, the
U.S. Food and Drug Administration, or FDA, granted us
510(k) clearance for use of the Diamondback 360° as a
therapy for treatment of patients with PAD. We commenced a
limited commercial introduction of the Diamondback 360° in
the United States in September 2007 and began a full commercial
launch during the quarter ended March 31, 2008. As of
June 30, 2009, we were selling the Diamondback 360° in
556 accounts that had completed an estimated 15,000 procedures.
The Diamondback 360°s single-use catheter
incorporates a flexible drive shaft with an offset crown coated
with diamond grit. With the aid of fluoroscopy, the physician
positions the crown at a plaque-containing lesion in the
peripheral artery and removes the plaque by causing the crown to
orbit against it. This mechanism of action creates a smooth
lumen, or channel, in the vessel. The Diamondback 360° is
designed to differentiate between plaque and compliant arterial
tissue, a concept that we refer to as differential
sanding. Normal arteries are compliant; they have the
ability to expand and contract as needed to supply blood flow to
the legs and feet. Arteries burdened with fibrotic (moderate)
and/or
calcified (hardened) plaque due to PAD lose their compliance
which makes other therapies such as angioplasty, stenting,
surgical bypass and directional atherectomy problematic. The
Diamondback 360° sands plaque into small particles and
restores both blood flow and vessel compliance. The particles
created by the Diamondback 360° are generally smaller than
red blood cells and are carried away by the bloodstream. The
small size of the particles avoids the need for plaque
collection reservoirs. The Diamondback 360° can treat the
diseased arteries with less than three minutes of sanding time,
potentially reducing the overall procedure time.
We have conducted three clinical trials involving
207 patients to demonstrate the safety and efficacy of the
Diamondback 360° in treating PAD. In particular, our
pivotal OASIS clinical trial was a prospective 20-center United
States study that involved 124 patients with 201 lesions
and successfully met FDA targets. The OASIS Study demonstrated a
low 2.4% incidence of target lesion revascularization at six
months. In addition, the Diamondback 360° achieved a 100%
limb salvage rate at six months in a group of patients with
mostly
below-the-knee
disease. We were the first company to conduct a prospective
multi-center clinical trial with a prior investigational device
exemption, or IDE, in support of a 510(k) clearance for this
device category. We continue to support device performance
through a rigorous clinical program and have initiated two
post-market, randomized feasibility studies to further
differentiate the outcomes of the Diamondback 360° from
those of conventional balloon angioplasty. In addition, we
believe that the Diamondback 360° provides a platform that
can be leveraged across multiple market segments. We are seeking
premarket approval, or PMA, to use the Diamondback 360° to
treat patients with coronary artery disease and have submitted
an IDE to the FDA.
In addition to the Diamondback 360°, we are expanding our
product portfolio through internal product development and
establishment of business relationships. We now offer multiple
accessory devices designed to complement the use of the
Diamondback 360°, and we have entered into distribution
agreements with Invatec, Inc. and Asahi-Intecc, Ltd.
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Market
Overview
PAD is a circulatory problem in which plaque deposits build up
on the walls of arteries, reducing blood flow to the limbs. The
most common early symptoms of PAD are pain, cramping or fatigue
in the leg or hip muscles while walking. Symptoms may progress
to include numbness, tingling or weakness in the leg and, in
severe cases, burning or aching pain in the leg, foot or toes
while resting. As PAD progresses, additional signs and symptoms
occur, including cooling or color changes in the skin of the
legs or feet, and sores on the legs or feet that do not heal. If
untreated, PAD may lead to critical limb ischemia, a condition
in which the amount of oxygenated blood being delivered to the
limb is insufficient to keep the tissue alive. Critical limb
ischemia often leads to large non-healing ulcers, infections,
gangrene and, eventually, limb amputation or death.
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. According to 2007 statistics from the American Heart
Association, PAD becomes more common with age and affects
approximately 12% to 20% of the population over 65 years
old. An aging population, coupled with increasing incidence of
diabetes and obesity, is likely to increase the prevalence of
PAD. In many older PAD patients, particularly those with
diabetes, PAD is characterized by fibrotic (moderate) or
calcified (hardened) plaque deposits that have not been
successfully treated with existing non-invasive treatment
techniques. PAD may involve arteries either above or below the
knee. Arteries above the knee are generally long, straight and
relatively wide, while arteries below the knee are shorter and
branch into arteries that are progressively smaller in diameter.
Despite the severity of PAD, it remains relatively
underdiagnosed. According to an article published in Podiatry
Today in 2006, only approximately 2.5 million of the eight
to 12 million people in the United States with PAD are
diagnosed. Although we believe the rate of diagnosis of PAD is
increasing, underdiagnosis continues due to patients failing to
display symptoms or physicians misinterpreting symptoms as
normal aging. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options. The PARTNERS study advocated increased PAD screening by
primary care physicians.
Physicians treat a significant portion of the 2.5 million
people in the United States who are diagnosed with PAD using
medical management, which includes lifestyle changes, such as
diet and exercise and drug treatment. For instance, within a
reference group of over 1,000 patients from the PARTNERS
study, 54% of the patients with a prior diagnosis of PAD were
receiving antiplatelet medication treatment. While medications,
diet and exercise may improve blood flow, they do not treat the
underlying obstruction and many patients have difficulty
maintaining lifestyle changes. Additionally, many prescribed
medications are contraindicated, or inadvisable, for patients
with heart disease, which often exists in PAD patients. As a
result of these challenges, many medically managed patients
develop more severe symptoms that require procedural
intervention.
Our
Solution
The Diamondback 360° represents a new approach to the
treatment of PAD that provides physicians and patients with a
procedure that addresses many of the limitations of traditional
treatment alternatives. The Diamondback 360°s
single-use catheter incorporates a flexible drive shaft with an
offset crown coated with diamond grit. Physicians position the
crown at the site of an arterial plaque lesion and remove the
plaque by causing the crown to orbit against it, creating a
smooth lumen, or channel, in the vessel. The Diamondback
360° is a device designed to differentiate between plaque
and compliant arterial tissue, a concept that we refer to as
differential sanding.
Normal arteries are compliant; they have the ability to expand
and contract as needed to supply blood flow to the legs and
feet. Arteries burdened with fibrotic (moderate)
and/or
calcified (hardened) plaque due to PAD lose their compliance
which makes other therapies such as angioplasty, stenting,
surgical bypass and atherectomy problematic. The Diamondback
360° sands plaque into small particles and restores both
blood flow and vessel compliance. The particles created by the
Diamondback 360° are generally smaller than red blood cells
and are carried away by the bloodstream. The small size of the
particles avoids the need for plaque collection reservoirs. The
Diamondback 360° can treat the diseased arteries with less
than three minutes of sanding time, potentially reducing the
overall procedure time.
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We believe that the Diamondback 360° offers the following
key benefits:
Strong
Safety Profile
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Differential Sanding Reduces Risk of Adverse
Events. The Diamondback 360° is designed to
differentiate between plaque and compliant arterial tissue. The
diamond grit coated offset crown engages and removes plaque from
the artery wall with minimal likelihood of penetrating or
damaging the fragile, internal elastic lamina layer of the
arterial wall because compliant tissue flexes away from the
crown. Furthermore, the Diamondback 360° rarely penetrates
even the middle inside layer of the artery and the two elastic
layers that border it. The Diamondback 360°s
perforation rate was 2.4% during our pivotal OASIS trial.
Analysis by an independent pathology laboratory of more than 434
consecutive cross sections of porcine arteries treated with the
Diamondback 360° revealed there was minimal to no damage,
on average, to the medial layer, which is typically associated
with restenosis. In addition, the safety profile of the
Diamondback 360° was found to be non-inferior to that of
angioplasty, which is often considered the safest of
interventional methods. This was demonstrated in our OASIS
trial, which had a low 4.8% rate of device-related serious
adverse events, or SAEs.
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Reduces the Risk of Distal Embolization. The
Diamondback 360° sands plaque away from artery walls in a
manner that produces particles of such a small size
generally smaller than red blood cells that they are
carried away by the bloodstream. The small size of the particles
avoids the need for plaque collection reservoirs on the catheter
and reduces the need for ancillary distal protection devices,
commonly used with directional cutting atherectomy, and also
significantly reduces the risk that larger pieces of removed
plaque will block blood flow downstream.
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Allows Continuous Blood Flow During
Procedure. The Diamondback 360° allows for
continuous blood flow during the procedure, except when used in
chronic total occlusions. Other devices may restrict blood flow
due to the size of the catheter required or the use of distal
protection devices, which could result in complications such as
excessive heat and tissue damage.
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Proven
Efficacy
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Efficacy Demonstrated in a 124-Patient Clinical
Trial. Our pivotal OASIS clinical trial was a
prospective 20-center study that involved 124 patients with
201 lesions and performance targets were established
cooperatively with the FDA before the trial began. Despite 55%
of the lesions consisting of calcified plaque and 48% of the
lesions having a length greater than three centimeters, the
performance of the device in the OASIS trial successfully met
the FDAs study endpoints.
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Treats Difficult, Fibrotic and Calcified
Lesions. The Diamondback 360° enables
physicians to remove plaque from long, fibrotic, calcified or
bifurcated lesions in peripheral arteries both above and below
the knee. Other PAD devices have demonstrated limited
effectiveness in treating these challenging lesions.
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Orbital Motion Improves
Device-to-Lumen
Ratio. The orbiting action of the Diamondback
360° can create a lumen of approximately 2.0 times the
diameter of the crown. The variable
device-to-lumen
ratio allows the continuous removal of plaque as the opening of
the lumen increases during the operation of the device.
Non-orbiting rotational atherectomy catheters remove plaque by
abrading the lesion with a spinning, abrasive burr, which acts
in a manner similar to a drill and only creates a lumen the same
size or slightly smaller than the size of the burr.
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Differential Sanding Creates Smooth
Lumens. The differential sanding of the
Diamondback 360° creates a smooth surface inside the lumen.
We believe that the smooth lumen created by the Diamondback
360° increases the velocity of blood flow and decreases the
resistance to blood flow which may decrease potential for
restenosis, or renarrowing of the arteries.
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Ease
of Use
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Utilizes Familiar Techniques. Physicians using
the Diamondback 360° employ techniques similar to those
used in angioplasty, which are familiar to interventional
cardiologists, vascular surgeons and interventional
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radiologists who are trained in endovascular techniques. The
Diamondback 360°s simple user interface requires
minimal additional training. The systems ability to
differentiate between diseased and compliant tissue reduces the
risk of complications associated with user error and potentially
broadens the user population.
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Single Insertion to Complete Treatment. The
Diamondback 360°s orbital technology and differential
sanding process in most cases allows for a single insertion to
treat lesions. Because the particles of plaque sanded away are
of such small sizes, the Diamondback 360° does not require
a collection reservoir that needs to be repeatedly emptied or
cleaned during the procedure. Rather, the Diamondback 360°
allows for multiple passes of the device over the lesion until
plaque is removed and a smooth lumen is created.
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Limited Use of Fluoroscopy. The relative
simplicity of our process and predictable crown location allows
physicians to significantly reduce fluoroscopy use, thus
limiting radiation exposure.
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Cost
and Time Efficient Procedure
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Short Procedure Time. The Diamondback
360° has a short procedure time typically ranging from two
to six minutes.
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Single Crown Can Create Various Lumen Sizes Limiting Hospital
Inventory Costs. The Diamondback 360°s
orbital mechanism of action allows a single-sized device to
create various diameter lumens inside the artery. Adjusting the
rotational speed of the crown changes the orbit to create the
desired lumen diameter, thereby potentially avoiding the need to
use multiple catheters of different sizes to treat multiple
lesions. The Diamondback 360° can create a lumen that is
100% larger than the actual diameter of the device, for a
device-to-lumen
ratio of approximately 1.0 to 2.0.
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Single Insertion Reduces Procedural
Time. Since the physician does not need to insert
and remove multiple catheters or clean a plaque collection
reservoir to complete the procedure, there is a potential for
decreased procedure time.
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Our
Strategy
Our goal is to be the leading provider of minimally invasive
solutions for the treatment of vascular disease. The key
elements of our strategy include:
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Drive Adoption Through Our Direct Sales Organization and Key
Physician Leaders. We expect to continue to drive
adoption of the Diamondback 360° through our direct sales
force, which targets interventional cardiologists, vascular
surgeons and interventional radiologists. We commenced a limited
commercial introduction in September 2007 and broadened its
commercialization efforts to a full commercial launch in the
quarter ended March 31, 2008. As of June 30, 2009, we
had a 124 person direct sales force driving product
adoption in 556 hospitals in the United States. Over 15,000
Diamondback 360° procedures were completed as of
June 30, 2009. As a key element of our strategy, we focus
on educating and training physicians on the Diamondback
360° through our direct sales force and during seminars
where physician industry leaders discuss case studies and
treatment techniques using the Diamondback 360°.
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Collect Additional Clinical Evidence on Benefits of the
Diamondback 360°. We are focused on using
clinical evidence to demonstrate the advantages of our system
and drive physician acceptance. We have conducted three clinical
trials to demonstrate the safety and efficacy of the Diamondback
360° in treating PAD, involving 207 patients,
including our pivotal OASIS trial. In addition, we have
initiated two clinically rigorous, randomized post-market
feasibility trials to further differentiate the performance of
the Diamondback 360° from conventional balloon angioplasty.
In both of these studies, the CALCIUM 360° and COMPLIANCE
360°, acute procedural success and device safety will be
verified by an independent core lab, and the long-term
durability of the procedure will be evaluated.
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Expand Product Portfolio within the Market for Treatment of
Peripheral Arteries. In addition to the
Diamondback 360°, we are expanding our product portfolio.
We now offer multiple accessory devices
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designed to complement the use of the Diamondback 360°.
Within the past 12 months, we have launched the following
products:
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ViperSlidetm
Lubricant an exclusive lubricant designed to
optimize the smooth operation of the Diamondback 360°
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ViperSheathtm
Introducer Sheath 5-7 French kink-resistant and
crush-resistant vascular access tools offered in 45 cm and 85 cm
lengths
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ViperTracktm
Radiopaque Tape a radiopaque tape to assist in
measuring lesion lengths and marking lesion locations
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ViperCaddytm
Guide Wire Management a secure guide wire holder
that is easy to use and provides a steady grip on the multiple
guide wires used during an interventional procedure.
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We are continuing to actively pursue internal product
development to further expand our portfolio of PAD treatment
solutions.
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Leverage Technology Platform into Coronary
Market. Based on the excellent clinical
performance of the Diamondback
360o in
treating lower extremity PAD, we intend to leverage the
devices capabilities to expand into the interventional
coronary market. A coronary application would address a large
market opportunity, further leveraging our core technology and
expanding its market potential. In 2008, we completed the ORBIT
I trial, a 50-patient study in India which investigated the
safety of the Diamondback
360o
device in treating calcified coronary artery lesions. Results
successfully met both safety and efficacy endpoints. An IDE
application was recently submitted to the FDA for ORBIT II, a
pivotal trial in the United States to evaluate the safety
and effectiveness of the Diamondback
360o in
treating severely calcified coronary lesions.
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Pursue Strategic Acquisitions and
Partnerships. We have recently entered into
agreements with both Invatec, Inc. and Asahi-Intecc, Ltd. In
April 2009, we signed a sales agency agreement with Invatec,
Inc. to distribute the Invatec balloon catheter line, including
the SubMarine
Plustm
PTA Balloon Catheter, the Admiral
Xtremetm
PTA Balloon Catheter and the Amphirion
Deeptm
PTA Balloon Catheter. These balloons are typically used at low
pressure, if needed, following the restoration of vessel
compliance with the Diamondback 360°. In August 2009, we
signed an exclusive distribution agreement with Asahi-Intecc,
Ltd. to market its peripheral guide wire line in the United
States. We offer two Asahi 0.18 wire platforms: the Astato 30
and Treasure 12. The Astato 30 is a high-penetration guide wire
specially designed to break through fibrous caps and calcium
deposits, and treat long, complex lesions. The Treasure 12 has a
one-piece core to provide control, torque performance and
tactile feedback to the physician.
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In addition to adding to our product portfolio through internal
development efforts, we intend to continue to explore the
acquisition of other product lines, technologies or companies
that may leverage our sales force or complement our strategic
objectives. We plan to continue to evaluate distribution
agreements, licensing transactions and other strategic
partnerships.
Our
Product
Components
of the Diamondback 360°
The Diamondback 360° consists of a single-use, low-profile
catheter that travels over our proprietary
ViperWiretm
Guide Wire. The system is used in conjunction with a reusable
external control unit.
Catheter. The catheter consists of:
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a control handle, which allows precise movement of the crown and
predictable crown location;
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a flexible drive shaft with a diamond grit coated offset crown,
which tracks and orbits over the guidewire; and
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a sheath, which covers the drive shaft and permits delivery of
saline or medications to the treatment area.
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6
The crown is available in two configurations classic
and solid. The classic crown addresses treatment needs in
arteries typically below the knee and in more tortuous anatomy,
while the solid crown addresses treatment needs in larger
arteries typically above the knee. The crown is available in
multiple sizes, including 1.25, 1.50, 1.75, 2.00 and 2.25
millimeter diameters. The catheter length is 135 centimeters
which addresses procedural approach and target lesion locations
both above and below the knee.
ViperWire Guidewire. The ViperWire, which is
located within the catheter, maintains device position in the
vessel and is the rail on which the catheter operates. The
ViperWire is available in two levels of firmness.
Control Unit. The control unit incorporates a
touch-screen interface on an easily maneuverable, lightweight
pole. Using an external air supply, the control unit regulates
air pressure to drive the turbine located in the catheter handle
to speeds ranging up to 200,000 revolutions per minute. Saline,
delivered by a pumping mechanism on the control unit, bathes the
device shaft and crown. The constant flow of saline reduces the
risk of heat generation.
Technology
Overview
The two technologies used in the Diamondback 360° are
plaque modification through differential sanding and plaque
removal.
Plaque Modification through Differential
Sanding. The Diamondback 360°s design
allows the device to differentiate between compliant and
diseased arterial tissue. This property is common with sanding
material such as the diamond grit used in the Diamondback
360°. The diamond preferentially engages and sands harder
material. The Diamondback 360° also treats soft plaque,
which is less compliant than a normal vessel wall. Arterial
lesions tend to be harder and stiffer than compliant, undiseased
tissue, and they often are fibrotic or calcified. The
Diamondback 360° sands the lesion but does not damage more
compliant parts of the artery. The mechanism is a function of
the centrifugal force generated by the Diamondback 360° as
it rotates. As the crown moves outward, the centrifugal force is
offset by the counterforce exerted by the arterial wall. If the
tissue is compliant, it flexes away, rather than generating an
opposing force that would allow the Diamondback 360° to
engage and sand the wall. Diseased tissue provides resistance
and is able to generate an opposing force that allows the
Diamondback 360° to engage and sand the plaque. The sanded
plaque is broken down into particles generally smaller than
circulating red blood cells that are washed away downstream with
the patients natural blood flow. Of 36 consecutive
experiments that we performed in carbon blocks, animal and
cadaver models:
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93.1% of particles were smaller than a red blood cell, with a
99% confidence interval; and
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99.3% of particles were smaller than the lumen of the
capillaries (which provide the connection between the arterial
and venous system), with a 99% confidence interval.
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The small particle size minimizes the risk of vascular bed
overload, or a saturation of the peripheral vessels with large
particles, which may cause slow or reduced blood flow to the
foot. We believe that the small size of the particles also
allows them to be managed by the bodys natural cleansing
of the blood, whereby various types of white blood cells
eliminate worn-out cells and other debris in the bloodstream.
Plaque Removal. The system operates on the
principles of centrifugal force. As the speed of the
crowns rotation increases, it creates centrifugal force,
which increases the crowns orbit and presses the diamond
grit coated offset crown against the lesion or plaque, removing
a small amount of plaque with each orbit. The characteristics of
the orbit and the resulting lumen size can be adjusted by
modifying three variables:
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Speed. An increase in speed creates a larger
lumen. Our current system allows the user to choose between
three rotational speeds. The fastest speed can result in a
device-to-lumen
ratio of 1.0 to 2.0, for a lumen that is approximately 100%
larger than the actual diameter of the device.
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Crown Characteristics. The crown can be
designed with various weights (as determined by different
materials and density) and coated with diamond grit of various
width, height and configurations. Our current system offers the
choice between a hollow, lightweight crown and a solid, heavier
crown, which could potentially increase the
device-to-lumen
ratio. We are developing a crown utilizing an alternative
material that potentially will enhance the devices orbit
and more effectively modify and remove plaque from the arterial
wall.
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7
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Drive Shaft Characteristics. The drive shaft
can be designed with various shapes and degrees of rigidity. We
are developing a new drive shaft that may enhance the ability to
advance the device more smoothly and effectively through
tortuous anatomy and challenging lesion morphologies and
potentially enhance the devices performance.
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We view the Diamondback 360° as a platform that can be used
to develop additional products by adjusting one or more of the
speed, crown and shaft variables.
Applications
The Diamondback 360° can be used to treat plaque in
multiple anatomic locations.
Below-the-Knee
Peripheral Artery Disease. Arteries below the
knee have small diameters and may be diffusely diseased,
calcified or both, limiting the effectiveness of traditional
devices. The Diamondback 360° is effective in both diffuse
and calcified vessels as demonstrated in the OASIS trial, where
94.5% of lesions treated were below the knee.
Above-the-Knee
Peripheral Artery Disease. Plaque in arteries
above the knee may also be diffuse, fibrotic and calcific;
however, these arteries are longer, straighter and wider than
below-the-knee
vessels. While effective in
difficult-to-treat
below-the-knee
vessels, and indicated for vessels up to four millimeters in
diameter, our product is also being used to treat lesions above
the knee. The Millennium Research Group estimates that there
will be approximately 258,600 procedures to treat
above-the-knee
PAD in 2010 and that there will be approximately 71,220
procedures to treat
below-the-knee
PAD in 2010.
Coronary Artery Disease. Given the many
similarities between peripheral and coronary artery disease, we
have developed a modified version of the Diamondback 360°
to treat coronary arteries. We have conducted numerous bench
studies, four pre-clinical animal studies, and our ORBIT I
50-patient human clinical study to evaluate the Diamondback
360° in coronary artery disease. In the bench studies, we
evaluated the system for conformity to specifications and
patient safety, and, under conditions of expected clinical use,
no safety issues were observed. In three of the animal studies,
the system was used to treat a large number of stented and
non-stented arterial lesions. The system was able to safely
debulk lesions without evidence or observations of significant
distal embolization, and the treated vessels in the animal
studies showed only minimal to no damage. The fourth animal
study evaluated the safety of the system for the treatment of
coronary stenosis. There were no device-related adverse events
associated with system treatment during this study, with some
evidence of injury observed in 17% of the tissue sections
analyzed, although 75% of these injuries were minimal or mild. A
coronary application would require us to conduct a clinical
trial and receive PMA from the FDA. We participated in three
pre-IDE meetings with the FDA and completed the human
feasibility portion of a coronary trial in the summer of 2008 in
India, enrolling 50 patients. The FDA has agreed to accept
the data from the India trial to support an IDE submission and
we have submitted the IDE based on the results of this trial.
Clinical
Trials and Studies for Our Products
We have conducted three clinical trials to demonstrate the
safety and efficacy of the Diamondback 360° in treating
PAD, enrolling a total of 207 patients in our PAD I and PAD
II pilot trials and our pivotal OASIS trial. We have recently
completed a retrospective study evaluating the long-term results
of 64 patients from the OASIS Trial in order to determine
durability of procedure results. In addition, we have also
initiated two post-market, randomized feasibility studies to
further differentiate the performance of the Diamondback
360° from conventional balloon angioplasty.
8
The common metrics used to evaluate the efficacy of plaque
removal devices for PAD include:
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Metric
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Description
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Absolute Plaque Reduction
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Absolute plaque reduction is the difference between the
pre-treatment percent stenosis, or the narrowing of the vessel,
and the
post-treatment
percent stenosis as measured angiographically.
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Target Lesion Revascularization
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Target lesion revascularization rate, or TLR rate, is the
percentage of patients at
follow-up
who have another peripheral intervention precipitated by their
worsening symptoms, such as an angioplasty, stenting or surgery
to reopen the treated lesion site.
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Ankle Brachial Index
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The Ankle Brachial Index, or ABI, is a measurement that is
useful to evaluate the adequacy of circulation in the legs and
improvement or worsening of leg circulation over time. The ABI
is a ratio between the blood pressure in a patients ankle
and a patients arm, with a ratio above 0.9 being normal.
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The common metrics used to evaluate the safety of atherectomy
devices for PAD include:
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Metric
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Description
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Serious Adverse Events
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Serious adverse events, or SAEs, include any experience that is
fatal or life-threatening, is permanently disabling, requires or
prolongs hospitalization, or requires intervention to prevent
permanent impairment or damage. SAEs may or may not be related
to the device.
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Perforations
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Perforations occur when the artery is punctured during
atherectomy treatment. Perforations may be nonserious or an SAE
depending on the treatment required to repair the perforation.
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Inclusion criteria for trials often limit size of lesion and
severity of disease, as measured by the Rutherford Class, which
utilizes a scale of I to VI, with I being mild and VI being most
severe, and the Ankle Brachial Index.
PAD I
Feasibility Trial
Our first trial was a two-site, 17-patient feasibility clinical
trial in Europe, which we refer to as PAD I, that began in
March 2005. Patients enrolled in the trial had lesions that were
less than 10 cm in length in arteries between 1.5 mm and 6.0 mm
in diameter, with Rutherford Class scores of IV or lower.
Patients were evaluated at the time of the procedure and at
30 days following treatment. The purpose of PAD I was to
obtain the first human clinical experience and evaluate the
safety of the Diamondback 360°. This was determined by
estimating the cumulative incidence of patients experiencing one
or more SAEs within 30 days post-treatment.
The results of PAD I were presented at the Transcatheter
Therapeutics conference, or TCT, in 2005 and published in
American Journal of Cardiology. Results confirmed that the
Diamondback 360° was safe and established that the
Diamondback 360° could be used to treat vessels in the
range of 1.5 mm to 4.0 mm, which are found primarily below the
knee. Also, PAD I showed that removal of plaque, could be
accomplished and the resulting
device-to-lumen
ratio was approximately 1.0 to 2.0. The SAE rate in PAD I was 6%
(one of 17 patients).
PAD II
Feasibility Trial
After being granted the CE Mark in May 2005, we began a
66-patient European clinical trial at seven sites, which we
refer to as PAD II, in August 2005. All patients had stenosis in
vessels below the femoral artery of between
9
1.5 mm and 4.0 mm in diameter, with at least 50% blockage. The
primary objectives of this study were to evaluate the acute
(30 days or less) risk of experiencing an SAE post
procedure and provide evidence of device effectiveness.
Effectiveness was confirmed angiographically and based on the
percentage of absolute plaque reduction.
The PAD II results demonstrated safe and effective debulking in
vessels with diameters ranging from 1.5 mm to 4.0 mm with a mean
absolute plaque reduction of 55%. The SAE rate in PAD II was 9%
(six of 66 patients), which did not differ significantly
from existing non-invasive treatment options.
OASIS
Pivotal Trial
We received an IDE to begin our pivotal United States trial,
OASIS, in September 2005. OASIS was a
124-patient,
20-center, prospective trial that began enrollment in January
2006.
Patients included in the trial had:
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an ABI of less than 0.9;
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a Rutherford Class score of V or lower; and
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treated arteries of between 1.5 mm and 4.0 mm or less in
diameter via angiogram measurement, with a well-defined lesion
of at least 50% diameter stenosis and lesions of no greater than
10.0 cm in length.
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The primary efficacy study endpoint was absolute plaque
reduction of the target lesions from baseline to immediately
post procedure. The primary safety endpoint was the cumulative
incidence of SAEs at 30 days.
In the OASIS trial, 94.5% of lesions treated were below the
knee, an area where lesions have traditionally gone untreated
until they require bypass surgery or amputation. Of the lesions
treated in OASIS, 55% were comprised of calcified plaque which
presents a challenge to proper expansion and apposition of
balloons and stents, and 48% were diffuse, or greater then 3 cm
in length, which typically requires multiple balloon expansions
or stent placements. Competing plaque removal devices are often
ineffective with these difficult to treat lesions.
The average time of treatment in the OASIS trial was three
minutes per lesion, which compares favorably to the treatment
time required by other plaque removal devices. We believe
physicians using other plaque removal devices require
approximately ten to 20 minutes of treatment time to achieve
desired results, although treatment times may vary depending
upon the nature of the procedure, the condition of the patient
and other factors. The following table is a summary of the OASIS
trial results:
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Item
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FDA Target
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OASIS Result
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Absolute Plaque Reduction
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55%
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59.4%
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SAEs at 30 days
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8% mean, with an upper
bound of 16%
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4.8% mean, device-related; 9.7%
mean, overall
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TLR
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20% or less
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2.4%
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Perforations
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N/A
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1 serious perforation
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ABI at baseline
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N/A
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0.68 ± 0.2*
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ABI at 30 days
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N/A
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0.9 ± 0.18*
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ABI at 6 months
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N/A
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0.83 ± 0.23*
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Mean ± Standard Deviation |
We submitted our OASIS data and received 510(k) clearance from
the FDA for use of the Diamondback 360°, including the
initial version of the control unit, with a hollow crown as a
therapy for patients with PAD in August 2007. The
FDAs labeling requirements reflected the inclusion
criteria for the OASIS trial listed above. We received 510(k)
clearances in October 2007 for the updated control unit used
with the Diamondback 360° and in November 2007 for the
Diamondback 360° with a solid crown. In May 2005, we
received the CE mark, allowing for the commercial use of the
Diamondback 360° within the European Union; however, our
current plans are to focus sales in the United States.
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OASIS
Long-Term Study
A retrospective study evaluating the long-term results of
64 patients from the pivotal OASIS trial has been
completed. Outcomes were analyzed out to a mean of
29 months and include limb salvage rate, target lesion
revascularization rate (TLR) and ankle-brachial index (ABI).
TLR, or reintervention in the originally treated lesion, was
13.6%. A 100% limb salvage rate was maintained. ABI scores, a
measure of blood flow to the ankle, remained significantly
improved. This 29 month data of OASIS patients adds to our
confidence in the safety and efficacy of the Diamondback
360°.
Post-Market
Feasibility Studies
In June 2009, the first patient was enrolled in the COMPLIANCE
360° clinical trial, the first of two PAD post-market
studies scheduled to begin in calendar 2009. This prospective,
randomized, multi-center study will evaluate the clinical
benefit of modifying plaque to change large vessel compliance
above the knee with the Diamondback
360o. The
study compares the performance of the Diamondback
360o,
plus low-pressure balloon inflation, if desired, with that of
high-pressure balloon inflation alone. The study calls for
enrolling 50 patients at five U.S. medical centers.
Hospital internal review board (IRB) submissions are in progress
for the CALCIUM
360o
study, a prospective, randomized, multi-center study, which will
compare the effectiveness of the Diamondback
360o to
balloon dilation in treating heavily calcified lesions below the
knee. Calcified plaque exists in about 75 percent of
lesions below the knee. This study will also enroll
50 patients at five U.S. medical centers.
Sales and
Marketing
We market and sell the Diamondback 360° through a direct
sales force in the United States. As of June 30, 2009, we
had a
124-person
direct sales force, including a Vice President of Sales, five
clinical specialists, eight associate sales managers, 93
district sales managers, 11 regional sales managers, two sales
directors, a director of customer operations, and three customer
service specialists. Upon receiving 510(k) clearance from the
FDA on August 30, 2007, we began limited commercialization
of the Diamondback 360° in September 2007. We commenced our
full commercial launch in the quarter ended March 31, 2008.
As of June 30, 2009, we were selling the Diamondback
360° in 556 accounts in the United States that had
completed an estimated 15,000 procedures.
While we sell directly to hospitals, we have targeted sales and
marketing efforts to interventional cardiologists, vascular
surgeons and interventional radiologists with experience using
similar catheter-based procedures, such as angioplasty,
stenting, and cutting or laser atherectomy. Physician referral
programs and
peer-to-peer
education are other key elements of our sales strategy. Patient
referrals come from general practitioners, podiatrists,
nephrologists and endocrinologists.
We target our marketing efforts to practitioners through
physician education, medical conferences, seminars, peer
reviewed journals and marketing materials. Our sales and
marketing program focuses on:
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educating physicians regarding the proper use and application of
the Diamondback 360°;
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developing relationships with key opinion leaders; and
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facilitating regional referral marketing programs.
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We are not marketing our products internationally and do not
expect to do so in the near future; however, we will continue to
evaluate international opportunities.
Research
and Development
As of June 30, 2009, we had 29 employees in our
research and development department, comprised primarily of
scientists, engineers and physicians, all of whom report to our
Executive Vice President. Our research and development efforts
are focused in the development of products to penetrate our
three key target markets:
11
below-the-knee,
above-the-knee
and coronary vessels. Research and development expenses for
fiscal 2009, fiscal 2008 and fiscal 2007 were
$14.7 million, $16.1 million and $8.4 million,
respectively.
Manufacturing
We use internally-manufactured and externally-sourced components
to manufacture the Diamondback 360°. Most of the
externally-sourced components are available from multiple
suppliers; however, a few key components, including the diamond
grit coated crown, are single sourced. We assemble the shaft,
crown and handle components
on-site, and
test, pack, seal and label the finished assembly before sending
the packaged product to a contract sterilization facility. The
sterilization facility sends samples to an independent
laboratory to test for sterility. Upon return from the
sterilizer, product is held in inventory prior to shipping to
our customers.
The current floor plan at our manufacturing facility allows for
finished goods of approximately 8,000 units of the
Diamondback 360° and for approximately 50 control units.
The manufacturing areas, including the shaft manufacturing and
the controlled-environment assembly areas, are equipped to
accommodate approximately 30,000 units per shift annually.
We are registered with the FDA as a medical device manufacturer.
We have opted to maintain quality assurance and quality
management certifications to enable us to market our products in
the member states of the European Union, the European Free Trade
Association and countries that have entered into Mutual
Recognition Agreements with the European Union. We are ISO
13485:2003 certified, and our renewal is due by December 2009.
During the time of commercialization, we have had two minor
instances of recall, involving one single lot of Diamondback
360° devices (eight units), and two boxes of ViperWires
(ten wires), related to Use By date labeling issues.
While these recalls were reported to the FDA, according to
regulations, they did not provide a risk to patient safety.
Third-Party
Reimbursement and Pricing
Third-party payors, including private insurers, and government
insurance programs, such as Medicare and Medicaid, pay for a
significant portion of patient care provided in the United
States. The single largest payor in the United States is the
Medicare program, a federal governmental health insurance
program administered by the Centers for Medicare and Medicaid
Services, or CMS. Medicare covers certain medical care expenses
for eligible elderly and disabled individuals, including a large
percentage of the population with PAD who could be treated with
the Diamondback 360°. In addition, private insurers often
follow the coverage and reimbursement policies of Medicare.
Consequently, Medicares coverage and reimbursement
policies are important to our operations.
CMS has established Medicare reimbursement codes describing
atherectomy products and procedures using atherectomy products,
and many private insurers follow these policies. We believe that
physicians and hospitals that treat PAD with the Diamondback
360° will generally be eligible to receive reimbursement
from Medicare and private insurers for the cost of the
single-use catheter and the physicians services.
The continued availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
The commercial success of our products in both domestic and
international markets will be dependent on whether third-party
coverage and reimbursement is available for patients that use
our products. Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new medical devices, and, as a
result, they may not continue to provide adequate payment for
our products. To position our device for acceptance by
third-party payors, we may have to agree to a lower net sales
price than we might otherwise charge. The continuing efforts of
governmental and commercial third-party payors to contain or
reduce the costs of healthcare may limit our revenue.
In some foreign markets, pricing and profitability of medical
devices are subject to government control. In the United States,
we expect that there will continue to be federal and state
proposals for similar controls. Also, the trends toward managed
healthcare in the United States and proposed legislation
intended to reduce the cost of government insurance programs
could significantly influence the purchase of healthcare
services and products and may result in lower prices for our
products or the exclusion of our products from reimbursement
programs.
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Competition
The medical device industry is highly competitive, subject to
rapid change and significantly affected by new product
introductions and other activities of industry participants. The
Diamondback 360° competes with a variety of other products
or devices for the treatment of vascular disease, including
stents, balloon angioplasty catheters and atherectomy catheters,
as well as products used in vascular surgery. Large competitors
in the stent and balloon angioplasty market segments include
Abbott Laboratories, Boston Scientific, Cook,
Johnson & Johnson and Medtronic. We also compete
against manufacturers of atherectomy catheters including, among
others, ev3, Spectranetics, Boston Scientific and Pathway
Medical Technologies, as well as other manufacturers that may
enter the market due to the increasing demand for treatment of
vascular disease. Several other companies provide products used
by surgeons in peripheral bypass procedures. Other competitors
include pharmaceutical companies that manufacture drugs for the
treatment of mild to moderate PAD and companies that provide
products used by surgeons in peripheral bypass procedures. We
are not aware of any competing catheter systems either currently
on the market or in development that also use an orbital motion
to create lumens larger than the catheter itself.
Because of the size of the peripheral and coronary market
opportunities, competitors and potential competitors have
historically dedicated significant resources to aggressively
promote their products. We believe that the Diamondback
360° competes primarily on the basis of:
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safety and efficacy;
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predictable clinical performance;
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ease of use;
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price;
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physician relationships;
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customer service and support; and
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adequate third-party reimbursement.
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Patents
and Intellectual Property
We rely on a combination of patent, copyright and other
intellectual property laws, trade secrets, nondisclosure
agreements and other measures to protect our proprietary rights.
As of August 31, 2009, we held 22 issued U.S. patents
and have 23 U.S. patent applications pending, as well as 48
issued or granted foreign patents and 24 foreign patent
applications, each of which corresponds to aspects of our
U.S. patents and applications. Our issued U.S. patents
expire between 2010 and 2027, and our most important patent,
U.S. Patent No. 6,494,890, is due to expire in 2017.
Our issued patents and patent applications relate primarily to
the design and operation of certain interventional atherectomy
devices, including the Diamondback 360°. These patents and
applications include claims covering key aspects of certain
rotational atherectomy devices including the design, manufacture
and therapeutic use of certain atherectomy abrasive heads, drive
shafts, control systems, handles and couplings. As we continue
to research and develop our atherectomy technology, we intend to
file additional U.S. and foreign patent applications
related to the design, manufacture and therapeutic uses of
atherectomy devices. In addition, we hold eight registered
U.S. trademarks and have eight U.S., three Canadian and
three European trademark applications pending.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. We
seek to protect our proprietary information and other
intellectual property by requiring our employees, consultants,
contractors, outside scientific collaborators and other advisors
to execute non-disclosure and assignment of invention agreements
on commencement of their employment or engagement. Agreements
with our employees also forbid them from bringing the
proprietary rights of third parties to us. We also require
confidentiality or material transfer agreements from third
parties that receive our confidential data or materials.
13
Government
Regulation of Medical Devices
Governmental authorities in the United States at the federal,
state and local levels and in other countries extensively
regulate, among other things, the development, testing,
manufacture, labeling, promotion, advertising, distribution,
marketing and export and import of medical devices such as the
Diamondback 360°.
Failure to obtain approval to market our products under
development and to meet the ongoing requirements of these
regulatory authorities could prevent us from marketing and
continuing to market our products.
United
States
The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
FDAs implementing regulations govern medical device design
and development, preclinical and clinical testing, premarket
clearance or approval, registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance.
Medical devices and their manufacturers are also subject to
inspection by the FDA. The FDCA, supplemented by other federal
and state laws, also provides civil and criminal penalties for
violations of its provisions. We manufacture and market medical
devices that are regulated by the FDA, comparable state agencies
and regulatory bodies in other countries.
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require
marketing authorization from the FDA prior to distribution. The
two primary types of FDA marketing authorization are premarket
notification (also called 510(k) clearance) and premarket
approval (also called PMA approval). The type of marketing
authorization applicable to a device 510(k)
clearance or PMA approval is generally linked to
classification of the device. The FDA classifies medical devices
into one of three classes (Class I, II or
III) based on the degree of risk FDA determines to be
associated with a device and the extent of control deemed
necessary to ensure the devices safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I
devices are deemed to pose the least risk and are subject only
to general controls applicable to all devices, such as
requirements for device labeling, premarket notification, and
adherence to the FDAs current good manufacturing practice
requirements, as reflected in its Quality System Regulation, or
QSR. Class II devices are intermediate risk devices that
are subject to general controls and may also be subject to
special controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient
registries or postmarket surveillance. Class III devices
are those for which insufficient information exists to assure
safety and effectiveness solely through general or special
controls, and include life-sustaining, life-supporting or
implantable devices, and devices not substantially
equivalent to a device that is already legally marketed.
Most Class I devices and some Class II devices are
exempted by regulation from the 510(k) clearance requirement and
can be marketed without prior authorization from FDA.
Class I and Class II devices that have not been so
exempted are eligible for marketing through the 510(k) clearance
pathway. By contrast, devices placed in Class III generally
require PMA approval prior to commercial marketing. The PMA
approval process is generally more stringent, time-consuming and
expensive than the 510(k) clearance process.
510(k) Clearance. To obtain 510(k) clearance
for a medical device, an applicant must submit a premarket
notification to the FDA demonstrating that the device is
substantially equivalent to a predicate device
legally marketed in the United States. A device is substantially
equivalent if, with respect to the predicate device, it has the
same intended use and has either (i) the same technological
characteristics or (ii) different technological
characteristics and the information submitted demonstrates that
the device is as safe and effective as a legally marketed device
and does not raise different questions of safety or
effectiveness. A showing of substantial equivalence sometimes,
but not always, requires clinical data. Generally, the 510(k)
clearance process can exceed 90 days and may extend to a
year or more.
After a device has received 510(k) clearance for a specific
intended use, any modification that could significantly affect
its safety or effectiveness, such as a significant change in the
design, materials, method of manufacture or intended use, will
require a new 510(k) clearance or PMA approval (if the device as
modified is not substantially equivalent to a legally marketed
predicate device). The determination as to whether new
authorization is needed is initially left to the manufacturer;
however, the FDA may review this determination to evaluate the
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regulatory status of the modified product at any time and may
require the manufacturer to cease marketing and recall the
modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant
regulatory fines or penalties.
We received 510(k) clearance for use of the Diamondback
360° as a therapy in patients with PAD in the
United States on August 22, 2007. We received
additional 510(k) clearances for the control unit used with the
Diamondback 360° on October 25, 2007 and for the solid
crown version of the Diamondback 360° on November 9,
2007.
Premarket Approval. A PMA application requires
the payment of significant user fees and must be supported by
valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and
manufacturing data, to demonstrate to the FDAs
satisfaction the safety and efficacy of the device. A PMA
application must also include a complete description of the
device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device,
and proposed labeling. After a PMA application is submitted and
found to be sufficiently complete, the FDA begins an in-depth
review of the submitted information. During this review period,
the FDA may request additional information or clarification of
information already provided. Also during the review period, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with the FDAs Quality System Regulations, or QSR, which
requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures.
FDA review of a PMA application is required by statute to take
no longer than 180 days, although the process typically
takes significantly longer, and may require several years to
complete. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
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the systems may not be safe or effective to the FDAs
satisfaction;
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the data from preclinical studies and clinical trials may be
insufficient to support approval;
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the manufacturing process or facilities used may not meet
applicable requirements; and
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changes in FDA approval policies or adoption of new regulations
may require additional data.
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If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter or an approvable letter, which usually
contains a number of conditions that must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDAs evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the
trials are conducted and then the data submitted in an amendment
to the PMA. Even if a PMA application is approved, the FDA may
approve the device with an indication that is narrower or more
limited than originally sought. The agency can also impose
restrictions on the sale, distribution or use of the device as a
condition of approval, or impose post approval requirements such
as continuing evaluation and periodic reporting on the safety,
efficacy and reliability of the device for its intended use.
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling, device
specifications, materials or design of a device that is approved
through the PMA process. PMA approval supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application and may not require as
extensive clinical data or the convening of an advisory panel.
We are currently seeking PMA to use the Diamondback 360° as
a therapy in treating patients with coronary artery disease and
have submitted an IDE to the FDA.
Clinical Trials. Clinical trials are almost
always required to support a PMA application and are sometimes
required for a 510(k) clearance. These trials generally require
submission of an application for an IDE to the FDA.
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The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is
safe to test the device in humans and that the testing protocol
is scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless
the product is deemed a non- significant risk device and
eligible for more abbreviated IDE requirements. Generally,
clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the study protocol
and informed consent are approved by appropriate institutional
review boards at the clinical trial sites.
FDA approval of an IDE allows clinical testing to go forward but
does not bind the FDA to accept the results of the trial as
sufficient to prove the products safety and efficacy, even
if the trial meets its intended success criteria. With certain
exceptions, changes made to an investigational plan after an IDE
is approved must be submitted in an IDE supplement and approved
by FDA (and by governing institutional review boards when
appropriate) prior to implementation.
All clinical trials must be conducted in accordance with
regulations and requirements collectively known as good clinical
practice. Good clinical practices include the FDAs IDE
regulations, which describe the conduct of clinical trials with
medical devices, including the recordkeeping, reporting and
monitoring responsibilities of sponsors and investigators, and
labeling of investigation devices. They also prohibit promotion,
test marketing or commercialization of an investigational device
and any representation that such a device is safe or effective
for the purposes being investigated. Good clinical practices
also include the FDAs regulations for institutional review
board approval and for protection of human subjects (such as
informed consent), as well as disclosure of financial interests
by clinical investigators.
Required records and reports are subject to inspection by the
FDA. The results of clinical testing may be unfavorable or, even
if the intended safety and efficacy success criteria are
achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or
completion of any clinical trials may be delayed or halted, or
be inadequate to support approval of a PMA application or
clearance of a premarket notification for numerous reasons,
including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a
clinical trial protocol or a clinical trial (or a change to a
previously approved protocol or trial that requires approval),
or place a clinical trial on hold;
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patients do not enroll in clinical trials or follow up at the
rate expected;
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patients do not comply with trial protocols or experience
greater than expected adverse side effects;
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institutional review boards and third-party clinical
investigators may delay or reject the trial protocol or changes
to the trial protocol;
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third-party clinical investigators decline to participate in a
trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, investigator
agreements, good clinical practices or other FDA requirements;
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third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
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regulatory inspections of the clinical trials or manufacturing
facilities, which may, among other things, require corrective
action or suspension or termination of the clinical trials;
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changes in governmental regulations or administrative actions;
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the interim or final results of the clinical trial are
inconclusive or unfavorable as to safety or efficacy; and
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the FDA concludes that the trial design is inadequate to
demonstrate safety and efficacy.
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Continuing Regulation. After a device is
approved and placed in commercial distribution, numerous
regulatory requirements continue to apply. These include:
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establishment registration and device listing upon the
commencement of manufacturing;
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the QSR, which requires manufacturers, including third-party
manufacturers, to follow design, testing, control, documentation
and other quality assurance procedures during medical device
design and manufacturing processes;
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labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling and promotional activities;
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medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused or
contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious
injury if malfunctions were to recur;
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corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections; and
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product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FDCA
caused by the device that may present a risk to health.
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In addition, the FDA may require a company to conduct postmarket
surveillance studies or order it to establish and maintain a
system for tracking its products through the chain of
distribution to the patient level.
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of clinical trials,
can result in enforcement action by the FDA, which may lead to
any of the following sanctions:
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warning letters or untitled letters;
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fines, injunctions and civil penalties;
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product recall or seizure;
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unanticipated expenditures;
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delays in clearing or approving or refusal to clear or approve
products;
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withdrawal or suspension of FDA approval;
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orders for physician notification or device repair, replacement
or refund;
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operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
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criminal prosecution.
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We and our contract manufacturers, specification developers and
suppliers are also required to manufacture our products in
compliance with current Good Manufacturing Practice, or GMP,
requirements set forth in the QSR.
The QSR requires a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of
marketed devices, and includes extensive requirements with
respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components,
production and process controls, packaging and labeling
controls, device evaluation, distribution, installation,
complaint handling, servicing and record keeping. The FDA
enforces the QSR through periodic announced and unannounced
inspections that may include the manufacturing facilities of
subcontractors. If the FDA believes that we or any of our
contract manufacturers or regulated suppliers is not in
compliance with these requirements, it can shut down our
manufacturing operations, require recall of our products, refuse
to clear or approve new marketing applications, institute legal
proceedings to detain or seize products, enjoin future
violations or assess civil and criminal penalties against us or
our officers or other employees. Any such action by the FDA
would have a material adverse effect on our business.
Fraud
and Abuse
Our operations will be directly, or indirectly through our
customers, subject to various state and federal fraud and abuse
laws, including, without limitation, the FDCA, federal
Anti-Kickback Statute and False Claims Act. These laws may
impact, among other things, our proposed sales, marketing and
education programs. In addition, these laws require us to screen
individuals and other companies, suppliers and vendors in order
to ensure that they are not debarred by the federal
government and therefore prohibited from doing business in the
healthcare industry.
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The federal Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for
or to induce either the referral of an individual, or the
furnishing or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the
Medicare and Medicaid programs. Several courts have interpreted
the statutes intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute
has been violated. The Anti-Kickback Statute is broad and
prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Many states have
also adopted laws similar to the federal Anti-Kickback Statute,
some of which apply to the referral of patients for healthcare
items or services reimbursed by any source, not only the
Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly
filing or causing to be filed a false claim to, or the knowing
use of false statements to obtain payment from, the federal
government. Various states have also enacted laws modeled after
the federal False Claims Act.
In addition to the laws described above, the Health Insurance
Portability and Accountability Act of 1996 created two new
federal crimes: healthcare fraud and false statements relating
to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. The false
statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services.
Voluntary industry codes, federal guidance documents and a
variety of state laws address the tracking and reporting of
marketing practices relative to gifts given and other
expenditures made to doctors and other healthcare professionals.
In addition to impacting our marketing and educational programs,
internal business processes will be affected by the numerous
legal requirements and regulatory guidance at the state, federal
and industry levels.
International
Regulation
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country. The time required to obtain approval in a
foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. For example, the
primary regulatory environment in Europe with respect to medical
devices is that of the European Union, which includes most of
the major countries in Europe. Other countries, such as
Switzerland, have voluntarily adopted laws and regulations that
mirror those of the European Union with respect to medical
devices. The European Union has adopted numerous directives and
standards regulating the design, manufacture, clinical trials,
labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking,
indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can
be commercially distributed throughout European Union, although
actual implementation of the these directives may vary on a
country-by-country
basis. The method of assessing conformity varies depending on
the class of the product, but normally involves a combination of
submission of a design dossier, self-assessment by the
manufacturer, a third-party assessment and, review of the design
dossier by a Notified Body. This third-party
assessment generally consists of an audit of the
manufacturers quality system and manufacturing site, as
well as review of the technical documentation used to support
application of the CE mark to ones product and possibly
specific testing of the manufacturers product. An
assessment by a Notified Body of one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. We
obtained CE marking approval for sale of the Diamondback
360° in May 2005.
Environmental
Regulation
Our operations are subject to regulatory requirements relating
to the environment, waste management and health and safety
matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. We are currently classified
and licensed as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota.
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Employees
As of June 30, 2009, we had 239 employees, including
49 employees in manufacturing, 124 employees in sales,
12 employees in marketing, four employees in clinicals,
20 employees in general and administrative, and
30 employees in research and development, all of which are
full-time employees. None of our employees are represented by a
labor union or parties to a collective bargaining agreement, and
we believe that our employee relations are good.
Risks
Relating to Our Business and Operations
We
have a history of net losses and anticipate that we will
continue to incur losses.
We are not profitable and have incurred net losses in each
fiscal year since our formation in 1989. In particular, we had
net losses of $31.9 million in fiscal 2009,
$39.2 million in fiscal 2008, and $15.6 million in
fiscal 2007. As of June 30, 2009, we had an accumulated
deficit of approximately $127.4 million. We commenced
commercial sales of the Diamondback 360° PAD System in
September 2007, and our short commercialization experience makes
it difficult for us to predict future performance. We also
expect to incur significant additional expenses for sales and
marketing and manufacturing as we continue to commercialize the
Diamondback 360° and additional expenses as we seek to
develop and commercialize future versions of the Diamondback
360° and other products. Additionally, we expect that our
general and administrative expenses will increase as our
business grows and we incur the legal and regulatory costs
associated with being a public company. As a result, we expect
our operating losses to continue but generally decline as we
continue our commercialization activities, develop additional
product enhancements, increase manufacturing capacity, and make
further regulatory submissions.
We
have a limited history selling the Diamondback 360°, which
is currently our primary product, and our inability to market
this product successfully would have a material adverse effect
on our business and financial condition.
Although we also sell a variety of ancillary products, the
Diamondback 360° is our primary product and we are largely
dependent on it. The Diamondback 360° received 510(k)
clearance from the FDA in the United States for use as a therapy
in patients with PAD in August 2007. We initiated a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007 and we therefore have limited
experience in the commercial manufacture and marketing of this
product. Our ability to generate revenue will depend upon our
ability to further successfully commercialize the Diamondback
360° and to develop, manufacture and receive required
regulatory clearances and approvals and patient reimbursement
for treatment with future versions of the Diamondback 360°.
As we continue to commercialize the Diamondback 360°, we
will need to expand our sales force to reach our target market.
Developing a sales force is expensive and time consuming and
could delay or limit the success of any product launch. Thus, we
may not be able to expand our sales and marketing capabilities
on a timely basis or at all. If we are unable to adequately
increase these capabilities, we will need to contract with third
parties to market and sell the Diamondback 360° and any
other products that we may develop. To the extent that we enter
into arrangements with third parties to perform sales, marketing
and distribution services on our behalf, our product revenues
could be lower than if we marketed and sold our products on a
direct basis. Furthermore, any revenues resulting from
co-promotion or other marketing and sales arrangements with
other companies will depend on the skills and efforts of others,
and we do not know whether these efforts will be successful.
Some of these companies may have current products or products
under development that compete with ours, and they may have an
incentive not to devote sufficient efforts to marketing our
products. If we fail to successfully develop, commercialize and
market the Diamondback 360° or any future versions of this
product that we develop, our business will be materially
adversely affected.
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The
Diamondback 360° and future products may never achieve
broad market acceptance.
The Diamondback 360° and future products we may develop may
never gain broad market acceptance among physicians, patients
and the medical community. The degree of market acceptance of
any of our products will depend on a number of factors,
including:
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the actual and perceived effectiveness and reliability of our
products;
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the prevalence and severity of any adverse patient events
involving our products, including infection, perforation or
dissection of the artery wall, internal bleeding, limb loss and
death;
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the results of any long-term clinical trials relating to use of
our products;
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the availability, relative cost and perceived advantages and
disadvantages of alternative technologies or treatment methods
for conditions treated by our systems;
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the degree to which treatments using our products are approved
for reimbursement by public and private insurers;
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the strength of our marketing and distribution
infrastructure; and
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the level of education and awareness among physicians and
hospitals concerning our products.
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Failure of the Diamondback 360° to significantly penetrate
current or new markets would negatively impact our business,
financial condition and results of operations.
If longer-term or more extensive clinical trials performed by us
or others indicate that procedures using the Diamondback
360° or any future products are not safe, effective and
long lasting, physicians may choose not to use our products.
Furthermore, unsatisfactory patient outcomes or injuries could
cause negative publicity for our products. Physicians may be
slow to adopt our products if they perceive liability risks
arising from the use of these products. It is also possible that
as our products become more widely used, latent defects could be
identified, creating negative publicity and liability problems
for us, thereby adversely affecting demand for our products. If
the Diamondback 360° and our future products do not achieve
an adequate level of acceptance by physicians, patients and the
medical community, our overall business and profitability would
be harmed.
Our
future growth depends on physician adoption of the Diamondback
360°, which requires physicians to change their screening
and referral practices.
We believe that we must educate physicians to change their
screening and referral practices. For example, although there is
a significant correlation between PAD and coronary artery
disease, many physicians do not routinely screen for PAD while
screening for coronary artery disease. We target our sales
efforts to interventional cardiologists, vascular surgeons and
interventional radiologists because they are often the primary
care physicians diagnosing and treating both coronary artery
disease and PAD. However, the initial point of contact for many
patients may be general practitioners, podiatrists,
nephrologists and endocrinologists, each of whom commonly treats
patients experiencing complications resulting from PAD. If we do
not educate referring physicians about PAD in general and the
existence of the Diamondback 360° in particular, they may
not refer patients to interventional cardiologists, vascular
surgeons or interventional radiologists for the procedure using
the Diamondback 360°, and those patients may instead be
surgically treated or treated with an alternative interventional
procedure. If we are not successful in educating physicians
about screening for PAD or referral opportunities, our ability
to increase our revenue may be impaired.
Our
customers may not be able to achieve adequate reimbursement for
using the Diamondback 360°, which could affect the
acceptance of our product and cause our business to
suffer.
The availability of insurance coverage and reimbursement for
newly approved medical devices and procedures is uncertain. The
commercial success of our products is substantially dependent on
whether third-party insurance coverage and reimbursement for the
use of such products and related services are available. We
expect the Diamondback 360° to generally be purchased by
hospitals and other providers who will then seek reimbursement
from various public and private third-party payors, such as
Medicare, Medicaid and private insurers, for the services
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provided to patients. We can give no assurance that these
third-party payors will provide adequate reimbursement for use
of the Diamondback 360° to permit hospitals and doctors to
consider the product cost-effective for patients requiring PAD
treatment, or that current reimbursement levels for the
Diamondback 360° will continue. In addition, the overall
amount of reimbursement available for PAD treatment could
decrease in the future. Failure by hospitals and other users of
our product to obtain sufficient reimbursement could cause our
business to suffer.
Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of
reimbursement, and, as a result, they may not cover or provide
adequate payment for use of the Diamondback 360°. In order
to position the Diamondback 360° for acceptance by
third-party payors, we may have to agree to lower prices than we
might otherwise charge. The continuing efforts of governmental
and commercial third-party payors to contain or reduce the costs
of healthcare may limit our revenue.
We expect that there will continue to be federal and state
proposals for governmental controls over healthcare in the
United States. Governmental and private sector payors have
instituted initiatives to limit the growth of healthcare costs
using, for example, price regulation or controls and competitive
pricing programs. Some
third-party
payors also require demonstrated superiority, on the basis of
randomized clinical trials, or pre-approval of coverage, for new
or innovative devices or procedures before they will reimburse
healthcare providers who use such devices or procedures. Also,
the trend toward managed healthcare in the United States and
proposed legislation intended to reduce the cost of government
insurance programs could significantly influence the purchase of
healthcare services and products and may result in necessary
price reductions for our products or the exclusion of our
products from reimbursement programs. It is uncertain whether
the Diamondback 360° or any future products we may develop
will be viewed as sufficiently cost-effective to warrant
adequate coverage and reimbursement levels.
If third-party coverage and reimbursement for the Diamondback
360° is limited or not available, the acceptance of the
Diamondback 360° and, consequently, our business will be
substantially harmed.
Healthcare
reform legislation could adversely affect our revenue and
financial condition.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives have
ranged from proposals to fundamentally change federal and state
healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under
governmental funded programs, to minor modifications to existing
programs. Recently, President Obama and members of Congress have
proposed significant reforms to the U.S. healthcare system.
Both the U.S. Senate and House of Representatives have
conducted hearings about U.S. healthcare reform. The Obama
administrations fiscal year 2010 budget included proposals
to limit Medicare payments and increase taxes. In addition,
members of Congress have proposed a single-payer healthcare
system, a government health insurance option to compete with
private plans and other expanded public healthcare measures. The
ultimate content or timing of any future healthcare reform
legislation, and its impact on us, is impossible to predict. If
significant reforms are made to the healthcare system in the
United States, or in other jurisdictions, those reforms may have
an adverse effect on our financial condition and results of
operations.
We
have limited data and experience regarding the safety and
efficacy of the Diamondback 360°. Any long-term data that
is generated may not be positive or consistent with our limited
short-term data, which would affect market acceptance of this
product.
Our success depends on the acceptance of the Diamondback
360° by the medical community as safe and effective.
Because our technology is relatively new in the treatment of
PAD, we have performed clinical trials only with limited patient
populations. The long-term effects of using the Diamondback
360° in a large number of patients are not known and the
results of short-term clinical use of the Diamondback 360°
do not necessarily predict long-term clinical benefit or reveal
long-term adverse effects. For example, we do not have
sufficient experience with the Diamondback 360° to evaluate
its relative effectiveness in different plaque morphologies,
including hard, calcified lesions and soft, non-calcified
lesions. If the results obtained from any future clinical trials
or clinical or
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commercial experience indicate that the Diamondback 360° is
not as safe or effective as other treatment options or as
current short-term data would suggest, adoption of this product
may suffer and our business would be harmed.
Even if we believe that the data collected from clinical trials
or clinical experience indicate positive results, each
physicians actual experience with our device will vary.
Clinical trials conducted with the Diamondback 360° have
involved procedures performed by physicians who are very
technically proficient. Consequently, both short and long-term
results reported in these studies may be significantly more
favorable than typical results achieved by physicians, which
could negatively impact market acceptance of the Diamondback
360°.
We
face significant competition and may be unable to sell the
Diamondback 360° at profitable levels.
We compete against very large and well-known stent and balloon
angioplasty device manufacturers, including Abbott Laboratories,
Boston Scientific, Cook, Johnson & Johnson and
Medtronic. We may have difficulty competing effectively with
these competitors because of their well-established positions in
the marketplace, significant financial and human capital
resources, established reputations and worldwide distribution
channels. We also compete against manufacturers of atherectomy
catheters including, among others, ev3, Spectranetics, Boston
Scientific and Pathway Medical Technologies, as well as other
manufacturers that may enter the market due to the increasing
demand for treatment of vascular disease. Several other
companies provide products used by surgeons in peripheral bypass
procedures. Other competitors include pharmaceutical companies
that manufacture drugs for the treatment of mild to moderate PAD
and companies that provide products used by surgeons in
peripheral bypass procedures.
Our competitors may:
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develop and patent processes or products earlier than we will;
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obtain regulatory clearances or approvals for competing medical
device products more rapidly than we will;
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market their products more effectively than we will; or
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develop more effective or less expensive products or
technologies that render our technology or products obsolete or
non-competitive.
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We have encountered and expect to continue to encounter
potential customers who, due to existing relationships with our
competitors, are committed to or prefer the products offered by
these competitors. If we are unable to compete successfully, our
revenue will suffer. Increased competition might lead to price
reductions and other concessions that might adversely affect our
operating results. Competitive pressures may decrease the demand
for our products and could adversely affect our financial
results.
Our
ability to compete depends on our ability to innovate
successfully. If our competitors demonstrate the increased
safety or efficacy of their products as compared to ours, our
revenue may decline.
The market for medical devices is highly competitive, dynamic
and marked by rapid and substantial technological development
and product innovations. Our ability to compete depends on our
ability to innovate successfully, and there are few barriers
that would prevent new entrants or existing competitors from
developing products that compete directly with our products.
Demand for the Diamondback 360° could be diminished by
equivalent or superior products and technologies offered by
competitors. Our competitors may produce more advanced products
than ours or demonstrate superior safety and efficacy of their
products. If we are unable to innovate successfully, the
Diamondback 360° could become obsolete and our revenue
would decline as our customers purchase competitor products.
We
have limited commercial manufacturing experience and could
experience difficulty in producing the Diamondback 360° or
will need to depend on third parties to manufacture the
product.
We have limited experience in commercially manufacturing the
Diamondback 360° and have no experience manufacturing this
product in the volume that we anticipate will be required if we
achieve planned levels of commercial sales. As a result, we may
not be able to develop and implement efficient, low-cost
manufacturing capabilities and processes that will enable us to
manufacture the Diamondback 360° or future products in
22
significant volumes, while meeting the legal, regulatory,
quality, price, durability, engineering, design and production
standards required to market our products successfully. If we
fail to develop and implement these manufacturing capabilities
and processes, we may be unable to profitably commercialize the
Diamondback 360° and any future products we may develop
because the per unit cost of our products is highly dependent
upon production volumes and the level of automation in our
manufacturing processes. There are technical challenges to
increasing manufacturing capacity, including equipment design
and automation capabilities, material procurement, problems with
production yields and quality control and assurance. Increasing
our manufacturing capacity will require that we invest
substantial additional funds and hire and retain additional
management and technical personnel who have the necessary
manufacturing experience. We may not successfully complete any
required increase in manufacturing capacity in a timely manner
or at all. If we are unable to manufacture a sufficient supply
of our products, maintain control over expenses or otherwise
adapt to anticipated growth, or if we underestimate growth, we
may not have the capability to satisfy market demand and our
business will suffer.
The forecasts of demand we use to determine order quantities and
lead times for components purchased from outside suppliers may
be incorrect. Lead times for components may vary significantly
depending on the type of component, the size of the order, time
required to fabricate and test the components, specific supplier
requirements and current market demand for the components and
subassemblies. Failure to obtain required components or
subassemblies when needed and at a reasonable cost would
adversely affect our business.
In addition, we may in the future need to depend upon third
parties to manufacture the Diamondback 360° and future
products. We also cannot assure you that any third-party
contract manufacturers will have the ability to produce the
quantities of our products needed for development or commercial
sales or will be willing to do so at prices that allow the
products to compete successfully in the market. Additionally, we
can give no assurance that even if we do contract with
third-party manufacturers for production that these
manufacturers will not experience manufacturing difficulties or
experience quality or regulatory issues. Any difficulties in
locating and hiring third-party manufacturers, or in the ability
of third-party manufacturers to supply quantities of our
products at the times and in the quantities we need, could have
a material adverse effect on our business.
We
depend upon third-party suppliers, including single source
suppliers to us and our customers, making us vulnerable to
supply problems and price fluctuations.
We rely on third-party suppliers to provide us with certain
components of our products and to provide key components or
supplies to our customers for use with our products. We rely on
single source suppliers for the components of the Diamondback
360°. We purchase components from these suppliers on a
purchase order basis and carry only limited levels of inventory
for these components. If we underestimate our requirements, we
may not have an adequate supply, which could interrupt
manufacturing of our products and result in delays in shipments
and loss of revenue. We depend on these suppliers to provide us
and our customers with materials in a timely manner that meet
ours and their quality, quantity and cost requirements. These
suppliers may encounter problems during manufacturing for a
variety of reasons, including unanticipated demand from larger
customers, failure to follow specific protocols and procedures,
failure to comply with applicable regulations, equipment
malfunction, quality or yield problems, and environmental
factors, any of which could delay or impede their ability to
meet our demand and our customers demand. Our reliance on
these outside suppliers also subjects us to other risks that
could harm our business, including:
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interruption of supply resulting from modifications to, or
discontinuation of, a suppliers operations;
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delays in product shipments resulting from defects, reliability
issues or changes in components from suppliers;
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price fluctuations due to a lack of long-term supply
arrangements for key components with our suppliers;
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our suppliers may make errors in manufacturing components, which
could negatively affect the efficacy or safety of our products
or cause delays in shipment of our products;
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our suppliers may discontinue production of components, which
could significantly delay our production and sales and impair
operating margins;
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we and our customers may not be able to obtain adequate supplies
in a timely manner or on commercially acceptable terms;
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we and our customers may have difficulty locating and qualifying
alternative suppliers for ours and their sole-source supplies;
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switching components may require product redesign and new
regulatory submissions, either of which could significantly
delay production and sales;
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we may experience production delays related to the evaluation
and testing of products from alternative suppliers and
corresponding regulatory qualifications;
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our suppliers manufacture products for a range of customers, and
fluctuations in demand for the products these suppliers
manufacture for others may affect their ability to deliver
components to us or our customers in a timely manner; and
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our suppliers may encounter financial hardships unrelated to us
or our customers demand for components or other products,
which could inhibit their ability to fulfill orders and meet
requirements.
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Other than existing, unfulfilled purchase obligations, our
suppliers have no contractual obligations to supply us with, and
we are not contractually obligated to purchase from them, any of
our supplies. Any supply interruption from our suppliers or
failure to obtain additional suppliers for any of the components
used in our products would limit our ability to manufacture our
products and could have a material adverse effect on our
business, financial condition and results of operations. We have
no reason to believe that any of our current suppliers could not
be replaced if they were unable to deliver components to us in a
timely manner or at an acceptable price and level of quality.
However, if we lost one of these suppliers and were unable to
obtain an alternate source on a timely basis or on terms
acceptable to us, our production schedules could be delayed, our
margins could be negatively impacted, and we could fail to meet
our customers demand. Our customers rely upon our ability
to meet committed delivery dates and any disruption in the
supply of key components would adversely affect our ability to
meet these dates and could result in legal action by our
customers, cause us to lose customers or harm our ability to
attract new customers, any of which could decrease our revenue
and negatively impact our growth. In addition, to the extent
that our suppliers use technology or manufacturing processes
that are proprietary, we may be unable to obtain comparable
materials or components from alternative sources.
Manufacturing operations are often faced with a suppliers
decision to discontinue manufacturing a component, which may
force us or our customers to make last time purchases, qualify a
substitute part, or make a design change which may divert
engineering time away from the development of new products.
We
will need to increase the size of our organization and we may
experience difficulties managing growth. If we are unable to
manage the anticipated growth of our business, our future
revenue and operating results may be adversely
affected.
The growth we may experience in the future will provide
challenges to our organization, requiring us to rapidly expand
our sales and marketing personnel and manufacturing operations.
Our sales and marketing force has increased from six employees
on January 1, 2007 to 136 employees on June 30,
2009, and we expect to continue to grow our sales and marketing
force. We also expect to significantly expand our manufacturing
operations to meet anticipated growth in demand for our
products. Rapid expansion in personnel means that less
experienced people may be producing and selling our product,
which could result in unanticipated costs and disruptions to our
operations. If we cannot scale and manage our business
appropriately, our anticipated growth may be impaired and our
financial results will suffer.
We
anticipate future losses and may require additional financing,
and our failure to obtain additional financing when needed could
force us to delay, reduce or eliminate our product development
programs or commercialization efforts.
We anticipate future losses and therefore may be dependent on
additional financing to execute our business plan. Although we
expect to achieve our first profitable quarter during fiscal
year 2011, our plans for expansion may
24
still require additional financing. In particular, we may
require additional capital in order to continue to conduct the
research and development and obtain regulatory clearances and
approvals necessary to bring any future products to market and
to establish effective marketing and sales capabilities for
existing and future products. Our operating plan may change, and
we may need additional funds sooner than anticipated to meet our
operational needs and capital requirements for product
development, clinical trials and commercialization. Additional
funds may not be available when we need them on terms that are
acceptable to us, or at all. If adequate funds are not available
on a timely basis, we may terminate or delay the development of
one or more of our products, or delay establishment of sales and
marketing capabilities or other activities necessary to
commercialize our products.
Our future capital requirements will depend on many factors,
including:
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the costs of expanding our sales and marketing infrastructure
and our manufacturing operations;
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the degree of success we experience in commercializing the
Diamondback 360°;
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the number and types of future products we develop and
commercialize;
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the costs, timing and outcomes of regulatory reviews associated
with our future product candidates;
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the costs of preparing, filing and prosecuting patent
applications and maintaining, enforcing and defending
intellectual property-related claims; and
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the extent and scope of our general and administrative expenses.
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Raising
additional capital through debt financing may restrict our
operations.
To the extent that we raise additional capital through debt
financing, the terms may include provisions that adversely
affect your rights as a stockholder. Debt financing, if
available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions
such as incurring additional debt, making capital expenditures
or declaring dividends. Any of these events could adversely
affect our ability to achieve our product development and
commercialization goals and have a material adverse effect on
our business, financial condition and results of operations.
We do
not intend to market the Diamondback 360° internationally
in the near future, which will limit our potential revenue from
this product.
As a part of our product development and regulatory strategy, we
do not intend to market the Diamondback 360°
internationally in the near future in order to focus our
resources and efforts on the U.S. market, as international
efforts would require substantial additional sales and
marketing, regulatory and personnel expenses. Our decision to
market this product only in the United States will limit our
ability to reach all of our potential markets and will limit our
potential sources of revenue. In addition, our competitors will
have an opportunity to further penetrate and achieve market
share abroad until such time, if ever, that we market the
Diamondback 360° or other products internationally.
We are
dependent on our senior management team and scientific
personnel, and our business could be harmed if we are unable to
attract and retain personnel necessary for our
success.
We are highly dependent on our senior management, especially
David L. Martin, our President and Chief Executive Officer. Our
success will depend on our ability to retain senior management
and to attract and retain qualified personnel in the future,
including scientists, clinicians, engineers and other highly
skilled personnel and to integrate current and additional
personnel in all departments. Competition for senior management
personnel, as well as scientists, clinical and regulatory
specialists, engineers and sales personnel, is intense and we
may not be able to retain our personnel. The loss of members of
our senior management, scientists, clinical and regulatory
specialists, engineers and sales personnel could prevent us from
achieving our objectives of continuing to grow the company. The
loss of a member of our senior management or professional staff
would require the remaining senior executive officers to divert
immediate and substantial attention to seeking a replacement. In
particular, we expect to substantially increase the size of our
sales force, which will require managements attention. In
that regard, ev3 Inc., ev3 Endovascular, Inc., and FoxHollow
Technologies, Inc. have brought an action against us that, if
successful,
25
could limit our ability to retain the services of certain sales
personnel that were formerly employed by those companies and
make it more difficult to recruit and hire such sales and other
personnel in the future. We do not carry key person life
insurance on any of our employees.
We may
incur significant costs due to the application of
Section 409A of the Internal Revenue Code.
The estimated fair value of the common stock underlying our
stock options was originally estimated in good faith by our
board of directors based upon the best information available
regarding the company on the dates of grant, including financing
activity, development of our business, the FDA process and
launch of our product, the initial public offering process and
our financial results. During the fiscal years ended
June 30, 2007 and June 30, 2008, we did not obtain
valuations from an independent valuation firm contemporaneously
with each option grant date. As further discussed under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Significant Judgments and
Estimates, we hired an independent valuation firm to
determine the estimated fair value of our common stock for
financial reporting purposes as of various dates, including
June 29, 2007, September 30, 2007, December 31,
2007, March 31, 2008 and June 30, 2008. Our board
considered these estimates when estimating the fair market value
of our common stock on each option grant date that followed the
boards receipt of an estimate from the valuation firm, but
certain grants were later deemed to have been made at less than
fair market value when such valuation estimates were
retrospectively applied. With respect to options granted from
June 12, 2007 through February 14, 2008, the estimated
fair value of the common stock determined by the independent
valuation firm was higher than the exercise price of stock
options we had previously granted at or near such dates by a
weighted average per share amount of approximately $0.79.
If the Internal Revenue Service were to determine that the fair
market value of our common stock was higher than the exercise
price of any of our stock options as of the grant date of such
options, either in accordance with our financial reporting
valuations or under a different methodology, then we and our
optionholders may experience adverse tax consequences under
Section 409A of the Internal Revenue Code and related
provisions, including the imposition of future tax liabilities
and penalties based on the spread between the fair market value
and the exercise price at the time of option vesting and on
future increases (if any) in the value of our stock or the
company after the vesting date. These liabilities may be
significant. The imposition of such liabilities may affect a
significant portion of our employees and could adversely affect
employee morale and our business operations.
We may
be subject to damages or other remedies as a result of pending
litigation.
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc. filed a complaint against us and
certain of our employees alleging, among other things,
misappropriation and use of their confidential information by us
and certain of our employees who were formerly employees of
FoxHollow. The complaint also alleges that certain of our
employees violated their employment agreements with FoxHollow
requiring them to refrain from soliciting FoxHollow employees.
There can be no assurance as to the outcome of this litigation.
We are defending this litigation vigorously. If we are not
successful in defending it, we could be required to pay
substantial damages and be subject to equitable relief that
could include a requirement that we terminate the employment of
certain employees, including certain key sales personnel who
were formerly employed by FoxHollow. In any event, the defense
of this litigation, regardless of the outcome, could result in
substantial legal costs and diversion of our managements
time and efforts from the operation of our business. If the
plaintiffs in this litigation are successful, it could have a
material adverse effect on our business, operations and
financial condition.
Risks
Related to Government Regulation
Our
ability to market the Diamondback 360° in the United States
is limited to use as a therapy in patients with PAD, and if we
want to expand our marketing claims, we will need to file for
additional FDA clearances or approvals and conduct further
clinical trials, which would be expensive and time-consuming and
may not be successful.
The Diamondback 360° received FDA 510(k) clearance in the
United States for use as a therapy in patients with PAD. This
general clearance restricts our ability to market or advertise
the Diamondback 360° beyond this use and could affect our
growth. While off-label uses of medical devices are common and
the FDA does not regulate
26
physicians choice of treatments, the FDA does restrict a
manufacturers communications regarding such off-label use.
We will not actively promote or advertise the Diamondback
360° for off-label uses. In addition, we cannot make
comparative claims regarding the use of the Diamondback
360° against any alternative treatments without conducting
head-to-head
comparative clinical trials, which would be expensive and time
consuming. If our promotional activities fail to comply with the
FDAs regulations or guidelines, we may be subject to FDA
warnings or enforcement action.
If we determine to market the Diamondback 360° in the
United States for other uses, for instance, use in the coronary
arteries, we would need to conduct further clinical trials and
obtain premarket approval from the FDA. In 2008, we completed
the ORBIT I trial, a 50-patient study in India which
investigated the safety of the Diamondback
360o in
treating calcified coronary artery lesions, and results
successfully met both safety and efficacy endpoints. An
investigational device exemption, or IDE application was
recently submitted to the FDA for ORBIT II, a pivotal trial in
the United States to evaluate the safety and effectiveness of
the Diamondback
360o in
treating severely calcified coronary lesions. Clinical trials
are complex, expensive, time consuming, uncertain and subject to
substantial and unanticipated delays. Before we may begin
clinical trials, we must submit and obtain approval for an IDE,
that describes, among other things, the manufacture of, and
controls for, the device and a complete investigational plan.
Clinical trials generally involve a substantial number of
patients in a multi-year study. We may encounter problems with
our clinical trials, and any of those problems could cause us or
the FDA to suspend those trials, or delay the analysis of the
data derived from them.
A number of events or factors, including any of the following,
could delay the completion of our clinical trials in the future
and negatively impact our ability to obtain FDA clearance or
approval for, and to introduce, a particular future product:
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failure to obtain approval from the FDA or any foreign
regulatory authority to commence an investigational study;
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conditions imposed on us by the FDA or any foreign regulatory
authority regarding the scope or design of our clinical trials;
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delays in obtaining or maintaining required approvals from
institutional review boards or other reviewing entities at
clinical sites selected for participation in our clinical trials;
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insufficient supply of our future product candidates or other
materials necessary to conduct our clinical trials;
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difficulties in enrolling patients in our clinical trials;
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negative or inconclusive results from clinical trials, results
that are inconsistent with earlier results, or the likelihood
that the part of the human anatomy involved is more prone to
serious adverse events, necessitating additional clinical trials;
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serious or unexpected side effects experienced by patients who
use our future product candidates; or
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failure by any of our third-party contractors or investigators
to comply with regulatory requirements or meet other contractual
obligations in a timely manner.
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Our clinical trials may not begin as planned, may need to be
redesigned, and may not be completed on schedule, if at all.
Delays in our clinical trials may result in increased
development costs for our future product candidates, which could
cause our stock price to decline and limit our ability to obtain
additional financing. In addition, if one or more of our
clinical trials is delayed, competitors may be able to bring
products to market before we do, and the commercial viability of
our future product candidates could be significantly reduced.
Even if we believe that a clinical trial demonstrates promising
safety and efficacy data, such results may not be sufficient to
obtain FDA clearance or approval. Without conducting and
successfully completing further clinical trials, our ability to
market the Diamondback 360° will be limited and our revenue
expectations may not be realized.
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We may
become subject to regulatory actions if we are found to have
promoted the Diamondback 360° for unapproved
uses.
If the FDA determines that our promotional materials, training
or other activities constitute promotion of our product for an
unapproved use, it could request that we cease use of or modify
our training or promotional materials or subject us to
regulatory enforcement actions, including the issuance of an
untitled or warning letter, injunction, seizure, civil fine and
criminal penalties. It is also possible that other federal,
state or foreign enforcement authorities might take action if
they consider promotional, training or other materials to
constitute promotion of our product for an unapproved or
uncleared use, which could result in significant fines or
penalties under other statutory authorities, such as laws
prohibiting false claims for reimbursement.
The
Diamondback 360° may in the future be subject to product
recalls that could harm our reputation.
The FDA and similar governmental authorities in other countries
have the authority to require the recall of commercialized
products in the event of material regulatory deficiencies or
defects in design or manufacture. A government mandated or
voluntary recall by us could occur as a result of component
failures, manufacturing errors or design or labeling defects.
During the time of commercialization, we have had two minor
instances of recall, involving one single lot of Diamondback
360° devices (eight units), and two boxes of ViperWires
(ten wires), related to Use By date labeling issues.
Any additional recalls of our product would divert managerial
and financial resources, harm our reputation with customers and
have an adverse effect on our financial condition and results of
operations.
If we
or our suppliers fail to comply with ongoing regulatory
requirements, or if we experience unanticipated problems, our
products could be subject to restrictions or withdrawal from the
market.
The Diamondback 360° and related manufacturing processes,
clinical data, adverse events, recalls or corrections and
promotional activities, are subject to extensive regulation by
the FDA and other regulatory bodies. In particular, we and our
component suppliers are required to comply with the FDAs
Quality System Regulation, or QSR, and other regulations, which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage and shipping of any product for which we obtain
marketing clearance or approval. The FDA enforces the QSR
through announced and unannounced inspections. We and certain of
our third-party manufacturers have not yet been inspected by the
FDA. Failure by us or one of our component suppliers to comply
with the QSR requirements or other statutes and regulations
administered by the FDA and other regulatory bodies, or failure
to adequately respond to any observations, could result in,
among other things:
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warning or other letters from the FDA;
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fines, injunctions and civil penalties;
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product recall or seizure;
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unanticipated expenditures;
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delays in clearing or approving or refusal to clear or approve
products;
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withdrawal or suspension of approval or clearance by the FDA or
other regulatory bodies;
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orders for physician notification or device repair, replacement
or refund;
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operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
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criminal prosecution.
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If any of these actions were to occur, it would harm our
reputation and cause our product sales to suffer.
Furthermore, any modification to a device that has received FDA
clearance or approval that could significantly affect its safety
or efficacy, or that would constitute a major change in its
intended use, design or manufacture, requires a new clearance or
approval from the FDA. If the FDA disagrees with any
determination by us that new
28
clearance or approval is not required, we may be required to
cease marketing or to recall the modified product until we
obtain clearance or approval. In addition, we could be subject
to significant regulatory fines or penalties.
Regulatory clearance or approval of a product may also require
costly post-marketing testing or surveillance to monitor the
safety or efficacy of the product. Later discovery of previously
unknown problems with our products, including unanticipated
adverse events or adverse events of unanticipated severity or
frequency, manufacturing problems, or failure to comply with
regulatory requirements such as the QSR, may result in
restrictions on such products or manufacturing processes,
withdrawal of the products from the market, voluntary or
mandatory recalls, fines, suspension of regulatory approvals,
product seizures, injunctions or the imposition of civil or
criminal penalties.
The
use, misuse or off-label use of the Diamondback 360° may
increase the risk of injury, which could result in product
liability claims and damage to our business.
The use, misuse or off-label use of the Diamondback 360°
may result in injuries that lead to product liability suits,
which could be costly to our business. The Diamondback 360°
is not FDA-cleared or approved for treatment of the carotid
arteries, the coronary arteries, within bypass grafts or stents,
of thrombus or where the lesion cannot be crossed with a
guidewire or a significant dissection is present at the lesion
site. We cannot prevent a physician from using the Diamondback
360° for off-label applications. The application of the
Diamondback 360° to coronary or carotid arteries, as
opposed to peripheral arteries, is more likely to result in
complications that have serious consequences, including heart
attacks or strokes which could result, in certain circumstances,
in death.
We
will face risks related to product liability claims, which could
exceed the limits of available insurance coverage.
If the Diamondback 360° is defectively designed,
manufactured or labeled, contains defective components or is
misused, we may become subject to costly litigation by our
customers or their patients. The medical device industry is
subject to substantial litigation, and we face an inherent risk
of exposure to product liability claims in the event that the
use of our product results or is alleged to have resulted in
adverse effects to a patient. In most jurisdictions, producers
of medical products are strictly liable for personal injuries
caused by medical devices. We may be subject in the future to
claims for personal injuries arising out of the use of our
products. Product liability claims could divert
managements attention from our core business, be expensive
to defend and result in sizable damage awards against us. A
product liability claim against us, even if ultimately
unsuccessful, could have a material adverse effect on our
financial condition, results of operations and reputation. While
we have product liability insurance coverage for our products
and intend to maintain such insurance coverage in the future,
there can be no assurance that we will be adequately protected
from the claims that will be brought against us.
Compliance
with environmental laws and regulations could be expensive.
Failure to comply with environmental laws and regulations could
subject us to significant liability.
Our operations are subject to regulatory requirements relating
to the environment, waste management and health and safety
matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. Although we are currently
classified as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota, we cannot ensure that we will
maintain our licensed status as such, nor can we ensure that we
will not incur material costs or liability in connection with
our operations, or that our past or future operations will not
result in claims or injury by employees or the public.
Environmental laws and regulations could also become more
stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with violations.
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We and
our distributors must comply with various federal and state
anti-kickback, self-referral, false claims and similar laws, any
breach of which could cause a material adverse effect on our
business, financial condition and results of
operations.
Our relationships with physicians, hospitals and the marketers
of our products are subject to scrutiny under various federal
anti-kickback, self-referral, false claims and similar laws,
often referred to collectively as healthcare fraud and abuse
laws.
Healthcare fraud and abuse laws are complex, and even minor,
inadvertent violations can give rise to claims that the relevant
law has been violated. If our operations are found to be in
violation of these laws, we, as well as our employees, may be
subject to penalties, including monetary fines, civil and
criminal penalties, exclusion from federal and state healthcare
programs, including Medicare, Medicaid, Veterans Administration
health programs, workers compensation programs and TRICARE
(the healthcare system administered by or on behalf of the
U.S. Department of Defense for uniformed services
beneficiaries, including active duty and their dependents,
retirees and their dependents), and forfeiture of amounts
collected in violation of such prohibitions. Individual
employees may need to defend such suits on behalf of us or
themselves, which could lead to significant disruption in our
present and future operations. Certain states in which we intend
to market our products have similar fraud and abuse laws,
imposing substantial penalties for violations. Any government
investigation or a finding of a violation of these laws would
likely have a material adverse effect on our business, financial
condition and results of operations.
Anti-kickback laws and regulations prohibit any knowing and
willful offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of an individual or the
ordering or recommending of the use of a product or service for
which payment may be made by Medicare, Medicaid or other
government-sponsored healthcare programs. In addition, the cost
of non-compliance with these laws could be substantial, since we
could be subject to monetary fines and civil or criminal
penalties, and we could also be excluded from federally funded
healthcare programs, including Medicare and Medicaid, for
non-compliance.
We have entered into consulting agreements with physicians,
including some who may make referrals to us or order our
product. One of these physicians was one of 20 principal
investigators in our OASIS clinical trial at the same time he
was acting as a paid consultant for us. In addition, some of
these physicians own our stock, which they purchased in
arms-length transactions on terms identical to those
offered to non-physicians, or received stock options from us as
consideration for consulting services performed by them. We
believe that these consulting agreements and equity investments
by physicians are common practice in our industry, and while
these transactions were structured with the intention of
complying with all applicable laws, including the federal ban on
physician self-referrals, commonly known as the Stark
Law, state anti-referral laws and other applicable
anti-kickback laws, it is possible that regulatory or
enforcement agencies or courts may in the future view these
transactions as prohibited arrangements that must be
restructured or for which we would be subject to other
significant civil or criminal penalties, or prohibit us from
accepting referrals from these physicians. Because our strategy
relies on the involvement of physicians who consult with us on
the design of our product, we could be materially impacted if
regulatory or enforcement agencies or courts interpret our
financial relationships with our physician advisors who refer or
order our product to be in violation of applicable laws and
determine that we would be unable to achieve compliance with
such applicable laws. This could harm our reputation and the
reputations of our clinical advisors.
The scope and enforcement of all of these laws is uncertain and
subject to rapid change, especially in light of the lack of
applicable precedent and regulations. There can be no assurance
that federal or state regulatory or enforcement authorities will
not investigate or challenge our current or future activities
under these laws. Any investigation or challenge could have a
material adverse effect on our business, financial condition and
results of operations. Any state or federal regulatory or
enforcement review of us, regardless of the outcome, would be
costly and time consuming. Additionally, we cannot predict the
impact of any changes in these laws, whether these changes are
retroactive or will have effect on a going-forward basis only.
30
We
incur significant costs as a result of operating as a public
company, and our management is required to devote substantial
time to compliance initiatives.
As a public company, we incur significant legal, accounting and
other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act, as well as rules subsequently
implemented by the Securities and Exchange Commission and the
Nasdaq Global Market, have imposed various requirements on
public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and
changes in corporate governance practices. Our management and
other personnel devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations
have increased our legal and financial compliance costs and made
some activities more time consuming and costly. While we have
developed and instituted a corporate compliance program based on
what we believe are the current appropriate best practices and
continue to update the program in response to newly implemented
or changing regulatory requirements, we cannot ensure that it is
or will be in compliance with all potentially applicable
regulations.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must
perform system and process evaluation and testing of our
internal controls over financial reporting to allow management
and, at certain times, our independent registered public
accounting firm to report on the effectiveness of our internal
controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, when required, may reveal deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses. Moreover, if we are not able to comply with
the requirements of Section 404 in a timely manner, or if
we or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities, which would require additional financial
and management resources.
These obligations divert managements time and attention
away from our business. Our management may not be able to
effectively and timely implement controls and procedures that
adequately respond to the increased regulatory compliance and
reporting requirements that are applicable. If we fail to staff
our accounting and finance function adequately or maintain
internal controls adequate to meet the demands that are placed
upon us a public company, including the requirements of the
Sarbanes-Oxley Act, we may be unable to report our financial
results accurately or in a timely manner, and our business and
stock price may suffer. The costs of being a public company, as
well as diversion of managements time and attention, may
have a material adverse effect on our business, financial
condition and results of operations.
Additionally, these laws and regulations could make it more
difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same
or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons
to serve on our board of directors, board committees or as
executive officers.
Risks
Relating to Our Intellectual Property
Our
inability to adequately protect our intellectual property could
allow our competitors and others to produce products based on
our technology, which could substantially impair our ability to
compete.
Our success and ability to compete depends, in part, upon our
ability to maintain the proprietary nature of our technologies.
We rely on a combination of patents, copyrights and trademarks,
as well as trade secrets and nondisclosure agreements, to
protect our intellectual property. As of August 31, 2009,
we had a portfolio of 22 issued U.S. patents and 48 issued
or granted
non-U.S. patents
covering aspects of our core technology, which expire between
2010 and 2027. However, our issued patents and related
intellectual property may not be adequate to protect us or
permit us to gain or maintain a competitive advantage. The
issuance of a patent is not conclusive as to its scope, validity
or enforceability. The scope, validity or enforceability of our
issued patents can be challenged in litigation or proceedings
before the U.S. Patent and Trademark Office, or the USPTO.
In addition, our pending patent applications include claims to
numerous important aspects of our products under development
that are not currently protected by any of our issued patents.
We cannot assure you that any of our pending patent applications
31
will result in the issuance of patents to us. The USPTO may deny
or require significant narrowing of claims in our pending patent
applications. Even if any patents are issued as a result of
pending patent applications, they may not provide us with
significant commercial protection or be issued in a form that is
advantageous to us. Proceedings before the USPTO could result in
adverse decisions as to the priority of our inventions and the
narrowing or invalidation of claims in issued patents. Further,
if any patents we obtain or license are deemed invalid and
unenforceable, or have their scope narrowed, it could impact our
ability to commercialize or license our technology.
Changes in either the patent laws or in interpretations of
patent laws in the United States and other countries may
diminish the value of our intellectual property. For instance,
the U.S. Supreme Court has recently modified some tests
used by the USPTO in granting patents during the past
20 years, which may decrease the likelihood that we will be
able to obtain patents and increase the likelihood of challenge
of any patents we obtain or license. In addition, the USPTO has
adopted new rules of practice (the application of which has been
enjoined as a result of litigation) that limit the number of
claims that may be filed in a patent application and the number
of continuation or
continuation-in-part
applications that may be filed. These new rules may result in
patent applicants being unable to secure all of the rights that
they would otherwise have been entitled to in the absence of the
new rules and, therefore, may negatively affect our ability to
obtain comprehensive patent coverage. The laws of some foreign
countries may not protect our intellectual property rights to
the same extent as the laws of the United States, if at all.
To protect our proprietary rights, we may, in the future, need
to assert claims of infringement against third parties to
protect our intellectual property. The outcome of litigation to
enforce our intellectual property rights in patents, copyrights,
trade secrets or trademarks is highly unpredictable, could
result in substantial costs and diversion of resources, and
could have a material adverse effect on our financial condition,
reputation and results of operations regardless of the final
outcome of such litigation. In the event of an adverse judgment,
a court could hold that some or all of our asserted intellectual
property rights are not infringed, invalid or unenforceable, and
could order us to pay third-party attorneys fees. Despite
our efforts to safeguard our unpatented and unregistered
intellectual property rights, we may not be successful in doing
so or the steps taken by us in this regard may not be adequate
to detect or deter misappropriation of our technology or to
prevent an unauthorized third party from copying or otherwise
obtaining and using our products, technology or other
information that we regard as proprietary. In addition, we may
not have sufficient resources to litigate, enforce or defend our
intellectual property rights. Additionally, third parties may be
able to design around our patents.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. In
this regard, we seek to protect our proprietary information and
other intellectual property by requiring our employees,
consultants, contractors, outside scientific collaborators and
other advisors to execute non-disclosure and assignment of
invention agreements on commencement of their employment or
engagement. Agreements with our employees also forbid them from
bringing the proprietary rights of third parties to us. We also
require confidentiality or material transfer agreements from
third parties that receive our confidential data or materials.
However, trade secrets are difficult to protect. We cannot
provide any assurance that employees and third parties will
abide by the confidentiality or assignment terms of these
agreements, or that we will be effective securing necessary
assignments from these third parties. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our products or obtain and use information that
we regard as proprietary. Enforcing a claim that a third party
illegally obtained and is using any of our trade secrets is
expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the United States are sometimes less
willing to protect trade secrets. Finally, others may
independently discover trade secrets and proprietary
information, and this would prevent us from asserting any such
trade secret rights against these parties.
Our inability to adequately protect our intellectual property
could allow our competitors and others to produce products based
on our technology, which could substantially impair our ability
to compete.
Claims
of infringement or misappropriation of the intellectual property
rights of others could prohibit us from commercializing
products, require us to obtain licenses from third parties or
require us to develop non-infringing alternatives, and subject
us to substantial monetary damages and injunctive
relief.
The medical technology industry is characterized by extensive
litigation and administrative proceedings over patent and other
intellectual property rights. The likelihood that patent
infringement or misappropriation claims
32
may be brought against us increases as we achieve more
visibility in the marketplace and introduce products to market.
All issued patents are entitled to a presumption of validity
under the laws of the United States. Whether a product infringes
a patent involves complex legal and factual issues, the
determination of which is often uncertain. Therefore, we cannot
be certain that we have not infringed the intellectual property
rights of such third parties or others. Our competitors may
assert that our products are covered by U.S. or foreign
patents held by them. We are aware of numerous patents issued to
third parties that relate to the manufacture and use of medical
devices for interventional cardiology. The owners of each of
these patents could assert that the manufacture, use or sale of
our products infringes one or more claims of their patents.
Because patent applications may take years to issue, there may
be applications now pending of which we are unaware that may
later result in issued patents that we infringe. If another
party has filed a U.S. patent application on inventions
similar to ours, we may have to participate in an interference
proceeding declared by the USPTO to determine priority of
invention in the United States. The costs of these proceedings
can be substantial, and it is possible that such efforts would
be unsuccessful if unbeknownst to us, the other party had
independently arrived at the same or similar invention prior to
our own invention, resulting in a loss of our U.S. patent
position with respect to such inventions. There could also be
existing patents of which we are unaware that one or more
aspects of its technology may inadvertently infringe. In some
cases, litigation may be threatened or brought by a
patent-holding company or other adverse patent owner who has no
relevant product revenues and against whom our patents may
provide little or no deterrence.
Any infringement or misappropriation claim could cause us to
incur significant costs, place significant strain on our
financial resources, divert managements attention from our
business and harm our reputation. Some of our competitors may be
able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a
material adverse effect on our ability to raise the funds
necessary to continue our operations. Although patent and
intellectual property disputes in the medical device area have
often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and
could include ongoing royalties. If the relevant patents were
upheld in litigation as valid and enforceable and we were found
to infringe, we could be prohibited from commercializing any
infringing products unless we could obtain licenses to use the
technology covered by the patent or are able to design around
the patent. We may be unable to obtain a license on terms
acceptable to us, if at all, and we may not be able to redesign
any infringing products to avoid infringement. Further, any
redesign may not receive FDA clearance or approval or may not
receive such clearance or approval in a timely manner. Any such
license could impair operating margins on future product
revenue. A court could also order us to pay compensatory damages
for such infringement, and potentially treble damages, plus
prejudgment interest and third-party attorneys fees. These
damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court
also could enter orders that temporarily, preliminarily or
permanently enjoin us and our customers from making, using,
selling, offering to sell or importing infringing products, or
could enter an order mandating that we undertake certain
remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional
damages to third parties. Adverse determinations in a judicial
or administrative proceeding or failure to obtain necessary
licenses could prevent us from manufacturing and selling our
products, which would have a significant adverse impact on our
business.
Risks
Relating to Ownership of Our Common Stock
Until
recently there has not been a public market for our common stock
and our stock price is expected to be volatile and you may not
be able to resell your shares.
The market price of our common stock could be subject to
significant fluctuations. Market prices for securities of
early-stage pharmaceutical, medical device, biotechnology and
other life sciences companies have historically been
particularly volatile. Some of the factors that may cause the
market price of our common stock to fluctuate include:
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our ability to develop, obtain regulatory clearances or
approvals for and market new and enhanced products on a timely
basis;
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changes in governmental regulations or in the status of our
regulatory approvals, clearances or future applications;
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our announcements or our competitors announcements
regarding new products, product enhancements, significant
contracts, number of hospitals and physicians using our
products, acquisitions or strategic investments;
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announcements of technological or medical innovations for the
treatment of vascular disease;
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delays or other problems with the manufacturing of the
Diamondback 360°;
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volume and timing of orders for the Diamondback 360° and
any future products, if and when commercialized;
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changes in the availability of third-party reimbursement in the
United States and other countries;
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quarterly variations in our or our competitors results of
operations;
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changes in earnings estimates or recommendations by securities
analysts who cover our common stock;
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failure to meet estimates or recommendations by securities
analysts who cover our stock;
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changes in healthcare policy;
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product liability claims or other litigation;
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product recalls;
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accusations that we have violated a law or regulation;
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sales of large blocks of our common stock, including sales by
our executive officers, directors and significant stockholders;
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disputes or other developments with respect to intellectual
property rights;
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changes in accounting principles; and
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general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
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In addition, if securities class action litigation is initiated
against us, we would incur substantial costs and our
managements attention would be diverted from operations.
All of these factors could cause the price of our stock to
decline, and you may lose some or all of your investment.
Moreover, the stock markets in general have experienced
substantial volatility that has often been unrelated to the
operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price
of our common stock.
In the past, following periods of volatility in the market price
of a companys securities, stockholders have often
instituted class action securities litigation against such
company. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm our profitability and
reputation.
We do
not expect to pay cash dividends, and accordingly, stockholders
must rely on stock appreciation for any return on their
investment in the company.
We anticipate that we will retain our earnings, if any, for
future growth and therefore do not anticipate that we will pay
cash dividends in the future. As a result, appreciation of the
price of our common stock is the only potential source of return
to stockholders. Investors seeking cash dividends should not
invest in our common stock.
34
If
equity research analysts do not publish research or reports
about our business or if they issue unfavorable research or
downgrade the companys common stock, the price of our
common stock could decline.
Investors may look to reports of equity research analysts for
additional information regarding our industry and operations.
Therefore, any trading market for our common stock will rely in
part on the research and reports that equity research analysts
publish about us and our business. We do not control these
analysts. Equity research analysts may elect not to provide
research coverage of our common stock, which may adversely
affect the market price of our common stock. If equity research
analysts do provide research coverage of our common stock, the
price of our common stock could decline if one or more of these
analysts downgrade the common stock or if they issue other
unfavorable commentary about us or our business. If one or more
of these analysts ceases coverage of the company, we could lose
visibility in the market, which in turn could cause our stock
price to decline.
Some
provisions of our charter documents and Delaware law may have
anti-takeover effects that could discourage an acquisition of us
by others, even if an acquisition would be beneficial to our
stockholders.
Provisions in our restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so
would benefit our stockholders. These provisions include:
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authorizing the issuance of blank check preferred
stock, the terms of which may be established and shares of which
may be issued without stockholder approval;
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limiting the removal of directors by the stockholders;
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prohibiting stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
stockholders;
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eliminating the ability of stockholders to call a special
meeting of stockholders; and
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establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings.
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In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with an interested stockholder for a period of
three years following the date on which the stockholder became
an interested stockholder, unless such transactions are approved
by such corporations board of directors. This provision
could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to the
combined companys stockholders.
Future
sales and issuances of our common stock or rights to purchase
common stock, including pursuant to equity incentive plans,
could result in additional dilution of the percentage ownership
of our stockholders and could cause our stock price to
fall.
Sales of a substantial number of shares of the combined
companys common stock in the public market or the
perception that these sales might occur, could depress the
market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities.
We are unable to predict the effect that sales may have on the
prevailing market price of the common stock.
To the extent we raise additional capital by issuing equity
securities, including in a debt financing where we issue
convertible notes or notes with warrants, our stockholders may
experience substantial dilution. We may sell common stock in one
or more transactions at prices and in a manner we determine from
time to time. If we sell common stock in more than one
transaction, existing stockholders may be materially diluted. In
addition, new investors could gain rights superior to existing
stockholders, such as liquidation and other preferences. We have
stock options and warrants outstanding to purchase shares of our
capital stock. Our stockholders will incur dilution upon
exercise of any outstanding stock options or warrants.
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Item 1B.
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Unresolved
Staff Comments.
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Not applicable.
Our principal executive offices are located in a
47,000 square foot facility located in St. Paul, Minnesota.
We have leased this facility through November 2012 with an
option to renew through November 2017. This facility
accommodates our research and development, sales, marketing,
manufacturing, finance and administrative activities.
In September 2009, we entered into an agreement to lease a
46,000 square foot production facility in Pearland, Texas
beginning April 1, 2010. We have leased this facility
through March 2020. This facility will primarily accommodate
additional manufacturing activities.
We believe that our current premises, combined with the
Pearland, Texas production facility, are substantially adequate
for our current and anticipated future needs for the foreseeable
future.
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Item 3.
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Legal
Proceedings.
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On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc., together referred to as the
Plaintiffs, filed a complaint in the Ramsey County District
Court for the State of Minnesota against us and Sean Collins and
Aaron Lew, who are former employees of FoxHollow currently
employed by us, as well as against unknown former employees of
Plaintiffs currently employed by us, referred to in the
complaint as John Does 1-10. On July 2, 2008, Plaintiffs
served and filed with the court a second amended complaint. In
this amended pleading, Plaintiffs asserted claims against us as
well as ten of our employees, all of whom were formerly employed
by one or more of the Plaintiffs. The second amended complaint
also continues to refer to John Doe 1-10 defendants,
who are not identified by name.
The second amended complaint alleges the following:
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That certain of our employees (i) violated provisions in
their employment agreements with their former employer
FoxHollow, barring them from misusing FoxHollow confidential
information and from soliciting or encouraging employees of
FoxHollow to join us, and (ii) breached a duty of loyalty
owed to FoxHollow.
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That we and certain of our employees misappropriated trade
secrets of one or more of the Plaintiffs.
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That all defendants engaged in unfair competition and conspired
to gain an unfair competitive and economic advantage for us to
the detriment of the Plaintiffs.
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That (i) we tortiously interfered with the contracts
between FoxHollow and certain of our employees by allegedly
procuring breaches of the non-solicitation
encouragement provision in those agreements, and (ii) one
of our employees tortiously interfered with the contracts
between certain of our employees and FoxHollow by allegedly
procuring breaches of the confidential information provision in
those agreements.
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In the second amended complaint, the Plaintiffs seek, among
other forms of relief, an award of damages in an amount greater
than $50,000, a variety of forms of injunctive relief, exemplary
damages under the Minnesota Trade Secrets Act, and recovery of
their attorney fees and litigation costs. Although we have
requested the information, the Plaintiffs have not yet disclosed
what specific amount of damages they claim.
On December 28, 2007, the Plaintiffs filed with the court a
motion for a temporary restraining order, which the court
granted in part and denied in part in an order dated
January 10, 2008. With regard to former employees of ev3 or
FoxHollow who are now employed with us, the court
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enjoined those employees from disclosing trade secrets of ev3 or
FoxHollow;
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directed that any of such employees who signed a FoxHollow
employment agreement must not disclose the identity of FoxHollow
Key Opinion Leaders or Thought Leaders or use this information
to aid us;
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ordered that these persons must not maintain, use or disclose
any confidential information about the FoxHollow Key Opinion
Leaders or Thought Leaders that was received while they were
employed with FoxHollow, and that if such information had
already been disclosed or used, they were required to advise the
recipients of such information in writing that this information
is confidential and may not be used by them or disclosed to
anyone;
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ordered that if any of these employees contact any physician who
is a FoxHollow Key Opinion Leader or Thought Leader,
he/she must
be able to trace, document and account, with specificity, how
he/she was
able to identify such prospect through information, records or
documents obtained outside
his/her
employment with Plaintiffs; and
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directed that those employees who are subject to a FoxHollow
employee nonsolicitation agreement must not, for one year after
leaving FoxHollow, be involved in soliciting or recruiting any
current employee of the Plaintiffs to leave that employment or
to accept employment with us.
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In the memorandum accompanying the January 10, 2008 order,
the court noted that Mr. Collins admitted he took certain
FoxHollow sales information just prior to the conclusion of his
employment with FoxHollow, and noted that Mr. Collins had
indicated a willingness to return that information to FoxHollow.
Mr. Collins has returned the information.
We believe the January 10, 2008 court order and the
continuing confidentiality obligations of our officers and
employees who were subject to employment agreements with
FoxHollow will have no material impact on our sales efforts and
the efforts of our management. In accordance with the
courts order, we have undertaken an effort to document and
account, with specificity, how our employees identified our
existing physician customers through information, records or
documents that did not originate with FoxHollow, and we have
implemented procedures to document how we identify new physician
customers. We believe all of our existing physician customers
were identified through appropriate sources, such as
publicly-available information, employees preexisting
physician relationships and referrals from existing physician
customers. In addition, we do not believe the court order
imposes any materially adverse restriction on identifying and
contacting new physician prospects since these physicians are
typically well-known in their industry and are easily identified
through appropriate sources. Accordingly, we do not anticipate
that the court order will materially impact our sales efforts.
In July 2008, all defendants in the case filed motions with the
district court asking the court to dismiss all claims on the
grounds that the claims should be decided exclusively in
arbitration in accordance with provisions found in the
employment agreements between FoxHollow and eight of the 10
individual defendants. In October 2008, the district court
granted this motion with respect to the eight individual
defendants who had arbitration provisions in their FoxHollow
employment agreements and stayed proceedings in the action
against these parties pending the outcome of any subsequent
arbitration proceedings. At the same time, the court denied the
motions to compel arbitration brought by us and by the two other
individual defendants. In late October 2008, both we and the two
individual defendants filed appeals from the district
courts order denying the motions to compel arbitration. In
January 2009, the district court stayed all proceedings in the
action pending resolution of the appeals. During the oral
argument before the Court of Appeals that occurred in May 2009,
counsel for the Plaintiffs informed the court that the
Plaintiffs do not intend to commence arbitration proceedings
against the eight co-Defendants who prevailed in the district
court on motions to compel arbitration. On August 11, 2009,
the Court of Appeals issued a decision affirming the district
courts order denying the motions by us and the two
individual defendants to compel arbitration. In late August
2009, both we and the two individual defendants filed petitions
with the Minnesota Supreme Court, asking that court to review
the August 11, 2009, decision by the Minnesota Court of
Appeals. We anticipate learning by the end of October 2009
whether the Supreme Court will accept review.
The Diamondback 360° is, at least in some applications,
considered to be a direct competitor with one of
Plaintiffs products. Our current Chief Executive Officer,
Vice President of Business Operations and Vice President of
Business Development were formerly employed by FoxHollow. These
officers remain subject to confidentiality provisions in their
employment agreements with FoxHollow, but the employee
nonsolicitation provisions in their agreements with FoxHollow
have expired. As of August 31, 2009, 35 of the 126 members
of our sales department, or 27.8%, were formerly employed by one
or more of the Plaintiffs.
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We are defending this litigation vigorously. However, if we are
not successful in this litigation, we could be required to pay
substantial damages and could be subject to equitable relief
that could include a requirement that we terminate or otherwise
alter the terms or conditions of employment of certain
employees, including certain key sales personnel who were
formerly employed by FoxHollow. In any event, the defense of
this litigation, regardless of the outcome, could result in
substantial legal costs and diversion of our managements
time and efforts from the operation of our business.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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None.
Executive
Officers of the Registrant.
The information required by Item 10 relating to directors,
our code of ethics, procedures for stockholder recommendations
of director nominees, the audit committee and compliance with
Section 16 of the Exchange Act is incorporated herein by
reference to the sections entitled Election of
Directors, Corporate Governance and
Section 16(a) Beneficial Ownership Reporting
Compliance, which appear in our definitive proxy statement
for our 2009 Annual Meeting.
The names, ages and positions of our executive officers are as
follows:
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Name
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Age
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Position
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David L. Martin
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President and Chief Executive Officer
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Laurence L. Betterley
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Chief Financial Officer
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James E. Flaherty
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Chief Administrative Officer and Secretary
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Brian Doughty
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Vice President of Commercial Operations
|
Scott Kraus
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|
|
39
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|
|
Vice President of Sales
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Paul Koehn
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|
|
46
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|
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Vice President of Manufacturing
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Robert J. Thatcher
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|
|
55
|
|
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Executive Vice President
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Paul Tyska
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51
|
|
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Vice President of Business Development
|
David L. Martin, President and Chief Executive
Officer. Mr. Martin has been our President
and Chief Executive Officer since February 2007, and a director
since August 2006. Mr. Martin also served as our Interim
Chief Financial Officer from January 2008 to April 2008. Prior
to joining us, Mr. Martin was Chief Operating Officer of
FoxHollow Technologies, Inc. from January 2004 to February 2006,
Executive Vice President of Sales and Marketing of FoxHollow
Technologies, Inc. from January 2003 to January 2004, Vice
President of Global Sales and International Operations at
CardioVention Inc. from October 2001 to May 2002, Vice President
of Global Sales for RITA Medical Systems, Inc. from March 2000
to October 2001 and Director of U.S. Sales, Cardiac Surgery
for Guidant Corporation from September 1999 to March 2000.
Mr. Martin has also held sales and sales management
positions for The Procter & Gamble Company and Boston
Scientific Corporation.
Laurence L. Betterley, Chief Financial
Officer. Mr. Betterley joined us in April
2008 as our Chief Financial Officer. Previously,
Mr. Betterley was Chief Financial Officer at Cima NanoTech,
Inc. from May 2007 to April 2008, Senior Vice President and
Chief Financial Officer of PLATO Learning, Inc. from June 2004
to January 2007, Senior Vice President and Chief Financial
Officer of Diametrics Medical, Inc. from 1996 to 2003, and Chief
Financial Officer of Cray Research Inc. from 1994 to 1996.
James E. Flaherty, Chief Administrative Officer and
Secretary. Mr. Flaherty has been our Chief
Administrative Officer since January 14, 2008.
Mr. Flaherty was our Chief Financial Officer from March
2003 to January 14, 2008. As Chief Administrative Officer,
Mr. Flaherty reports directly to our Chief Executive
Officer and has responsibility for information technology,
facilities, legal matters, financial analysis of business
development opportunities and business operations. Prior to
joining us, Mr. Flaherty served as an independent financial
consultant from 2001 to 2003 and Chief Financial Officer of
Zomax Incorporated from 1997 to 2001 and Racotek, Inc. from 1990
to 1996. On June 9, 2005, the Securities and Exchange
Commission filed a civil injunctive action charging Zomax
Incorporated with violations of federal securities law by filing
a materially misstated
Form 10-Q
38
for the period ended June 30, 2000. The SEC further charged
that in a conference call with analysts, certain of Zomaxs
executive officers, including Mr. Flaherty, misrepresented
or omitted to state material facts regarding Zomaxs
prospects of meeting quarterly revenue and earnings targets, in
violation of federal securities law. Without admitting or
denying the SECs charges, Mr. Flaherty consented to
the entry of a court order enjoining him from any violation of
certain provisions of federal securities law. In addition,
Mr. Flaherty agreed to disgorge $16,770 plus prejudgment
interest and pay a $75,000 civil penalty.
Brian Doughty, Vice President of Commercial
Operations. Mr. Doughty joined us in
December 2006 as Director of Marketing, was named Vice President
of Marketing in August 2007 and became Vice President of
Commercial Operations in April 2009. Prior to joining us,
Mr. Doughty was Director of Marketing at
EKOS Corporation from February 2005 to December 2006,
National Sales Initiatives Manager of FoxHollow Technologies,
Inc. from September 2004 to February 2005, National Sales
Operations Director at Medtronic from August 2000 to September
2004, and Sales Team Leader for Johnson and Johnson from
December 1998 to August 2000. Mr. Doughty has also held
sales and sales management positions for Ameritech Information
Systems.
Scott Kraus, Vice President of
Sales. Mr. Kraus has been with us since
September 2006, acting as a senior sales director, until
becoming Vice President of Sales in April 2009. Previously,
Mr. Kraus was at Boston Scientific Corporation where he
served as an Account Manager/Regional Sales Manager from April
2006 to September 2006. He held the same position with Guidant
Corporation from December 2000 to April 2006, before Boston
Scientifics acquisition of Guidant in April 2006. Earlier,
he gained sales experience at C.R. Bard, Bristol-Myers Squibb
and Surgical Specialties Corporation.
Paul Koehn, Vice President of
Manufacturing. Mr. Koehn joined us in March
2007 as Director of Manufacturing and was promoted to Vice
President of Manufacturing in October 2007. Previously,
Mr. Koehn was Vice President of Operations for Sewall Gear
Manufacturing from 2000 to March 2007 and before joining Sewall
Gear, Mr. Koehn held various quality and manufacturing
management roles with Dana Corporation.
Robert J. Thatcher, Executive Vice
President. Mr. Thatcher joined us as Senior
Vice President of Sales and Marketing in October 2005 and became
Vice President of Operations in September 2006.
Mr. Thatcher became Executive Vice President in August
2007. Previously, Mr. Thatcher was Senior Vice President of
TriVirix Inc. from October 2003 to October 2005.
Mr. Thatcher has more than 29 years of medical device
experience in both large and
start-up
companies. Mr. Thatcher has held various sales management,
marketing management and general management positions at
Medtronic, Inc., Schneider USA, Inc. (a former division of
Pfizer Inc.), Boston Scientific Corporation and several startup
companies.
Paul Tyska, Vice President of Business
Development. Mr. Tyska joined us in August
2006 as Vice President of Business Development. Previously,
Mr. Tyska was employed at FoxHollow Technologies, Inc.
since July 2003 where he most recently served as National Sales
Director from February 2006 to August 2006. Mr. Tyska has
held various positions with Guidant Corporation, CardioThoracic
Systems, Inc., W. L. Gore & Associates and ATI Medical
Inc.
39
PART II
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Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Price
Range of Common Stock and Dividend Policy
Prior to the closing of the merger on February 25, 2009,
the stock of Replidyne was traded on the Nasdaq Global Market
under the symbol RDYN. On February 26, 2009,
the stock of CSI began trading on the Nasdaq Global Market under
the symbol CSII. The following table sets forth the
high and low sales prices for our common stock (based upon
intra-day
trading) as reported by the Nasdaq Global Market, as adjusted to
reflect a
1-for-10
reverse stock split that occurred on February 25, 2009:
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Common Stock
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|
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High
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Low
|
|
Fiscal Year Ended June 30, 2009
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|
|
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First quarter
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$
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14.30
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$
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11.60
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Second quarter
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12.70
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2.80
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Third quarter (through February 25, 2009)
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10.30
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6.60
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Third quarter (from February 26, 2009 through
March 31, 2009)
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10.15
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4.78
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Fourth quarter
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7.97
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5.60
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Fiscal Year Ended June 30, 2008
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First quarter
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$
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75.00
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$
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52.30
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Second quarter
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66.60
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30.50
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Third quarter
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31.00
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12.90
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Fourth quarter
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19.00
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12.50
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The number of record holders of our common stock on
September 23, 2009 was approximately 527. No cash dividends
have been previously paid on our common stock and none are
anticipated during fiscal year 2010. We are restricted from
paying dividends under our Loan and Security Agreement with
Silicon Valley Bank.
Recent
Sales of Unregistered Securities
Between February 26, 2009 and June 30, 2009, we issued
and sold 12,615 unregistered shares of our common stock pursuant
to warrant exercises with exercise price of $1.55 per share. The
shares were sold in private transactions exempt from
registration pursuant to Section 4(2) of the Securities
Act. No underwriters were involved in the transactions or
received any commissions or other compensation. Proceeds of the
sales were used to fund our working capital requirements.
Issuer
Purchases of Equity Securities
None.
Securities
Authorized For Issuance Under Equity Compensation
Plans
For information on our equity compensation plans, refer to
Item 12, Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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You should read the following discussion and analysis of
financial condition and results of operations together with our
consolidated financial statements and the related notes included
elsewhere in this
Form 10-K.
This discussion and analysis contains forward-looking statements
about our business and operations, based on current expectations
and related to future events and our future financial
performance, that involve risks and uncertainties.
40
Our actual results may differ materially from those we
currently anticipate as a result of many important factors,
including the factors we describe under Risk Factors
and elsewhere in this
Form 10-K.
OVERVIEW
We are a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. Our initial product, the Diamondback 360°, is a
minimally invasive catheter system for the treatment of
peripheral arterial disease, or PAD.
We were incorporated as Replidyne, Inc. in Delaware in 2000. On
February 25, 2009, Replidyne, Inc. completed its business
combination with Cardiovascular Systems, Inc., a Minnesota
corporation (CSI-MN), in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as
of November 3, 2008. Pursuant to the Merger Agreement,
CSI-MN continued after the merger as the surviving corporation
and a wholly owned subsidiary of Replidyne. Replidyne changed
its name to Cardiovascular Systems, Inc. (CSI) and
CSI-MN merged with and into CSI, with CSI continuing after the
merger as the surviving corporation. These transactions are
referred to herein as the merger. Unless the context
otherwise requires, all references herein to the
Company, CSI, we,
us and our refer to CSI-MN prior to the
completion of the merger and to CSI following the completion of
the merger and the name change, and all references to
Replidyne refer to Replidyne prior to the completion
of the merger and the name change.
At the closing of the merger, Replidynes net assets, as
calculated pursuant to the terms of the Merger Agreement, were
approximately $36.6 million. As of immediately following
the effective time of the merger, former CSI-MN stockholders
owned approximately 80.2% of the outstanding common stock of the
combined company, and Replidyne stockholders owned approximately
19.8% of the outstanding common stock of the combined company.
Our common stock was accepted for listing on the Nasdaq Global
Market under the symbol CSII and trading commenced
on February 26, 2009.
Replidyne was a biopharmaceutical company focused on
discovering, developing, in-licensing and commercializing
anti-infective products.
CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997,
we engaged in research and development on several different
product concepts that were later abandoned. Since 1997, we have
devoted substantially all of our resources to the development of
the Diamondback 360°.
From 2003 to 2005, we conducted numerous bench and animal tests
in preparation for application submissions to the FDA. We
initially focused our testing on providing a solution for
coronary in-stent restenosis but later changed the focus to PAD.
In 2006, we obtained an investigational device exemption from
the FDA to conduct our pivotal OASIS clinical trial, which was
completed in January 2007. The OASIS clinical trial was a
prospective
20-center
study that involved 124 patients with 201 lesions.
In August 2007, the FDA granted us 510(k) clearance for the use
of the Diamondback 360° as a therapy in patients with PAD.
We commenced a limited commercial introduction of the
Diamondback 360° in the United States in September
2007. This limited commercial introduction intentionally limited
the size of our sales force and the number of customers each
member of the sales force served in order to focus on obtaining
quality and timely product feedback on initial product usages.
We market the Diamondback 360° in the United States through
a direct sales force and commenced a full commercial launch in
the quarter ended March 31, 2008. We expend significant
capital on our sales and marketing efforts to expand our
customer base and utilization per customer. We manufacture the
Diamondback 360° internally at our facilities.
As of June 30, 2009, we had an accumulated deficit of
$127.4 million. We expect our losses to continue but
generally decline as we continue our commercialization
activities, develop additional product enhancements, increase
our manufacturing capacity, and make further regulatory
submissions. To date, we have financed our operations primarily
through the private placement of equity securities and
completion of the merger.
41
FINANCIAL
OVERVIEW
Revenues. We derive substantially all of our
revenues from the sale of the Diamondback 360° and other
ancillary products. The Diamondback 360° system consists of
a disposable, single-use, low-profile catheter that travels over
our proprietary ViperWire guidewire and an external control unit
that powers the system. Our ancillary products include the
ViperSlidetm
Lubricant, the
ViperSheathtm
Introducer Sheath,
ViperTracktm
Radiopaque Tape, and
ViperCaddytm
Guide Wire Management.
Cost of Goods Sold. We assemble the single-use
catheter with components purchased from third-party suppliers,
as well as with components manufactured in-house. The control
unit and guidewires are purchased from third-party suppliers.
Our cost of goods sold consists primarily of raw materials,
direct labor, and manufacturing overhead.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses include compensation for executive, sales, marketing,
finance, information technology, human resources and
administrative personnel, including stock-based compensation.
Other significant expenses include travel and marketing costs,
professional fees, and patent expenses.
Research and Development. Research and
development expenses include costs associated with the design,
development, testing, enhancement and regulatory approval of our
products. Research and development expenses include employee
compensation including stock-based compensation, supplies and
materials, consulting expenses, travel and facilities overhead.
We also incur significant expenses to operate clinical trials,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. All research
and development expenses are expensed as incurred.
Interest Income. Interest income is attributed
to both interest earned on deposits in investments that consist
of money market funds and auction rate securities and the
initial fair value and changes in fair value of the auction rate
securities put option discussed below.
Interest Expense. Interest expense results
from outstanding debt balances, the issuance of convertible
promissory notes, and debt discount amortization.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants. Decretion (accretion) of
redeemable convertible preferred stock warrants reflects the
change in the current estimated fair market value of the
preferred stock warrants on a quarterly basis, as determined by
management and the board of directors. Decretion (accretion) is
recorded as a decrease (increase) to redeemable convertible
preferred stock warrants in the consolidated balance sheet and a
decrease (increase) to net loss in the consolidated statement of
operations. Concurrent with the merger, all preferred stock
warrants were converted into warrants to purchase common stock
and, accordingly, we stopped recording decretion (accretion) as
of the merger date.
Gain (Impairment) on Investments. Gain
(impairment) on investments reflects the change in the fair
value of investments as determined with the assistance of
ValueKnowledge LLC, an independent third party valuation firm.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock. Decretion (accretion) of redeemable
convertible preferred stock reflects the change in the current
estimated fair market value of the preferred stock on a
quarterly basis, as determined by management and the board of
directors. Decretion (accretion) is recorded as a decrease
(increase) to redeemable convertible preferred stock in the
consolidated balance sheet and a decrease (increase) to the loss
attributable to common stockholders in the consolidated
statement of operations. The redeemable convertible preferred
stock was converted into common stock immediately prior to the
effective time of the merger with Replidyne. As such, the
preferred stockholders forfeited their liquidation preferences
and we stopped recording decretion (accretion) as of the merger
date.
Net Operating Loss Carryforwards. We have
established valuation allowances to fully offset our deferred
tax assets due to the uncertainty about our ability to generate
the future taxable income necessary to realize these deferred
assets, particularly in light of our historical losses. The
future use of net operating loss carryforwards is dependent on
us attaining profitable operations and will be limited in any
one year under Internal Revenue Code Section 382 due to
significant ownership changes (as defined in
Section 382) resulting from our equity financings.
42
At June 30, 2009, we had net operating loss carryforwards
for federal and state income tax reporting purposes of
approximately $110.2 million, which will expire at various
dates through fiscal 2029.
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND
ESTIMATES
Our managements discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of our consolidated financial
statements requires us to make estimates, assumptions and
judgments that affect amounts reported in those statements. Our
estimates, assumptions and judgments, including those related to
revenue recognition, allowance for doubtful accounts, excess and
obsolete inventory, investments, stock-based compensation,
preferred stock and preferred stock warrants are updated as
appropriate at least quarterly. We use authoritative
pronouncements, our technical accounting knowledge, cumulative
business experience, judgment and other factors in the selection
and application of our accounting policies. While we believe
that the estimates, assumptions and judgments that we use in
preparing our consolidated financial statements are appropriate,
these estimates, assumptions and judgments are subject to
factors and uncertainties regarding their outcome. Therefore,
actual results may materially differ from these estimates.
Some of our significant accounting policies require us to make
subjective or complex judgments or estimates. An accounting
estimate is considered to be critical if it meets both of the
following criteria: (1) the estimate requires assumptions
about matters that are highly uncertain at the time the
accounting estimate is made, and (2) different estimates
that reasonably could have been used, or changes in the estimate
that are reasonably likely to occur from period to period, would
have a material impact on the presentation of our financial
condition, results of operations, or cash flows. We believe that
the following are our critical accounting policies and estimates:
Revenue Recognition. We sell the majority of
our products via direct shipment to hospitals or clinics. We
recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery has
occurred; the sales price is fixed or determinable; and
collectability is reasonably assured. These criteria are met at
the time of delivery when the risk of loss and title passes to
the customer. We record estimated sales returns, discounts and
rebates as a reduction of net sales in the same period revenue
is recognized.
We also consider Emerging Issues Task Force Bulletin (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, in
revenue recognition. This standard addresses the timing and
method of revenue recognition for revenue arrangements that
include the delivery of more than one product or service. In
these cases, we recognize revenue from each element of the
arrangement as long as separate values for each element can be
determined, we have completed our obligation to deliver or
perform on that element, and collection of the resulting
receivable is reasonably assured.
Costs related to products delivered are recognized in the period
revenue is recognized. Cost of goods sold consists primarily of
raw materials, direct labor, and manufacturing overhead.
Allowance for Doubtful Accounts. We maintain
allowances for doubtful accounts. This allowance is an estimate
and is regularly evaluated for adequacy by taking into
consideration factors such as past experience, credit quality of
the customer base, age of the receivable balances, both
individually and in the aggregate, and current economic
conditions that may affect a customers ability to pay.
Provisions for the allowance for doubtful accounts attributed to
bad debt are recorded in general and administrative expenses.
Excess and Obsolete Inventory. We have
inventories that are principally comprised of capitalized direct
labor and manufacturing overhead, raw materials and components,
and finished goods. Due to the technological nature of our
products, there is a risk of obsolescence to changes in our
technology and the market, which is impacted by technological
developments and events. Accordingly, we write down our
inventories as we become aware of any situation where the
carrying amount exceeds the estimated realizable value based on
assumptions about future demands and market conditions. The
evaluation includes analyses of inventory levels, expected
product lives, product at risk of expiration, sales levels by
product and projections of future sales demand.
Investments. Our investments include AAA rated
auction rate securities (ARS) issued primarily by state agencies
and backed by student loans substantially guaranteed by the
Federal Family Education Loan Program
43
(FFELP). In February 2008, we were informed that there was
insufficient demand for auction rate securities, resulting in
failed auctions for $23.0 million of our auction rate
securities held at June 30, 2009 and 2008. Currently, these
affected securities are not liquid and will not become liquid
until a future auction for these investments are successful,
they are redeemed by the issuer, or they mature. As a result, at
June 30, 2009 and 2008, we have classified the fair value
of the auction rate securities as a long-term asset. We have
collected all interest due on our auction rate securities and
have no reason to believe that we will not collect all interest
due in the future.
On November 7, 2008, we accepted an offer from UBS AG
(UBS), providing rights related to our ARS (the
Rights). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined for this purpose
as the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS
has the right, in its discretion, to purchase or sell our ARS at
any time until July 2, 2012, so long as we receive payment
at par value upon any sale or disposition. We expect to sell our
ARS under the Rights. However, if the Rights are not exercised
before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our ARS. So long as we hold
ARS, they will continue to accrue interest as determined by the
auction process or the terms of the ARS if the auction process
fails. Prior to accepting the UBS offer, we recorded ARS as
investments
available-for-sale.
We recorded unrealized gains and losses on
available-for-sale
securities in accumulated other comprehensive income in the
stockholders equity (deficiency) section of the balance
sheet. Realized gains and losses were accounted for on the
specific identification method. After accepting the UBS offer,
we recorded the ARS as trading investments and realized gains
and losses are included in earnings.
The Rights represent a firm agreement in accordance with
SFAS 133, which defines a firm agreement as an agreement
with an unrelated party, binding on both parties and usually
legally enforceable, with the following characteristics:
a) the agreement specifies all significant terms, including
the quantity to be exchanged, the fixed price, and the timing of
the transaction, and b) the agreement includes a
disincentive for nonperformance that is sufficiently large to
make performance probable. The enforceability of the Rights
results in a put option and should be recognized as a free
standing asset separate from the ARS. At June 30, 2009, we
recorded $2.8 million as the fair value of the put option
asset with a corresponding credit to interest income. We
considered the expected time until the Rights are exercised,
carrying costs of the Rights, and the expected credit risk
attributes of the Rights and UBS in their valuation of the put
option. The put option does not meet the definition of a
derivative instrument under SFAS 133. Therefore, we have
elected to measure the put option at fair value under
SFAS 159, which permits an entity to elect the fair value
option for recognized financial assets, in order to match the
changes in the fair value of the ARS. As a result, unrealized
gains and losses will be included in earnings in future periods.
We determined the fair value of our auction rate securities and
quantified the
other-than-temporary
impairment loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets. Based
on these factors, we recorded impairment of investments for the
years ended June 30, 2009 and 2008 of $1.7 million and
$1.3 million, respectively.
Stock-Based Compensation. We account for
stock-based compensation expense in accordance with
SFAS No. 123(R), Share-Based Payment, as
interpreted by SAB No. 107 to account for stock-based
compensation expense associated with the issuance or amendment
of stock options and restricted stock awards.
SFAS No. 123(R) requires us to recognize stock-based
compensation expense in an amount equal to the fair value of
share-based payments computed at the date of grant. The fair
value of all stock option and restricted awards are expensed in
the consolidated statements of operations over the related
vesting period. We calculate the fair value on the date of grant
using a Black-Scholes model.
To determine the inputs for the Black-Scholes option pricing
model, we are required to develop several assumptions, which are
highly subjective. These assumptions include:
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our common stocks volatility;
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44
|
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|
|
the length of our options lives, which is based on future
exercises and cancellations;
|
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|
the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
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the risk-free rate of return; and
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future dividends.
|
Prior to the consummation of the merger, we used comparable
public company data to determine volatility for option grants.
Since we have a limited history of stock purchase and sale
activity, expected volatility is based on historical data from
several public companies similar to us in size and nature of
operations. We will continue to use comparable public company
data to determine expected volatility for option grants until
our historical volatility is relevant to measure. We use a
weighted average calculation to estimate the time our options
will be outstanding. We estimated the number of options that are
expected to be forfeited based on our historical experience. The
risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant for the estimated life of the
option. We use our judgment and expectations in setting future
dividend rates, which is currently expected to be zero.
All options we have granted become exercisable over periods
established at the date of grant. The option exercise price is
generally not less than the estimated fair market value of our
common stock at the date of grant, as determined by management
and board of directors.
The absence of an active market for our common stock prior to
the merger required our management and board of directors to
estimate the fair value of our common stock for purposes of
granting options and for determining stock-based compensation
expense. In response to these requirements, prior to the merger
our management and board of directors estimated the fair market
value of common stock at each date at which options are granted
based upon stock valuations and other qualitative factors. Our
management and board of directors conducted stock valuations
using two different valuation methods: the option pricing method
and the probability weighted expected return method. Both of
these valuation methods took into consideration the following
factors: financing activity, rights and preferences of our
preferred stock, growth of the executive management team,
clinical trial activity, the FDA process, the status of our
commercial launch, our mergers and acquisitions and public
offering processes, revenues, the valuations of comparable
public companies, our cash and working capital amounts, and
additional objective and subjective factors relating to our
business. Our management and board of directors set the exercise
prices for option grants based upon their best estimate of the
fair market value of the common stock at the time they made such
grants, taking into account all information available at those
times. In some cases, management and the board of directors made
retrospective assessments of the valuation of the common stock
at later dates and determined that the fair market value of the
common stock at the times the grants were made was different
than the exercise prices established for those grants. In cases
in which the fair market was higher than the exercise price, we
recognized stock-based compensation expense for the excess of
the fair market value of the common stock over the exercise
price.
Following the merger, our stock valuations are based upon the
market price for our common stock.
Preferred Stock. We record the current
estimated fair value of our convertible preferred stock on a
quarterly basis based on the fair market value of that stock as
determined by our management and board of directors. The
determination of fair market value included factors such as
recent financing activity, preferred stock rights and
preferences, clinical trials, revenues, and regulatory approval
process. In accordance with Accounting Series Release
No. 268, Presentation in Financial Statements of
Redeemable Preferred Stocks and EITF Abstracts,
Topic D-98, Classification and Measurement of Redeemable
Securities, we record changes in the current fair value of
our redeemable convertible preferred stock in the consolidated
statements of changes in stockholders equity (deficiency)
and comprehensive (loss) income and consolidated statements of
operations as accretion of redeemable convertible preferred
stock. Concurrent with the merger, all preferred stock was
converted to common stock and, accordingly, was reclassified to
stockholders equity (deficiency).
Preferred Stock Warrants. Freestanding
warrants and other similar instruments related to shares that
are redeemable are accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to our redeemable convertible preferred stock was classified as
a liability on the balance sheet
45
as of June 30, 2008. The warrant was subject to
remeasurement at each balance sheet date and any change in fair
value was recognized as a component of other income (expense).
Fair value was measured using the Black-Scholes option pricing
model. Concurrent with the merger, all preferred stock warrants
were converted into warrants to purchase common stock and,
accordingly, the liability was reclassified to
stockholders equity (deficiency).
RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, our
results of operations expressed as dollar amounts (in
thousands), and, for certain line items, the changes between the
specified periods expressed as percent increases or decreases:
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|
Year Ended June 30,
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|
Year Ended June 30,
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Percent
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Percent
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2009
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2008
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Change
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2008
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2007
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Change
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|
Revenues
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$
|
56,461
|
|
|
$
|
22,177
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|
|
|
154.6
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%
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|
$
|
22,177
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|
|
$
|
|
|
|
|
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|
Cost of goods sold
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|
16,194
|
|
|
|
8,927
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|
|
|
81.4
|
|
|
|
8,927
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Gross profit
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|
40,267
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|
|
|
13,250
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|
|
|
203.9
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|
|
|
13,250
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|
|
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|
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Expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling, general and administrative
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|
59,822
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|
|
|
35,326
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|
|
|
69.3
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|
|
|
35,326
|
|
|
|
6,691
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|
|
|
428.0
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|
Research and development
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|
14,678
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|
|
|
16,068
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|
|
|
(8.7
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)
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|
16,068
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|
|
|
8,446
|
|
|
|
90.2
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
74,500
|
|
|
|
51,394
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|
|
|
45.0
|
|
|
|
51,394
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|
|
|
15,137
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|
|
|
239.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss from operations
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|
|
(34,233
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)
|
|
|
(38,144
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)
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|
|
(10.3
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)
|
|
|
(38,144
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)
|
|
|
(15,137
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)
|
|
|
152.0
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|
Other income (expense):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
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|
|
(2,350
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)
|
|
|
(7
|
)
|
|
|
33,471.4
|
|
|
|
(7
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)
|
|
|
(13
|
)
|
|
|
(46.2
|
)
|
Interest income
|
|
|
3,380
|
|
|
|
1,167
|
|
|
|
189.6
|
|
|
|
1,167
|
|
|
|
881
|
|
|
|
32.5
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|
Decretion (accretion) of redeemable convertible preferred stock
warrants
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|
2,991
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|
|
|
(916
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)
|
|
|
426.5
|
|
|
|
(916
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)
|
|
|
(1,327
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)
|
|
|
(31.0
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)
|
Impairment on investments
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|
|
(1,683
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)
|
|
|
(1,267
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)
|
|
|
32.8
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|
|
|
(1,267
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total other income (expense)
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|
2,338
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|
|
|
(1,023
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)
|
|
|
328.5
|
|
|
|
(1,023
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)
|
|
|
(459
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)
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,895
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)
|
|
|
(39,167
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)
|
|
|
(18.6
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)
|
|
|
(39,167
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)
|
|
|
(15,596
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)
|
|
|
151.1
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
22,781
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|
|
|
(19,422
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)
|
|
|
217.3
|
|
|
|
(19,422
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)
|
|
|
(16,835
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)
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss available to common stockholders
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|
$
|
(9,114
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)
|
|
$
|
(58,589
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)
|
|
|
(84.4
|
)%
|
|
$
|
(58,589
|
)
|
|
$
|
(32,431
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)
|
|
|
80.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Year Ended June 30, 2009 with Fiscal Year Ended
June 30, 2008
Revenues. Revenues increased by
$34.3 million, or 154.6%, from $22.2 million for the
year ended June 30, 2008 to $56.5 million for the year
ended June 30, 2009. This increase was primarily
attributable to increased sales of the Diamondback 360°
during the year ended June 30, 2009 compared to three
quarters in the year ended June 30, 2008. As of
June 30, 2009, we had a
124-person
direct sales organization that was selling the Diamondback
360° in 556 accounts. As of June 30, 2008, we had
an 87-person
direct sales organization that was selling the Diamondback
360° in 186 accounts. We expect our revenue to continue
increasing as we continue to increase the number of physicians
using the devices and the usage rate per physician in the
U.S. PAD market and also introduce new and improved
products.
Cost of Goods Sold. Cost of goods sold
increased by $7.3 million, or 81.4%, from $8.9 million
for the year ended June 30, 2008 to $16.2 million for
the year ended June 30, 2009. These amounts represent the
cost of materials, labor and overhead for single-use catheters,
guidewires, control units, and other ancillary products. The
increase in gross margin from the year ended June 30, 2008
to June 30, 2009 is primarily due to increased volume,
46
manufacturing efficiencies, and product cost reductions. Cost of
goods sold for the years ended June 30, 2009 and 2008
includes $475,000 and $232,000, respectively, for stock-based
compensation. We expect that cost of goods sold as a percentage
of revenues will decline in the future as sales volumes
increase, although quarterly fluctuations could occur based on
timing of new product introductions, sales mix, unanticipated
warranty claims, or other unanticipated circumstances.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $24.5 million, from
$35.3 million for the year ended June 30, 2008 to
$59.8 million for the year ended June 30, 2009. The
primary reasons for the increase included the building of our
sales and marketing team, contributing $22.2 million;
increased consulting and professional services, including
$1.7 million in previously capitalized initial public
offering costs, contributing $2.4 million; and payroll
related expenses related to building our administrative team,
contributing $1.0 million. Selling, general, and
administrative expenses for the years ended June 30, 2009
and 2008 includes $5.7 million and $6.9 million,
respectively, for stock-based compensation. We expect our
selling, general and administrative expenses to increase in the
future due primarily to the costs associated with expanding our
sales and marketing organization to further commercialize our
products.
Research and Development Expenses. Research
and development expenses decreased by $1.4 million, or
8.7%, from $16.1 million for the year ended June 30,
2008 to $14.7 million for the year ended June 30,
2009. Research and development expenses relate to specific
projects to improve our product or expand into new markets, such
as the development of a new control unit, shaft designs, crown
designs, and PAD and coronary clinical trials. The reduction in
expense related to costs of a coronary clinical trial occurring
during the year ended June 30, 2008, along with fewer PAD
development projects in 2009. Research and development for the
years ended June 30, 2009 and 2008 includes $612,000 and
$297,000, respectively, for stock-based compensation. As we
continue to expand our product portfolio within the market for
the treatment of peripheral arteries and leverage our core
technology into the coronary market, we expect to incur research
and development expenses at a similar rate as for the year ended
June 30, 2009, although fluctuations could occur based on
the number of projects and studies and the timing of
expenditures.
Interest Expense. Interest expense increased
by $2.3 million, from $7,000 for the year ended
June 30, 2008 to $2.4 million for the year ended
June 30, 2009. Interest expense for the year ended
June 30, 2009 consisted of the amortization of debt
discount of $1.2 million and interest on outstanding debt
facilities of $1.1 million.
Interest Income. Interest income increased by
$2.2 million, from $1.2 million for the year ended
June 30, 2008 to $3.4 million for the year ended
June 30, 2009. The increase was primarily due to the impact
of recording the put option asset of $2.8 million related
to our auction rate securities. This was offset by lower average
cash and cash equivalent balances along with reduced yields.
Average cash and cash equivalent balances were
$16.5 million and $20.4 million for the years ended
June 30, 2009 and 2008, respectively.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants. Decretion of redeemable
convertible preferred stock warrants for the year ended
June 30, 2009 was $3.0 million. Accretion of
redeemable convertible preferred stock warrants for the year
ended June 30, 2008 was $916,000. Decretion (accretion) of
redeemable convertible preferred stock warrants reflects the
change in estimated fair value of preferred stock warrants at
the balance sheet dates. Due to the merger, decretion recognized
during the year ended June 30, 2009 reflects a change in
the estimated fair value of preferred stock warrants between
July 1, 2008, and February 25, 2009 (date of merger)
at which time the preferred stock warrants converted to common
stock warrants. Due to the conversion there will be no further
decretion (accretion) recorded for these warrants in the future.
Impairment on Investments. Impairment on
investments was $1.7 million and $1.3 million for the
years ended June 30, 2009 and 2008, respectively.
Impairment on investments was due to a decrease in the fair
value of investments in both periods.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock. Decretion of redeemable convertible
preferred stock for the year ended June 30, 2009 was
$22.8 million. Accretion of redeemable convertible
preferred stock for the year ended June 30, 2008 was
$19.4 million. Decretion (accretion) of redeemable
convertible preferred stock reflects the change in estimated
fair value of preferred stock at the balance sheet dates. Due to
the merger, decretion recognized during the year ended
June 30, 2009 reflects a change in the estimated fair value
of preferred
47
stock between July 1, 2008, and February 25, 2009
(date of merger) at which time the preferred stock converted to
common stock. Due to the conversion there will be no further
decretion (accretion) recorded for these shares in the future.
Comparison
of Fiscal Year Ended June 30, 2008 with Fiscal Year Ended
June 30, 2007
Revenues. We generated revenues of
$22.2 million during the year ended June 30, 2008
attributable to sales of the Diamondback 360° to customers
following FDA clearance in August 2007. We commenced a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007, followed by a full commercial
launch in the quarter ended March 31, 2008. Since September
2007, we expanded our sales and marketing efforts and shipped
more than 6,800 single-use catheters through June 30, 2008.
We applied EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues were deferred until the title and risk of loss of
each Diamondback 360° component, consisting of catheters,
guidewires, and a control unit, were transferred to the customer
based on the shipping terms. Many initial shipments to customers
also included a loaner control unit, which we provided, until
the new control unit received clearance from the FDA and was
subsequently available for sale.
Cost of Goods Sold. For the year ended
June 30, 2008, cost of goods sold was $8.9 million.
This amount represents the cost of materials, labor and overhead
for single-use catheters, guidewires and control units shipped
subsequent to obtaining FDA clearance for the Diamondback
360° in August 2007. Cost of goods sold for the year ended
June 30, 2008 includes $232,000 for stock-based
compensation. For the year ended June 30, 2007, there was
no cost of goods sold due to revenues not occurring until the
year ended June 30, 2008.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $28.6 million, from $6.7 million
for the year ended June 30, 2007 to $35.3 million for
the year ended June 30, 2008. The primary reasons for the
increase included the building of our sales and marketing team,
contributing $18.6 million, and increased consulting and
professional services, contributing $2.1 million. Selling,
general and administrative for the years ended June 30,
2008 and 2007 includes $6.9 million and $327,000,
respectively, for stock-based compensation.
Research and Development Expenses. Our
research and development expenses increased by
$7.7 million, from $8.4 million for the year ended
June 30, 2007 to $16.1 million for the year ended
June 30, 2008. Research and development spending increased
as we initiated projects to improve our product, such as the
development of a new control unit, shaft designs, crown designs,
and began human feasibility trials in the coronary market.
Research and development for the years ended June 30, 2008
and 2007 includes $297,000 and $63,000, respectively, for
stock-based compensation.
Interest Expense. Interest expense decreased
by $6,000, from $13,000 for the year ended June 30, 2007 to
$7,000 for the year ended June 30, 2008. The decrease was
due to the redemption of convertible promissory notes in the
year ended June 30, 2007.
Interest Income. Interest income increased by
$286,000, from $881,000 for the year ended June 30, 2007 to
$1.2 million for the year ended June 30, 2008. The
increase was primarily due to higher average cash and cash
equivalent balances. Average cash and cash equivalent balances
were $20.4 million and $18.5 million for the years
ended June 30, 2008 and 2007, respectively.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants. Accretion of redeemable
convertible preferred stock warrants for the years ended
June 30, 2008 and 2007 was $916,000 and $1.3 million,
respectively. Decretion (accretion) of redeemable convertible
preferred stock warrants reflects the change in estimated fair
value of preferred stock warrants at the balance sheet dates.
Impairment on Investments. Impairment on
investments was $1.3 million for the year ended
June 30, 2008. This impairment was due to a decrease in the
fair value of investments.
Accretion of Redeemable Convertible Preferred
Stock. Accretion of redeemable convertible
preferred stock was $19.4 million and $16.8 million
for the years ended June 30, 2008 and 2007, respectively.
Accretion of
48
redeemable convertible preferred stock reflects the change in
estimated fair value of preferred stock at the balance sheet
dates.
LIQUIDITY
AND CAPITAL RESOURCES
We had cash and cash equivalents of $33.4 million and
$7.6 million at June 30, 2009 and 2008, respectively.
During the year ended June 30, 2009, net cash used in
operations amounted to $29.3 million. As of June 30,
2009, we had an accumulated deficit of $127.4 million. We
have historically funded our operating losses primarily from the
issuance of common and preferred stock, convertible promissory
notes, and debt. We have incurred negative cash flows and net
losses since inception.
On February 25, 2009, we completed the merger, in
accordance with the terms of the Merger Agreement. At closing,
Replidynes net assets, as calculated pursuant to the terms
of the Merger Agreement, were approximately $36.6 million.
In February 2008, we were notified that recent conditions in the
global credit markets have caused insufficient demand for
auction rate securities, resulting in failed auctions for
$23.0 million of our auction rate securities held at
June 30, 2009 and 2008. These securities are currently not
liquid, as we have an inability to sell the securities due to
continued failed auctions. On March 28, 2008, we obtained a
margin loan from UBS Financial Services, Inc., the entity
through which we originally purchased our auction rate
securities, for up to $12.0 million, which was secured by
the $23.0 million par value of our auction rate securities.
The outstanding balance on this loan at June 30, 2008 was
$11.9 million. On August 21, 2008, we replaced this
loan with a margin loan from UBS Bank USA, which increased
maximum borrowings available to $23.0 million, which may be
adjusted from time to time by UBS Bank in its sole discretion.
The margin loan bears interest at variable rates that equal the
lesser of (i) 30 day LIBOR plus 1.25% or (ii) the
applicable reset rate, maximum auction rate or similar rate as
specified in the prospectus or other documentation governing the
pledged taxable student loan auction rate securities; however,
interest expense charged on the loan will not exceed interest
income earned on the auction rate securities. The loan is due on
demand and UBS Bank will require us to repay it in full from the
proceeds received from a public equity offering where net
proceeds exceed $50.0 million. In addition, if at any time
any of our auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value by UBS, then we must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank and are subject to change. From
August 21, 2008, the date this loan was initially funded,
through June 30, 2009, the margin requirements included
maximum borrowings, including interest, of $23.0 million.
If these margin requirements are not maintained, UBS Bank may
require us to make a loan payment in an amount necessary to
comply with the applicable margin requirements or demand
repayment of the entire outstanding balance. We have maintained
the margin requirements under the loans from both UBS entities.
The outstanding balance on this loan at June 30, 2009 was
$22.9 million.
On September 12, 2008, we entered into a loan and security
agreement with Silicon Valley Bank with maximum available
borrowings of $13.5 million, which agreement was amended on
February 25, 2009 and April 30, 2009. The agreement
includes a $3.0 million term loan, a $10.0 million
accounts receivable line of credit, and a $5.5 million term
loan that reduces availability of borrowings on the accounts
receivable line of credit. The terms of each of these loans are
as follows:
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|
|
|
|
The $3.0 million term loan has a fixed interest rate of
10.5% and a final payment amount equal to 3.0% of the loan
amount due at maturity. This term loan has a 36 month
maturity, with repayment terms that include interest only
payments during the first six months followed by 30 equal
principal and interest payments. This term loan also includes an
acceleration provision that requires us to pay the entire
outstanding balance, plus a penalty ranging from 1.0% to 6.0% of
the principal amount, upon prepayment or the occurrence and
continuance of an event of default. As part of the term loan
agreement, we granted Silicon Valley Bank a warrant to purchase
8,493 shares of Series B redeemable convertible
preferred stock at an exercise price of $14.16 per share. This
warrant was assigned a value of $75,000 for accounting purposes,
is immediately exercisable, and expires ten years after
issuance. The balance outstanding on the term loan at
June 30, 2009 was $2.6 million.
|
49
|
|
|
|
|
The accounts receivable line of credit has a two year maturity
and a floating interest rate equal to the prime rate, plus 2.0%,
with an interest rate floor of 7.0%. Interest on borrowings is
due monthly and the principal balance is due at maturity.
Borrowings on the line of credit are based on 80% of eligible
domestic receivables, which is defined as receivables aged less
than 90 days from the invoice date along with specific
exclusions for contra-accounts, concentrations, and government
receivables. Accounts receivable receipts are deposited into a
lockbox account in the name of Silicon Valley Bank. The accounts
receivable line of credit is subject to non-use fees, annual
fees, cancellation fees, and maintaining a minimum liquidity
ratio. There was no balance outstanding on the line of credit at
June 30, 2009. On April 30, 2009, the accounts
receivable line of credit was amended to allow for an increase
in borrowings from $5.0 million to $10.0 million. All
other terms and conditions of the original line of credit
agreement remain in place. The $5.5 million term loan
reduces available borrowings under the line of credit agreement.
|
|
|
|
The $5.5 million term loan was originally two guaranteed
term loans each with a one year maturity. Each of the guaranteed
term loans had a floating interest rate equal to the prime rate,
plus 2.25%, with an interest rate floor of 7.0%. Interest on
borrowings were due monthly and the principal balance was due at
maturity. One of our directors and stockholders and two entities
who held preferred shares and were also affiliated with two of
our directors agreed to act as guarantors of these term loans.
In consideration for guarantees, we issued the guarantors
warrants to purchase an aggregate of 296,539 shares of our
common stock at an exercise price of $9.28 per share.
|
On April 30, 2009, the guaranteed term loans were
refinanced into a $5.5 million term loan that has a fixed
interest rate of 9.0% and a final payment amount equal to 1.0%
of the loan amount due at maturity. As a result of the
refinancing, the guarantees on the original term loans have been
released. This term loan has a 30 month maturity, with
repayment terms that include equal monthly payments of principal
and interest beginning June 1, 2009. This term loan also
includes an acceleration provision that requires us to pay the
entire outstanding balance, plus a penalty ranging from 1.0% to
3.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. The term loan reduces
available borrowings under the amended accounts receivable line
of credit agreement. The balance outstanding on the guaranteed
term loans at June 30, 2009 was $5.3 million
(excluding debt discount of $0.7 million).
The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, we estimated the fair value of the term loans without
the guarantees and calculated the fair value of the common stock
warrants using the Black-Scholes method. The relative fair value
of the loans and warrants were applied to the loan proceeds of
$5.5 million resulting in an assigned value of
$3.7 million for the loans and $1.8 million for the
warrants. The assigned value of the warrants of
$1.8 million is treated as a debt discount. The balance of
the debt discount at June 30, 2009 is $0.7 million and
is being amortized over the remaining term of the
$5.5 million term loan.
Borrowings from Silicon Valley Bank are secured by all of our
assets, other than our auction rate securities and intellectual
property, and, until April 30, 2009, the investor
guarantees. The borrowings are subject to prepayment penalties
and financial covenants, and our achievement of minimum monthly
net revenue goals. The agreement also includes subjective
acceleration clauses which permit Silicon Valley Bank to
accelerate the due date under certain circumstances, including,
but not limited to, material adverse effects on our financial
status or otherwise. Any non-compliance by us under the terms of
our debt arrangements could result in an event of default under
the Silicon Valley Bank loan, which, if not cured, could result
in the acceleration of this debt. We were in compliance with all
financial covenants at June 30, 2009.
The reported changes in cash and cash equivalents and
investments for the year ended June 30, 2009 and 2008 are
summarized below.
Cash and Cash Equivalents. Cash and cash
equivalents was $33.4 million and $7.6 million at
June 30, 2009 and 2008, respectively. This increase is
primarily attributable to net assets acquired in the merger with
Replidyne.
Investments. Investments were
$20.0 million and $21.7 million at June 30, 2009
and 2008, respectively.
Our investments include AAA rated auction rate securities issued
primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program, or FFELP. The federal
50
government insures loans in the FFELP so that lenders are
reimbursed at least 97% of the loans outstanding principal
and accrued interest if a borrower defaults. Approximately 99.2%
of the par value of our auction rate securities is supported by
student loan assets that are guaranteed by the federal
government under the FFELP.
In February 2008, we were informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of our auction rate securities held at
June 30, 2009 and 2008. Currently, these affected
securities are not liquid and will not become liquid until a
future auction for these investments is successful, they are
redeemed by the issuer, they mature, or they are repurchased by
UBS. As a result, we have determined the fair value of our
auction rate securities at June 30, 2009 to be
$20.0 million and have classified them as a long-term
asset. We determined the fair value of our auction rate
securities with the assistance of ValueKnowledge LLC, an
independent third party valuation firm, which utilized various
valuation methods and considered, among other factors, estimates
of present value of the auction rate securities based upon
expected cash flows, the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value, the likelihood of a return of
liquidity to the market for these securities and the potential
to sell the securities in secondary markets.
On November 7, 2008, we accepted an offer from UBS AG
(UBS), providing rights related to our auction rate
securities (the Rights). The Rights permit us to
require UBS to purchase our auction rate securities at par
value, which is defined for this purpose as the liquidation
preference of the auction rate securities plus accrued but
unpaid dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS
has the right, in its discretion, to purchase or sell our
auction rate securities at any time until July 2, 2012, so
long as we receive payment at par value upon any sale or
disposition. We expect to sell our auction rates securities
under the Rights. However, if the Rights are not exercised
before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our auction rate securities.
At June 30, 2009, we have determined the fair value of our
auction rate security rights to be $2.8 million and have
classified them as a long-term asset. So long as we hold auction
rate securities, they will continue to accrue interest as
determined by the auction process or the terms of the auction
rate securities if the auction process fails.
Operating Activities. Net cash used in
operating activities was $29.7 million and
$31.9 million for the years ended June 30, 2009 and
2008, respectively. For the years ended June 30, 2009 and
2008, we had a net loss of $31.9 million and
$39.2 million, respectively. Changes in working capital
accounts also contributed to the net cash used in the years
ended June 30, 2009 and 2008. Significant changes in
working capital during these periods included:
|
|
|
|
|
cash used in accounts receivable of $3.7 million and
$5.1 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
cash used in (provided by) inventory of $(407,000) and
$2.7 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
cash used in (provided by) prepaid expenses and other current
assets of $(2.4) million and $1.3 million during the
years ended June 30, 2009 and 2008, respectively;
|
|
|
|
cash used in (provided by) accounts payable of $1.1 million
and $(3.6) million during the years ended June 30,
2009 and 2008, respectively; and
|
|
|
|
cash used in accrued expenses and other liabilities of $267,000
and $2.8 million during the years ended June 30, 2009
and 2008, respectively.
|
Investing Activities. Net cash provided by
(used in) investing activities was $36.0 million and
$(12.4) million for the years ended June 30, 2009 and
2008, respectively. For the year ended June 30, 2009, cash
acquired in the merger with Replidyne, net of transaction costs
paid, was $37.0 million. For the year ended June 30,
2008, we purchased investments in the amount of
$31.3 million. For the years ended June 30, 2009 and
2008, we sold investments in the amount of $50,000 and
$20.0 million, respectively. The balance of cash provided
by (used in) investing activities primarily related to the
purchase of property and equipment. Purchases of property and
equipment used cash of $957,000 and $721,000 for the years ended
June 30, 2009 and 2008, respectively.
51
Financing Activities. Net cash provided by
financing activities was $19.5 million and
$44.0 million in the years ended June 30, 2009 and
2008, respectively. Cash provided by financing activities during
these periods included:
|
|
|
|
|
proceeds from long-term debt of $19.8 million and
$16.4 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
exercise of stock options and warrants of $525,000 and
$1.9 million during the years ended June 30, 2009 and
2008, respectively; and
|
|
|
|
net proceeds from the issuance of convertible preferred stock of
$30.3 million in the year ended June 30, 2008.
|
Cash used in financing activities in these periods included:
|
|
|
|
|
payment of long-term debt of $945,000 and $4.5 million
during the years ended June 30, 2009 and 2008, respectively.
|
Our future liquidity and capital requirements will be influenced
by numerous factors, including the extent and duration of future
operating losses, the level and timing of future sales and
expenditures, the results and scope of ongoing research and
product development programs, working capital required to
support our sales growth, the receipt of and time required to
obtain regulatory clearances and approvals, our sales and
marketing programs, the continuing acceptance of our products in
the marketplace, competing technologies and market and
regulatory developments. As of June 30, 2009, we believe
our current cash and cash equivalents and available debt will be
sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future. We
intend to retain any future earnings to support operations and
to finance the growth and development of our business, and we do
not anticipate paying any dividends in the foreseeable future.
Contractual Cash Obligations. Our contractual
obligations and commercial commitments as of June 30, 2009
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating leases(1)
|
|
$
|
1,642
|
|
|
$
|
478
|
|
|
$
|
962
|
|
|
$
|
202
|
|
|
$
|
|
|
Purchase commitments(2)
|
|
|
5,424
|
|
|
|
5,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt maturities(3)
|
|
|
30,202
|
|
|
|
25,823
|
|
|
|
4,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,234
|
|
|
$
|
31,707
|
|
|
$
|
5,325
|
|
|
$
|
202
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts reflected in the table above for operating leases
represent future minimum payments under a non-cancellable
operating lease for our office and production facility along
with equipment. |
|
(2) |
|
This amount reflects open purchase orders. |
|
(3) |
|
The amounts reflected in the table above represents debt
maturities under various debt agreements. |
INFLATION
We do not believe that inflation has had a material impact on
our business and operating results during the periods presented.
OFF-BALANCE
SHEET ARRANGEMENTS
Since inception, we have not engaged in any off-balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
52
RECENT
ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles A
Replacement of FASB Statement No. 162.
SFAS No. 168 establishes the FASB Accounting
Standards
Codificationtm
(Codification) as the single source of authoritative
U.S. generally accepted accounting principles
(U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.
SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. When effective, the Codification will
supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates, which will serve
only to: (a) update the Codification; (b) provide
background information about the guidance; and (c)
provide the bases for conclusions on the change(s) in the
Codification. We do not expect the adoption of this standard
will have a material impact on our consolidated financial
position or results of operations.
In April 2009, the FASB issued FSP SFAS,
No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments. This FSP amends SFAS Statement
No. 107, Disclosures about Fair Values of Financial
Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This
FSP also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim
financial statements. This FSP is effective for interim periods
ending after June 15, 2009. We do not expect the adoption
of this standard will have a material impact on our consolidated
financial position or results of operations.
In June 2008, the FASB issued
EITF 07-05,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock.
EITF 07-05
provides guidance in assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entitys own stock for purposes of determining whether the
appropriate accounting treatment falls under the scope of
SFAS 133, Accounting For Derivative Instruments and
Hedging Activities
and/or
EITF 00-19,
Accounting For Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock.
EITF 07-05
is effective for year-ends beginning after December 15,
2008. We are currently evaluating the impact that the adoption
of this standard will have on our financial position and
consolidated results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective beginning in the first quarter of fiscal year
2010. We are currently evaluating the impact of this statement.
SFAS No. 157 was adopted for financial assets and
liabilities on July 1, 2008 and did not have a material
impact on our financial position or consolidated results of
operations during the year ended June 30, 2009.
In October 2008, the FASB issued FASB Staff Position
(FSP)
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active. FSP
SFAS No. 157-3
clarifies the application of SFAS No. 157, which we
adopted for financial assets and liabilities on July 1,
2008, in situations where the market is not active. We have
considered the guidance provided by FSP
SFAS No. 157-3
in our determination of estimated fair values as of
June 30, 2009.
In June 2008, the FASB issued Staff Position
EITF 03-06-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-06-1).
FSP
EITF 03-06-1
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method in SFAS No. 128, Earnings
per Share. FSP
EITF 03-06-1
is effective on July 1, 2009 and requires all prior-period
earnings per share data to be adjusted retrospectively. We do
53
not expect the adoption of this standard will have a material
impact on our consolidated financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods including the accounting for contingent consideration.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS 141(R) and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008 with
SFAS 141(R) to be applied prospectively while SFAS 160
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. We are
currently evaluating the impact of these statements, but expect
that the adoption of SFAS No. 141(R) will have a
material impact on how we will identify, negotiate, and value
any future acquisitions and a material impact on how an
acquisition will affect our consolidated financial statements,
and that SFAS No. 160 will not have a material impact
on our financial position or consolidated results of operations.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies. FSP
SFAS No. 141(R)-1 amends and clarifies the initial
recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from
contingencies in a business combination under
SFAS No. 141(R). FSP SFAS No. 141(R)-1 is
effective beginning fiscal year 2010 and must be applied to
assets and liabilities arising from contingencies in business
combinations for which the acquisition date is on or after
April 25, 2009. The adoption of FSP
SFAS No. 141(R)-1 will not be material to the
consolidated financial statements.
PRIVATE
SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Such
forward-looking information is included in this
Form 10-K
and in other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or
to be made by the Company). Forward-looking statements include
all statements based on future expectations. This
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, including our expectation that our losses will
continue; our plans to continue to expand our sales and
marketing efforts, conduct research and development and increase
our manufacturing capacity to support anticipated future growth;
the expected benefits of the Rights from UBS and our expectation
that we will sell our auction rate securities under the Rights;
our expectation of increased revenue, selling, general and
administrative expenses and research and development expenses;
our expectation that cost of goods sold as a percentage of
revenues will decline in the future; the sufficiency of our
current and anticipated financial resources; and our belief that
our current cash and cash equivalents and available debt will be
sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future. In some
cases, you can identify forward-looking statements by the
following words: anticipate, believe,
continue, could, estimate,
expect, intend, may,
ongoing, plan, potential,
predict, project, should,
will, would, or the negative of these
terms or other comparable terminology, although not all
forward-looking statements contain these words. Forward-looking
statements are only predictions and are not guarantees of
performance. These statements are based on our managements
beliefs and assumptions, which in turn are based on their
interpretation of currently available information.
These statements involve known and unknown risks, uncertainties
and other factors that may cause our results or our
industrys actual results, levels of activity, performance
or achievements to be materially different from the information
expressed or implied by these forward-looking statements. These
factors include regulatory developments in the U.S. and
foreign countries; the experience of physicians regarding the
effectiveness and reliability of the Diamondback
360o;
competition from other devices; unanticipated developments
affecting our estimates regarding expenses, future revenues and
capital requirements; fluctuations in results and expenses based
on new product introductions, sales mix, unanticipated warranty
claims, and the timing of project expenditures; our
54
inability to expand our sales and marketing organization and
research and development efforts; the sufficiency of UBSs
financial resources to purchase our auction rate securities; the
market for auction rate securities; our ability to obtain and
maintain intellectual property protection for product
candidates; our actual financial resources; general economic
conditions; and those matters identified and discussed in
Item 1A of this
Form 10-K
under Risk Factors.
You should read these risk factors and the other cautionary
statements made in this
Form 10-K
as being applicable to all related forward-looking statements
wherever they appear in this
Form 10-K.
We cannot assure you that the forward-looking statements in this
Form 10-K
will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be
material. You should read this
Form 10-K
completely. Other than as required by law, we undertake no
obligation to update these forward-looking statements, even
though our situation may change in the future.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk or
availability. To achieve these objectives, our investment policy
allows us to maintain a portfolio of cash equivalents and
investments in a variety of marketable securities, including
money market funds, U.S. government securities, and certain
bank obligations. Our cash and cash equivalents as of
June 30, 2009 include liquid money market accounts. Due to
the short-term nature of these investments, we believe that
there is no material exposure to interest rate risk.
In February 2008, we were informed that there was insufficient
demand for auction rate securities (ARS), resulting in failed
auctions for $23.0 million of our ARS held at June 30,
2009 and June 30, 2008. Currently, these affected
securities are not liquid and will not become liquid until a
future auction for these investments is successful, they are
redeemed by the issuer, or they mature. For discussion of the
related risks, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
55
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
56
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Cardiovascular Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
stockholders equity (deficiency) and comprehensive (loss)
income and cash flows present fairly, in all material respects,
the financial position of Cardiovascular Systems, Inc. (the
Company) at June 30, 2009 and 2008, and the
results of its operations and its cash flows for each of the
three years in the period ended June 30, 2009, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 28, 2009
F-1
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,411
|
|
|
$
|
7,595
|
|
Accounts receivable, net
|
|
|
8,474
|
|
|
|
4,897
|
|
Inventories
|
|
|
3,369
|
|
|
|
3,776
|
|
Prepaid expenses and other current assets
|
|
|
798
|
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
46,052
|
|
|
|
18,204
|
|
Auction rate securities put option
|
|
|
2,800
|
|
|
|
|
|
Investments, trading
|
|
|
20,000
|
|
|
|
|
|
Investments,
available-for-sale
|
|
|
|
|
|
|
21,733
|
|
Property and equipment, net
|
|
|
1,719
|
|
|
|
1,041
|
|
Patents, net
|
|
|
1,363
|
|
|
|
980
|
|
Other assets
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
72,370
|
|
|
$
|
41,958
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
25,823
|
|
|
$
|
11,888
|
|
Accounts payable
|
|
|
4,751
|
|
|
|
5,851
|
|
Accrued expenses
|
|
|
5,600
|
|
|
|
3,583
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
36,174
|
|
|
|
21,322
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
4,379
|
|
|
|
|
|
Redeemable convertible preferred stock warrants
|
|
|
|
|
|
|
3,986
|
|
Lease obligation and other liabilities
|
|
|
1,485
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
5,864
|
|
|
|
4,086
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,038
|
|
|
|
25,408
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, no par
value; authorized 3,511,269 shares, issued and outstanding
3,081,375 at June 30, 2008; aggregate liquidation value
$31,230 at June 30, 2008
|
|
|
|
|
|
|
51,213
|
|
Series A-1
redeemable convertible preferred stock, no par value; authorized
1,461,220 shares at June 30, 2008; issued and
outstanding 1,461,220 at June 30, 2008; aggregate
liquidation value $19,862 at June 30, 2008
|
|
|
|
|
|
|
23,657
|
|
Series B redeemable convertible preferred stock, no par
value; authorized 1,412,908 shares, issued and outstanding
1,412,591 at June 30, 2008; aggregate liquidation value
$20,871 at June 30, 2008
|
|
|
|
|
|
|
23,372
|
|
Stockholders equity (deficiency)
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value at June 30, 2009 and no
par value at June 30, 2008; authorized 100,000,000 common
shares at June 30, 2009 and 45,290,000 common shares and
3,235,000 undesignated shares at June 30, 2008,
respectively; issued and outstanding 14,113,904 at June 30,
2009 and 4,900,984 at June 30, 2008, respectively
|
|
|
14
|
|
|
|
35,933
|
|
Additional paid in capital
|
|
|
146,455
|
|
|
|
|
|
Common stock warrants
|
|
|
11,282
|
|
|
|
680
|
|
Accumulated deficit
|
|
|
(127,419
|
)
|
|
|
(118,305
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficiency)
|
|
|
30,332
|
|
|
|
(81,692
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficiency)
|
|
$
|
72,370
|
|
|
$
|
41,958
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share and
|
|
|
|
share amounts)
|
|
|
Revenues
|
|
$
|
56,461
|
|
|
$
|
22,177
|
|
|
$
|
|
|
Cost of goods sold
|
|
|
16,194
|
|
|
|
8,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,267
|
|
|
|
13,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
59,822
|
|
|
|
35,326
|
|
|
|
6,691
|
|
Research and development
|
|
|
14,678
|
|
|
|
16,068
|
|
|
|
8,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
74,500
|
|
|
|
51,394
|
|
|
|
15,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(34,233
|
)
|
|
|
(38,144
|
)
|
|
|
(15,137
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,350
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
Interest income
|
|
|
3,380
|
|
|
|
1,167
|
|
|
|
881
|
|
Decretion (accretion) of redeemable convertible preferred stock
warrants
|
|
|
2,991
|
|
|
|
(916
|
)
|
|
|
(1,327
|
)
|
Impairment on investments
|
|
|
(1,683
|
)
|
|
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,338
|
|
|
|
(1,023
|
)
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,895
|
)
|
|
|
(39,167
|
)
|
|
|
(15,596
|
)
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
22,781
|
|
|
|
(19,422
|
)
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(9,114
|
)
|
|
$
|
(58,589
|
)
|
|
$
|
(32,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.13
|
)
|
|
$
|
(13.25
|
)
|
|
$
|
(8.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
4,020,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Cardiovascular
Systems, Inc.
Comprehensive
(Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid In Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
(Loss) Income
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006
|
|
|
4,010,799
|
|
|
$
|
25,578
|
|
|
$
|
|
|
|
$
|
1,280
|
|
|
$
|
(27,285
|
)
|
|
$
|
|
|
|
$
|
(427
|
)
|
|
$
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.55 per share
|
|
|
44,158
|
|
|
|
86
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued in connection with
Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
4,054,957
|
|
|
$
|
26,054
|
|
|
$
|
|
|
|
$
|
1,366
|
|
|
$
|
(59,716
|
)
|
|
$
|
(7
|
)
|
|
$
|
(32,303
|
)
|
|
$
|
(15,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/forfeiture of restricted stock awards, net
|
|
|
525,473
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at
$1.55 - $12.37 per share
|
|
|
320,554
|
|
|
|
2,382
|
|
|
|
|
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
4,900,984
|
|
|
$
|
35,933
|
|
|
$
|
|
|
|
$
|
680
|
|
|
$
|
(118,305
|
)
|
|
$
|
|
|
|
$
|
(81,692
|
)
|
|
$
|
(39,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/forfeiture of restricted stock awards, net
|
|
|
425,359
|
|
|
|
2,464
|
|
|
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
756
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.55-$8.83 per share
|
|
|
100,333
|
|
|
|
640
|
|
|
|
307
|
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
(8,217
|
)
|
|
|
10,031
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred warrants to common warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,781
|
|
|
|
|
|
|
|
22,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
5,954,389
|
|
|
|
6
|
|
|
|
75,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger with Replidyne, net of merger costs
|
|
|
2,732,839
|
|
|
|
3
|
|
|
|
35,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To adjust common stock to par value
|
|
|
|
|
|
|
(39,864
|
)
|
|
|
39,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,895
|
)
|
|
|
|
|
|
|
(31,895
|
)
|
|
|
(31,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
14,113,904
|
|
|
$
|
14
|
|
|
$
|
146,455
|
|
|
$
|
11,282
|
|
|
$
|
(127,419
|
)
|
|
$
|
|
|
|
$
|
30,332
|
|
|
$
|
(31,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,895
|
)
|
|
$
|
(39,167
|
)
|
|
$
|
(15,596
|
)
|
Adjustments to reconcile net loss to net cash used in operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
417
|
|
|
|
264
|
|
|
|
153
|
|
Provision for doubtful accounts
|
|
|
95
|
|
|
|
164
|
|
|
|
|
|
Amortization of patents
|
|
|
53
|
|
|
|
29
|
|
|
|
45
|
|
(Decretion) accretion of redeemable convertible preferred stock
warrants
|
|
|
(2,991
|
)
|
|
|
916
|
|
|
|
1,327
|
|
Amortization of debt discount
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
6,771
|
|
|
|
7,381
|
|
|
|
390
|
|
Amortization of discount on investments
|
|
|
|
|
|
|
(52
|
)
|
|
|
(293
|
)
|
Impairment on investments
|
|
|
1,683
|
|
|
|
1,267
|
|
|
|
|
|
Gain on auction rate securities put option
|
|
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of merger
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,672
|
)
|
|
|
(5,061
|
)
|
|
|
|
|
Inventories
|
|
|
407
|
|
|
|
(2,726
|
)
|
|
|
(322
|
)
|
Prepaid expenses and other assets
|
|
|
2,362
|
|
|
|
(1,323
|
)
|
|
|
(113
|
)
|
Accounts payable
|
|
|
(1,100
|
)
|
|
|
3,631
|
|
|
|
1,709
|
|
Accrued expenses and other liabilities
|
|
|
(268
|
)
|
|
|
2,809
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
(29,710
|
)
|
|
|
(31,868
|
)
|
|
|
(12,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(957
|
)
|
|
|
(720
|
)
|
|
|
(465
|
)
|
Purchases of investments
|
|
|
|
|
|
|
(31,314
|
)
|
|
|
(23,169
|
)
|
Sales of investments
|
|
|
50
|
|
|
|
19,988
|
|
|
|
11,840
|
|
Costs incurred in connection with patents
|
|
|
(436
|
)
|
|
|
(397
|
)
|
|
|
(58
|
)
|
Cash acquired in Replidyne merger, net of transaction costs paid
|
|
|
37,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
36,026
|
|
|
|
(12,443
|
)
|
|
|
(11,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of redeemable convertible preferred stock
|
|
|
|
|
|
|
30,296
|
|
|
|
30,294
|
|
Payment of offering costs
|
|
|
|
|
|
|
(51
|
)
|
|
|
(1,776
|
)
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Issuance of convertible preferred stock warrants
|
|
|
75
|
|
|
|
|
|
|
|
1,767
|
|
Exercise of stock options and warrants
|
|
|
525
|
|
|
|
1,865
|
|
|
|
94
|
|
Proceeds from long-term debt
|
|
|
19,845
|
|
|
|
16,398
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(945
|
)
|
|
|
(4,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
19,500
|
|
|
|
43,998
|
|
|
|
30,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
25,816
|
|
|
|
(313
|
)
|
|
|
6,354
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
7,595
|
|
|
|
7,908
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
33,411
|
|
|
$
|
7,595
|
|
|
$
|
7,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
$
|
(22,781
|
)
|
|
$
|
19,422
|
|
|
$
|
16,835
|
|
Conversion of Series A warrants to common warrants
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with merger
|
|
|
8,217
|
|
|
|
|
|
|
|
|
|
Conversion of redeemable convertible preferred stock to common
stock
|
|
|
75,456
|
|
|
|
|
|
|
|
|
|
Expiration of common warrants
|
|
|
76
|
|
|
|
|
|
|
|
|
|
Adjustment of common stock to par value
|
|
|
39,864
|
|
|
|
|
|
|
|
|
|
Capitalized financing costs included in accounts payable
|
|
|
|
|
|
|
311
|
|
|
|
|
|
Capitalized financing costs included in accrued expenses
|
|
|
|
|
|
|
47
|
|
|
|
|
|
Net unrealized gain (loss) on investments
|
|
|
|
|
|
|
7
|
|
|
|
(7
|
)
|
Conversion of convertible promissory notes and accrued interest
into Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(3,145
|
)
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,051
|
|
|
$
|
7
|
|
|
$
|
13
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CARDIOVASCULAR
SYSTEMS, INC.
(dollars
in thousands, except per share and share amounts)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Company
Description
Cardiovascular Systems, Inc. was incorporated as Replidyne, Inc.
in Delaware in 2000. On February 25, 2009, Replidyne, Inc.
completed its reverse merger with Cardiovascular Systems, Inc.,
a Minnesota corporation (CSI-MN) incorporated in
1989, in accordance with the terms of the Agreement and Plan of
Merger and Reorganization, dated as of November 3, 2008.
Pursuant to the Merger Agreement, CSI-MN continued after the
merger as the surviving corporation and a wholly owned
subsidiary of Replidyne. Replidyne changed its name to
Cardiovascular Systems, Inc. (CSI) and CSI-MN merged
with and into CSI, with CSI continuing after the merger as the
surviving corporation. These transactions are referred to herein
as the merger.
Unless the context otherwise requires, all references herein to
the Company, CSI, we,
us and our refer to CSI-MN prior to the
completion of the merger and to CSI following the completion of
the merger and the name change, and all references to
Replidyne refer to Replidyne prior to the completion
of the merger and the name change. CSI is considered the
accounting acquirer in the merger and financial results
presented for all periods reflect historical CSI results.
The Company develops, manufactures and markets devices for the
treatment of vascular diseases. The Company has completed a
pivotal clinical trial in the United States to demonstrate the
safety and efficacy of the Companys Diamondback 360°
PAS System in treating peripheral arterial disease. On
August 30, 2007, the U.S. Food and Drug
Administration, or FDA, granted the Company 510(k) clearance to
market the Diamondback 360° for the treatment of peripheral
arterial disease. The Company commenced a limited commercial
introduction of the Diamondback 360° in the United States
in September 2007. During the quarter ended March 31, 2008,
the Company began its full commercial launch of the Diamondback
360°. Prior to the merger, Replidyne was a
biopharmaceutical company focused on discovering, developing,
in-licensing and commercializing anti-infective products.
For the fiscal year ended June 30, 2007, the Company was
considered a development stage enterprise as
prescribed in Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises. During that time, the
Companys major emphasis was on planning, research and
development, recruitment and development of a management and
technical staff, and raising capital. The Company no longer
considers itself a development stage enterprise as these
development stage activities were completed prior to the first
quarter of fiscal 2008. The Companys management team,
organizational structure and distribution channel are in place.
The Companys primary focus is on the sale and
commercialization of its current product to end user customers.
Principles
of Consolidation
The consolidated balance sheets, statements of operations,
changes in stockholders equity (deficiency) and
comprehensive (loss) income, and cash flows include the accounts
of the Company and its wholly owned inactive Netherlands
subsidiary, SCS B.V., after elimination of all significant
intercompany transactions and accounts. SCS B.V. was formed for
the purpose of conducting human trials and the development of
production facilities. Operations of the subsidiary ceased in
fiscal 2002; accordingly, there are no assets or liabilities
included in the consolidated financial statements related to SCS
B.V.
Cash
and Cash Equivalents
The Company considers all money market funds and other
investments purchased with an original maturity of three months
or less to be cash and cash equivalents.
F-6
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Customer credit terms are established
prior to shipment with the general standard being net
30 days. Collateral or any other security to support
payment of these receivables generally is not required. The
Company maintains allowances for doubtful accounts. This
allowance is an estimate and is regularly evaluated by the
Company for adequacy by taking into consideration factors such
as past experience, credit quality of the customer base, age of
the receivable balances, both individually and in the aggregate,
and current economic conditions that may affect a
customers ability to pay. Provisions for the allowance for
doubtful accounts attributed to bad debt are recorded in general
and administrative expenses. The following table shows allowance
for doubtful accounts activity for the fiscal years ended
June 30, 2009 and 2008:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2007
|
|
$
|
|
|
Provision for doubtful accounts
|
|
|
164
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
164
|
|
Provision for doubtful accounts
|
|
|
95
|
|
Write-offs
|
|
|
(6
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
253
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a
first-in,
first-out (FIFO) method of valuation. The
establishment of inventory allowances for excess and obsolete
inventories is based on estimated exposure on specific inventory
items.
Investments
The Companys investments include AAA rated auction rate
securities (ARS) issued primarily by state agencies and backed
by student loans substantially guaranteed by the Federal Family
Education Loan Program (FFELP). In February 2008, the Company
was informed that there was insufficient demand for auction rate
securities, resulting in failed auctions for $23,000 of the
Companys auction rate securities held at June 30,
2009 and 2008. Currently, these affected securities are not
liquid and will not become liquid until a future auction for
these investments are successful, they are redeemed by the
issuer, or they mature. As a result, at June 30, 2009 and
2008, the Company has classified the fair value of the auction
rate securities as a long-term asset. The Company has collected
all interest due on its auction rate securities and has no
reason to believe that it will not collect all interest due in
the future.
On November 7, 2008, the Company accepted an offer from UBS
AG (UBS), providing rights related to the
Companys ARS (the Rights). The Rights permit
the Company to require UBS to purchase the Companys ARS at
par value, which is defined for this purpose as the liquidation
preference of the ARS plus accrued but unpaid dividends or
interest, at any time during the period of June 30, 2010
through July 2, 2012. Conversely, UBS has the right, in its
discretion, to purchase or sell the Companys ARS at any
time until July 2, 2012, so long as the Company receives
payment at par value upon any sale or disposition. The Company
expects to sell its ARS under the Rights. However, if the Rights
are not exercised before July 2, 2012 they will expire and
UBS will have no further rights or obligation to buy the
Companys ARS. So long as the Company holds ARS, they will
continue to accrue interest as determined by the auction process
or the terms of the ARS if the auction process fails. Prior to
accepting the UBS offer, the Company recorded ARS as investments
available-for-sale.
The Company recorded unrealized gains and losses on
available-for-sale
securities in accumulated other comprehensive income in the
stockholders equity (deficiency) section of the balance
sheet. Realized gains and losses were accounted for on the
specific identification
F-7
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method. After accepting the UBS offer, the Company recorded ARS
as trading investments and unrealized gains and losses are
included in earnings.
The Rights represent a firm agreement in accordance with
SFAS 133, which defines a firm agreement as an agreement
with an unrelated party, binding on both parties and usually
legally enforceable, with the following characteristics:
a) the agreement specifies all significant terms, including
the quantity to be exchanged, the fixed price, and the timing of
the transaction, and b) the agreement includes a
disincentive for nonperformance that is sufficiently large to
make performance probable. The enforceability of the Rights
results in a put option and should be recognized as a free
standing asset separate from the ARS. At June 30, 2009, the
Company recorded $2,800 as the fair value of the put option
asset with a corresponding credit to interest income. The
Company considered the expected time until the Rights are
exercised, carrying costs of the Rights, and the expected credit
risk attributes of the Rights and UBS in their valuation of the
put option. The put option does not meet the definition of a
derivative instrument under SFAS 133. Therefore, the
Company has elected to measure the put option at fair value
under SFAS 159, which permits an entity to elect the fair
value option for recognized financial assets, in order to match
the changes in the fair value of the ARS. As a result,
unrealized gains and losses will be included in earnings in
future periods.
The Company determined the fair value of its auction rate
securities and quantified the
other-than-temporary
impairment loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets. Based
on these factors, the Company recorded impairment of investments
for the years ended June 30, 2009 and 2008 of $1,683 and
$1,267, respectively.
The amortized cost and fair value of
available-for-sale
investments as of June 30, 2008 was $21,733. All ARS at
June 30, 2008 had original maturities greater than ten
years.
Property
and Equipment
Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over estimated useful lives of five
years for production equipment and furniture and fixtures; three
years for computer equipment and software; and the shorter of
their estimated useful lives or the lease term for leasehold
improvements. Expenditures for maintenance and repairs and minor
renewals and betterments which do not extend or improve the life
of the respective assets are expensed as incurred. All other
expenditures for renewals and betterments are capitalized. The
assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gains or
losses included in the consolidated statement of operations.
Patents
The capitalized costs incurred to obtain patents are amortized
using the straight-line method over their remaining estimated
lives, not exceeding 20 years. The recoverability of
capitalized patent costs is dependent upon the Companys
ability to derive revenue-producing products from such patents
or the ultimate sale or licensing of such patent rights. Patents
that are abandoned are written off at the time of abandonment.
Operating
Lease
The Company leases office space under an operating lease. The
lease arrangement contains a rent escalation clause for which
the lease expense is recognized on a straight-line basis over
the terms of the lease. Rent expense
F-8
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that is recognized but not yet paid is included in lease
obligation and other liabilities on the consolidated balance
sheets.
Long-Lived
Assets
The Company regularly evaluates the carrying value of long-lived
assets for events or changes in circumstances that indicate that
the carrying amount may not be recoverable or that the remaining
estimated useful life should be changed. An impairment loss is
recognized when the carrying amount of an asset exceeds the
anticipated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. The
amount of the impairment loss to be recorded, if any, is
calculated by the excess of the assets carrying value over
its fair value.
Revenue
Recognition
The Company sells the majority of its products via direct
shipment to hospitals or clinics. The Company recognizes revenue
when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred; the sales price
is fixed or determinable; and collectability is reasonably
assured. These criteria are met at the time of delivery when the
risk of loss and title passes to the customer. The Company
records estimated sales returns, discounts and rebates as a
reduction of net sales in the same period revenue is recognized.
The Company also considers Emerging Issues Task Force Bulletin
(EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, in
revenue recognition. This standard addresses the timing and
method of revenue recognition for revenue arrangements that
include the delivery of more than one product or service. In
these cases, the Company recognizes revenue from each element of
the arrangement as long as separate values for each element can
be determined, the Company has completed its obligation to
deliver or perform on that element, and collection of the
resulting receivable is reasonably assured.
Costs related to products delivered are recognized in the period
revenue is recognized. Cost of goods sold consists primarily of
raw materials, direct labor, and manufacturing overhead.
Warranty
Costs
The Company provides its customers with the right to receive a
replacement if a product is determined to be defective at the
time of shipment. Warranty reserve provisions are estimated
based on Company experience, volume, and expected warranty
claims. Warranty reserve, provisions and claims for the fiscal
years ended June 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2007
|
|
$
|
|
|
Provision
|
|
|
137
|
|
Claims
|
|
|
(125
|
)
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
12
|
|
Provision
|
|
|
559
|
|
Claims
|
|
|
(506
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
65
|
|
|
|
|
|
|
Income
Taxes
Deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts based on enacted tax rates applicable to the
F-9
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the
determination of deferred tax assets. The Companys
judgment and tax strategies are subject to audit by various
taxing authorities.
Research
and Development Expenses
Research and development expenses include costs associated with
the design, development, testing, enhancement and regulatory
approval of the Companys products. Research and
development expenses include employee compensation, including
stock-based compensation, supplies and materials, consulting
expenses, travel and facilities overhead. The Company also
incurs significant expenses to operate clinical trials,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. Research and
development expenses are expensed as incurred.
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents, investments and accounts receivable. The Company
maintains its cash and investment balances primarily with two
financial institutions. At times, these balances exceed
federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk in cash and cash equivalents.
Fair
Value of Financial Instruments
Effective July 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), which provides a
framework for measuring fair value and expands disclosures about
fair value measurements. In February 2008, the Financial
Accounting Standards Board (FASB) issued FASB Staff
Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
provides a one-year deferral on the effective date of
SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at least annually.
Therefore, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and
financial liabilities only.
SFAS 157 classifies these inputs into the following
hierarchy:
Level 1 Inputs quoted prices in active
markets for identical assets and liabilities
Level 2 Inputs observable inputs other
than quoted prices in active markets for identical assets and
liabilities
Level 3 Inputs unobservable inputs
F-10
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the fair value of the
Companys auction rate securities that were measured on a
recurring basis as of June 30, 2009. Assets are measured on
a recurring basis if they are remeasured at least annually:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
|
Available-for-
|
|
|
Trading
|
|
|
Securities Put
|
|
|
|
Sale Securities
|
|
|
Securities
|
|
|
Option
|
|
|
Balance at June 30, 2008
|
|
$
|
21,733
|
|
|
$
|
|
|
|
$
|
|
|
Transfer to trading securities
|
|
|
(21,733
|
)
|
|
|
21,733
|
|
|
|
|
|
Gain on auction rate securities put option
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
Sales of investments
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
Impairment on investments
|
|
|
|
|
|
|
(1,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the Company believes that the carrying
amounts of its other financial instruments, including accounts
receivable, accounts payable and accrued liabilities approximate
their fair value due to the short-term maturities of these
instruments. The carrying amount of long-term debt approximates
fair value based on interest rates currently available for debt
with similar terms and maturities.
Use of
Estimates
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based
Compensation
Effective July 1, 2006, the Company adopted Financial
Accounting Standards Board (FASB)
SFAS No. 123(R), Share-Based Payment, as
interpreted by SAB No. 107 to account for stock-based
compensation expense associated with the issuance or amendment
of stock options and restricted stock awards.
SFAS No. 123(R) requires the Company to recognize
stock-based compensation expense in an amount equal to the fair
value of share-based payments computed at the date of grant. The
fair value of all stock option and restricted stock awards are
expensed in the consolidated statements of operations over the
related vesting period. The Company calculates the fair value on
the date of grant using a Black-Scholes model.
Preferred
Stock
The Company recorded the estimated fair value of its redeemable
convertible preferred stock based on the fair market value of
that stock as determined by management and the Board of
Directors. In accordance with Accounting Series Release
No. 268, Presentation in Financial Statements of
Redeemable Preferred Stocks, and EITF Abstracts,
Topic D-98, Classification and Measurement of Redeemable
Securities, the Company recorded changes in the fair value
of its redeemable convertible preferred stock in the
consolidated statements of changes in stockholders equity
(deficiency) and comprehensive (loss) income and consolidated
statements of operations as decretion (accretion) of redeemable
convertible preferred stock. The Company adjusted redeemable
convertible preferred stock for changes in fair value until the
date of merger at which time all redeemable convertible
preferred stock was converted into common stock and,
accordingly, was reclassified to stockholders equity
(deficiency).
F-11
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock Warrants
Freestanding warrants and other similar instruments related to
shares that are redeemable are accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity,
and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to the Companys redeemable convertible preferred stock is
classified as a liability on the consolidated balance sheets as
of June 30, 2008. The warrant was subject to remeasurement
at each balance sheet date and any change in fair value was
recognized as a component of interest (expense) income. Fair
value on the grant date was measured using the Black-Scholes
option pricing model and similar underlying assumptions
consistent with the issuance of stock option awards. The Company
adjusted the liability for changes in fair value until the date
of merger at which time all preferred stock warrants were
converted into warrants to purchase common stock and,
accordingly, the liability was reclassified to equity.
Recent
Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles A
Replacement of FASB Statement No. 162.
SFAS No. 168 establishes the FASB Accounting
Standards
Codificationtm
(Codification) as the single source of authoritative
U.S. generally accepted accounting principles
(U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.
SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. When effective, the Codification will
supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates, which will serve
only to: (a) update the Codification; (b) provide
background information about the guidance; and (c)
provide the bases for conclusions on the change(s) in the
Codification. The Company does not expect the adoption of this
standard will have a material impact on its consolidated
financial position or results of operations.
In April 2009, the FASB issued FSP SFAS,
No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments. This FSP amends SFAS Statement
No. 107, Disclosures about Fair Values of Financial
Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This
FSP also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim
financial statements. This FSP is effective for interim periods
ending after June 15, 2009. The Company does not expect the
adoption of this standard will have a material impact on its
consolidated financial position or results of operations.
In June 2008, the FASB issued
EITF 07-05,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock.
EITF 07-05
provides guidance in assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entitys own stock for purposes of determining whether the
appropriate accounting treatment falls under the scope of
SFAS 133, Accounting For Derivative Instruments and
Hedging Activities
and/or
EITF 00-19,
Accounting For Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock.
EITF 07-05
is effective for year-ends beginning after December 15,
2008. The Company is currently evaluating the impact that the
adoption of this standard will have on its financial condition
and consolidated results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157, or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for
F-12
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain nonfinancial assets and nonfinancial liabilities. The
portion of SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for the Company beginning in the first quarter
of fiscal year 2010. The Company is currently evaluating the
impact of this statement. SFAS No. 157 was adopted for
financial assets and liabilities on July 1, 2008 and did
not have a material impact on the Companys financial
position or consolidated results of operations during the year
ended June 30, 2009.
In October 2008, the FASB issued FASB Staff Position
(FSP)
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active. FSP
SFAS No. 157-3
clarifies the application of SFAS No. 157, which the
Company adopted for financial assets and liabilities on
July 1, 2008, in situations where the market is not active.
The Company has considered the guidance provided by FSP
SFAS No. 157-3
in its determination of estimated fair values as of
June 30, 2009.
In June 2008, the FASB issued Staff Position
EITF 03-06-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-06-1).
FSP
EITF 03-06-1
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method in SFAS No. 128, Earnings
per Share. FSP
EITF 03-06-1
is effective for the Company on July 1, 2009 and requires
all prior-period earnings per share data to be adjusted
retrospectively. The Company does not expect the adoption of
this standard will have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods including the accounting for contingent consideration.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS 141(R) and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008 with
SFAS 141(R) to be applied prospectively while SFAS 160
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. The Company is
currently evaluating the impact of these statements, but expects
that the adoption of SFAS No. 141(R) will have a
material impact on how the Company will identify, negotiate, and
value any future acquisitions and a material impact on how an
acquisition will affect its consolidated financial statements,
and that SFAS No. 160 will not have a material impact
on its financial position or consolidated results of operations.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies. FSP
SFAS No. 141(R)-1 amends and clarifies the initial
recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from
contingencies in a business combination under
SFAS No. 141(R). FSP SFAS No. 141(R)-1 is
effective for the Company beginning fiscal year 2010 and must be
applied to assets and liabilities arising from contingencies in
business combinations for which the acquisition date is on or
after April 25, 2009. The adoption of FSP
SFAS No. 141(R)-1 will not be material to the
consolidated financial statements.
On February 25, 2009, the Company completed its reverse
merger with Replidyne, Inc. Immediately prior to the merger each
share of CSI-MNs Series A,
A-1, and B
convertible preferred stock automatically converted into
approximately one share of CSI-MNs common stock.
At closing, Replidynes net assets, as calculated pursuant
to the terms of the Merger Agreement, were $36,607. Based on the
amount of net assets, each outstanding share of CSI-MNs
common stock, including each share
F-13
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
issuable upon conversion of CSI-MN Series A,
Series A-1
and Series B convertible preferred stock as described
above, was converted at the effective time of the merger into
the right to receive 0.647 shares of Company common stock,
taking into account a
1-for-10
reverse stock split approved by Replidynes stockholders
and board of directors on February 24, 2009. All share and
per share amounts reflect the effect of the conversion factor
for all periods presented. Immediately following the effective
time of the merger, former CSI-MN stockholders owned
approximately 80.2% of the outstanding common stock of the
Company, and Replidyne stockholders owned approximately 19.8% of
the outstanding common stock of the Company. Options exercisable
for a total of 5,681,974 shares of CSI-MN common stock
(equivalent to a total of 3,676,208 shares of Company
common stock) and warrants exercisable for a total of
4,836,051 shares of CSI-MN common stock (equivalent to a
total of 3,128,740 shares of Company common stock) were
assumed by the Company in connection with the merger.
Immediately prior to the merger, warrants to purchase shares of
CSI-MN Series A and Series B convertible preferred
stock were converted into warrants to purchase shares of CSI-MN
common stock at the same ratios as the preferred stock converted
into common stock. Each option and warrant to purchase CSI-MN
common stock outstanding at the effective time of the merger was
assumed by the Company at the effective time of the merger. Each
such option or warrant became an option or warrant, as
applicable, to acquire that number of shares of Company common
stock equal to the product obtained by multiplying the number of
shares of CSI-MN common stock subject to such option or warrant
by 0.647, rounded down to the nearest whole share of Company
common stock. Following the merger, each such option or warrant
has a purchase price per share of Company common stock equal to
the quotient obtained by dividing the per share purchase price
of CSI-MN common stock subject to such option or warrant by
0.647, rounded up to the nearest whole cent.
The Companys common stock was accepted for listing on the
Nasdaq Global Market under the symbol CSII and
trading commenced on February 26, 2009.
The Company believes that Replidyne did not meet the definition
of a business in accordance with the Statements of Financial
Accounting Standards No. 141, Business Combinations, and
Emerging Issues Task Force (EITF)
No. 98-3,
Determining Whether a Nonmonetary Transaction Involves Receipt
of Productive Assets or of a Business, because as of the date of
merger Replidyne had reduced its employee headcount to three
employees that were not engaged in development or
commercialization efforts and did not transition to the combined
company, and had discontinued and engaged in a process to sell
or otherwise dispose of its research and development programs.
As such, at the time the transaction was consummated,
Replidynes sole business activity was liquidation through
the merger. Under EITF
No. 98-3,
the total estimated purchase price is allocated to the assets
acquired and liabilities assumed in connection with the
transaction, based on their estimated fair values. As a result,
the cost of the merger has been measured at the estimated fair
value of the net assets acquired, and no goodwill has been
recognized. While the accounting treatment of the transaction is
an acquisition of assets and assumption of certain liabilities
by the Company, the manner in which such transaction was
consummated is a merger whereby former CSI-MN stockholders
control the combined entity. Accordingly, consistent with
guidance relating to such transactions, CSI-MN (the legal
acquiree, but the accounting acquirer) is considered to be the
continuing reporting entity that acquires the registrant,
Replidyne (the legal acquirer, but the accounting acquiree), and
therefore the transaction is considered to be a reverse merger.
The merger qualified as a tax-free reorganization under
provisions of Section 368(a) of the Internal Revenue Code.
CSI-MN directors constitute a majority of the combined
companys board of directors and CSI-MN executive officers
constitute all members of executive management of the combined
company.
The financial statements of the combined entity reflect the
historical results of CSI-MN before the merger and do not
include the historical financial results of Replidyne before the
completion of the merger. The combined entity has changed its
year-end to June 30 to correspond to the historical results of
CSI-MN. Stockholders equity and earnings per share of the
combined entity and, except as noted, all other share references
have been retroactively restated to reflect the number of shares
of common stock received by CSI-MN security holders in the
merger, after
F-14
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
giving effect to the difference between the par values of the
capital stock of CSI-MN and Replidyne, with the offset to
additional paid-in capital.
A summary of the estimated fair value of the net assets acquired
and merger costs incurred in the merger are as follows:
|
|
|
|
|
Description
|
|
Amount
|
|
|
Cash and cash equivalents
|
|
$
|
38,479
|
|
Prepaid expenses and other current assets
|
|
|
1,135
|
|
Property and equipment
|
|
|
138
|
|
Other assets
|
|
|
525
|
|
Liabilities
|
|
|
(3,670
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
36,607
|
|
|
|
|
|
|
The Company incurred merger related costs of $1,110 that were
recorded in additional paid in capital as part of the
transaction.
The Company has recorded a current and long-term asset totaling
$651 at June 30, 2009 related to a deposit for a portion of
the vacated Replidyne office and production facility that has
been subleased to two tenants. The tenants have prepaid the
entire sublease amount and this prepayment has been netted
against the lease liability that is included in accrued expenses
and lease obligation and other liabilities on the balance sheet.
The deposit is being held at an escrow agent and returned in
monthly payments until lease expiration in September 2011. The
Company has recorded the unreturned portion of the deposit at
June 30, 2009, resulting in $281 in prepaid expenses and
other current assets and $370 in other assets on the balance
sheet.
The Company has recorded a current and long-term liability
totaling $2,389 at June 30, 2009 related to
Replidynes lease on the vacated office and production
facility. The lease currently requires monthly base rent
payments of $50 plus common area maintenance and operating
expenses. Monthly base rent escalates over the remaining lease
term to a maximum of $59 at lease expiration in September 2011.
The Company has recorded the estimated net present value of the
base rent, common area maintenance and operating expenses offset
by estimated rental income at June 30, 2009, resulting in
$998 in accrued expenses and $1,391 in lease obligation and
other liabilities on the balance sheet.
F-15
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Selected
Consolidated Financial Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
8,727
|
|
|
$
|
5,061
|
|
Less: Allowance for doubtful accounts
|
|
|
(253
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,474
|
|
|
$
|
4,897
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,536
|
|
|
$
|
2,338
|
|
Work in process
|
|
|
348
|
|
|
|
117
|
|
Finished goods
|
|
|
1,485
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,369
|
|
|
$
|
3,776
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
2,313
|
|
|
$
|
1,360
|
|
Furniture
|
|
|
168
|
|
|
|
169
|
|
Leasehold improvements
|
|
|
109
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,590
|
|
|
|
1,619
|
|
Less: Accumulated depreciation and amortization
|
|
|
(871
|
)
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,719
|
|
|
$
|
1,041
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,715
|
|
|
$
|
1,279
|
|
Less: Accumulated amortization
|
|
|
(352
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,363
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, future estimated amortization of
patents and patent licenses will be:
|
|
|
|
|
2010
|
|
$
|
46
|
|
2011
|
|
|
45
|
|
2012
|
|
|
45
|
|
2013
|
|
|
45
|
|
2014
|
|
|
45
|
|
Thereafter
|
|
|
1,137
|
|
|
|
|
|
|
|
|
$
|
1,363
|
|
|
|
|
|
|
F-16
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This future amortization expense is an estimate. Actual amounts
may vary from these estimated amounts due to additional
intangible asset acquisitions, potential impairment, accelerated
amortization or other events.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
Salaries and bonus
|
|
$
|
1,453
|
|
|
$
|
1,229
|
|
Commissions
|
|
|
1,441
|
|
|
|
1,493
|
|
Accrued vacation
|
|
|
1,198
|
|
|
|
554
|
|
Merger related lease obligation
|
|
|
998
|
|
|
|
|
|
Other
|
|
|
510
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,600
|
|
|
$
|
3,583
|
|
|
|
|
|
|
|
|
|
|
Loan
and Security Agreement with Silicon Valley Bank
On September 12, 2008, the Company entered into a loan and
security agreement with Silicon Valley Bank with maximum
available borrowings of $13,500, which agreement was amended on
February 25, 2009 and April 30, 2009. The agreement
includes a $3,000 term loan, a $10,000 accounts receivable line
of credit, and a $5,500 term loan that reduces the availability
of funds on the accounts receivable line of credit. The terms of
each of these loans are as follows:
|
|
|
|
|
The $3,000 term loan has a fixed interest rate of 10.5% and a
final payment amount equal to 3.0% of the loan amount due at
maturity. This term loan has a 36 month maturity, with
repayment terms that include interest only payments during the
first six months followed by 30 equal principal and interest
payments. This term loan also includes an acceleration provision
that requires the Company to pay the entire outstanding balance,
plus a penalty ranging from 1.0% to 6.0% of the principal
amount, upon prepayment or the occurrence and continuance of an
event of default. As part of the term loan agreement, the
Company granted Silicon Valley Bank a warrant to purchase
8,493 shares of Series B redeemable convertible
preferred stock at an exercise price of $14.16 per share. This
warrant was assigned a value of $75 for accounting purposes, is
immediately exercisable, and expires ten years after issuance.
The balance outstanding on the term loan at June 30, 2009
was $2,642.
|
|
|
|
The accounts receivable line of credit as amended has a two year
maturity and a floating interest rate equal to the prime rate,
plus 2.0%, with an interest rate floor of 7.0%. Interest on
borrowings is due monthly and the principal balance is due at
maturity. Borrowings on the line of credit are based on 80% of
eligible domestic receivables, which is defined as receivables
aged less than 90 days from the invoice date along with
specific exclusions for contra-accounts, concentrations, and
government receivables. The Companys accounts receivable
receipts are deposited into a lockbox account in the name of
Silicon Valley Bank. The accounts receivable line of credit is
subject to non-use fees, annual fees, cancellation fees, and
maintaining a minimum liquidity ratio. There was no balance
outstanding on the line of credit at June 30, 2009. On
April 30, 2009, the accounts receivable line of credit was
amended to allow for an increase in borrowings from $5,000 to
$10,000. All other terms and conditions of the original line of
credit agreement remain in place. The $5,500 term loan reduces
available borrowings under the line of credit agreement.
|
|
|
|
The term loan was originally two guaranteed term loans each with
a one year maturity. Each of the guaranteed term loans had a
floating interest rate equal to the prime rate, plus 2.25%, with
an interest rate floor of 7.0%. Interest on borrowings was due
monthly and the principal balance was due at maturity. One of
the Companys directors and stockholders and two entities
who held the Companys preferred shares and were also
affiliated with two of the Companys directors agreed to
act as guarantors of these term loans. In
|
F-17
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
consideration for guarantees, the Company issued the guarantors
warrants to purchase an aggregate of 296,539 shares of the
Companys common stock at an exercise price of $9.28 per
share.
|
On April 30, 2009, the guaranteed term loans were
refinanced into a $5,500 term loan that has a fixed interest
rate of 9.0% and a final payment amount equal to 1.0% of the
loan amount due at maturity. As a result of the refinancing, the
guarantees on the original term loans have been released. This
term loan has a 30 month maturity, with repayment terms
that include equal monthly payments of principal and interest
beginning June 1, 2009. This term loan also includes an
acceleration provision that requires the Company to pay the
entire outstanding balance, plus a penalty ranging from 1.0% to
3.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. The term loan reduces
available borrowings under the amended accounts receivable line
of credit agreement. The balance outstanding on the term loan at
June 30, 2009 was $5,328.
The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, the Company estimated the fair value of the term loans
without the guarantees and calculated the fair value of the
common stock warrants using the Black-Scholes method. The
relative fair value of the loans and warrants were applied to
the loan proceeds of $5,500, resulting in an assigned value of
$3,686 for the loans and $1,814 for the warrants. The assigned
value of the warrants of $1,814 is treated as a debt discount.
The balance of the debt discount at June 30, 2009 is $661
and is being amortized over the remaining term of the $5,500
term loan.
Borrowings from Silicon Valley Bank are collateralized by all of
the Companys assets, other than the Companys ARS and
intellectual property, and, until April 30, 2009, the
investor guarantees. The borrowings are subject to prepayment
penalties and financial covenants, including the Companys
achievement of minimum monthly net revenue goals. The agreement
also includes subjective acceleration clauses which permit
Silicon Valley Bank to accelerate the due date under certain
circumstances, including, but not limited to, material adverse
effects on a Companys financial status or otherwise. Any
non-compliance by the Company under the terms of the
Companys debt arrangements could result in an event of
default under the Silicon Valley Bank loan, which, if not cured,
could result in the acceleration of this debt. The Company was
in compliance with all monthly financial covenants through
August 31, 2009.
Loan
Payable
On March 28, 2008, the Company obtained a margin loan from
UBS Financial Services, Inc. for up to $12,000, with a floating
interest rate equal to
30-day
LIBOR, plus 0.25%. The loan was collateralized by the
$23,000 par value of the Companys auction rate
securities. The maximum borrowing amount may have been adjusted
from time to time by UBS Financial Services in its sole
discretion. The loan was due on demand and UBS Financial
Services may have required the Company to repay it in full from
any loan or financing arrangement or a public equity offering.
The margin requirements were determined by UBS Financial
Services and were subject to change. As of June 30, 2008,
the margin requirements provided that UBS Financial Services
would require a margin call on this loan if at any time the
outstanding borrowings, including interest, exceed $12,000 or
75% of UBS Financial Services estimate of the fair value
of the Companys auction rate securities. If these margin
requirements were not maintained, UBS Financial Services may
have required the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. As of
June 30, 2008, the Company maintained these margin
requirements.
On August 21, 2008, the Company replaced this loan with a
margin loan from UBS Bank USA, which increased maximum
borrowings available to $23,000, which may be adjusted from time
to time by UBS Bank in its sole discretion. The margin loan
bears interest at variable rates that equal the lesser of
(i) 30 day LIBOR plus 1.25% or (ii) the
applicable reset rate, maximum auction rate or similar rate as
specified in the prospectus or other documentation governing the
pledged taxable student loan auction rate securities; however,
interest expense charged on the loan will not exceed interest
income earned on the auction rate securities. The loan is due on
demand and UBS Bank will require the Company to repay it in full
from the proceeds received from a public equity offering
F-18
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
where net proceeds exceed $50,000. In addition, if at any time
any of the Companys auction rate securities may be sold,
exchanged, redeemed, transferred or otherwise conveyed for no
less than their par value by UBS, then the Company must
immediately effect such a transfer and the proceeds must be used
to pay down outstanding borrowings under this loan. The margin
requirements are determined by UBS Bank and are subject to
change. As of June 30, 2009, the margin requirements
include maximum borrowings, including interest, of $22,950. If
these margin requirements are not maintained, UBS Bank may
require the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. The Company
has maintained the margin requirements under the loans from both
UBS entities. The outstanding balance on this loan at
June 30, 2009 was $22,893 and is included in maturities
during the year ending June 30, 2010.
As of June 30, 2009, debt maturities (including debt
discount) were as follows:
|
|
|
|
|
2010
|
|
$
|
25,823
|
|
2011
|
|
|
3,252
|
|
2012
|
|
|
1,127
|
|
|
|
|
|
|
Total
|
|
$
|
30,202
|
|
Less: Current Maturities
|
|
|
(25,823
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
4,379
|
|
|
|
|
|
|
Immediately prior to consummation of the merger, the Company
issued warrants to preferred stockholders to purchase an
aggregate of 2,264,264 shares of Company common stock at an
exercise price at $8.83 per share. The warrants were assigned a
value of $8,217 for accounting purposes and were recorded as
additional paid in capital as part of the merger. The warrants
are immediately exercisable and expire five years after issuance.
In connection with the merger, 439,317 fully exercisable
preferred stock warrants were converted into common stock
warrants. The exercise prices on these warrants range from $8.83
- $14.16 and expire at various dates through September 2018.
During the year ended June 30, 2009, the Company issued the
former guarantors of the Silicon Valley Bank guaranteed term
loans warrants to purchase an aggregate of 296,539 shares
of the Companys common stock at an exercise price of $9.28
per share. The warrants were assigned a value of $1,810 for
accounting purposes, are immediately exercisable, and expire
five years after issuance.
F-19
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes common stock warrant activity:
|
|
|
|
|
|
|
|
|
Warrants
|
|
Price Range
|
|
|
Outstanding
|
|
per Share
|
|
Warrants outstanding at June 30, 2006
|
|
|
169,978
|
|
|
$1.55-12.37
|
Warrants issued
|
|
|
88,864
|
|
|
$8.83
|
Warrants exercised
|
|
|
(2,102
|
)
|
|
$1.55
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2007
|
|
|
256,740
|
|
|
$1.55-12.37
|
Warrants exercised
|
|
|
(76,312
|
)
|
|
$1.55-12.37
|
Warrants expired
|
|
|
(22,387
|
)
|
|
$7.73
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2008
|
|
|
158,041
|
|
|
$1.55-12.37
|
Warrants issued
|
|
|
2,560,803
|
|
|
$8.83-9.28
|
Warrants converted
|
|
|
439,317
|
|
|
$8.83-14.16
|
Warrants exercised
|
|
|
(33,431
|
)
|
|
$1.55-7.73
|
Warrants expired
|
|
|
(8,605
|
)
|
|
$7.73
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2009
|
|
|
3,116,125
|
|
|
$1.55-$14.16
|
|
|
|
|
|
|
|
The following assumptions were utilized in determining the fair
value of warrants issued under the Black-Scholes model:
|
|
|
|
|
Year Ended
|
|
|
June 30,
|
|
|
2009
|
|
Weighted average fair value of warrants granted
|
|
$4.06
|
Risk-free interest rates
|
|
2.5%-3.0%
|
Expected life
|
|
5 years
|
Expected volatility
|
|
46.7%-55.5%
|
Expected dividends
|
|
None
|
|
|
6.
|
Stock
Options and Restricted Stock Awards
|
The Company has a 2007 Equity Incentive Plan (the 2007
Plan), which was assumed from CSI-MN, under which options
to purchase common stock and restricted stock awards have been
granted to employees, directors and consultants at exercise
prices determined by the board of directors; and also in
connection with the merger the Company assumed options and
restricted stock awards granted by CSI-MN under its 1991 Stock
Option Plan (the 1991 Plan) and 2003 Stock Option
Plan (the 2003 Plan) (the 2007 Plan, the 1991 Plan
and the 2003 Plan collectively, the Plans). The 1991
Plan and 2003 Plan permitted the granting of incentive stock
options and nonqualified options. A total of 485,250 shares
of common stock were originally reserved for issuance under the
1991 Plan, but with the execution of the 2003 Plan no additional
options were granted under it. A total of 2,458,600 shares
of common stock were originally reserved for issuance under the
2003 Plan but with the approval of the 2007 Plan no additional
options will be granted under it. The 2007 Plan originally
allowed for the granting of up to 1,941,000 shares of
common stock as approved by the board of directors in the form
of nonqualified or incentive stock options, restricted stock
awards, restricted stock unit awards, performance share awards,
performance unit awards or stock appreciation rights to
officers, directors, consultants and employees of the Company.
The Plan was amended in February 2009 to increase the number of
authorized shares to 2,509,969. The amended 2007 Plan also
includes a renewal provision whereby the number of shares shall
automatically be increased on the first day of each fiscal year
beginning July 1, 2008, and ending July 1, 2017, by
the lesser of (i) 970,500 shares, (ii) 5% of the
outstanding common shares on such date, or (iii) a lesser
amount determined by the board of directors.
F-20
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 1, 2009 the number of shares available for grant
was increased by 705,695 under the 2007 plans renewal
provision.
All options granted under the Plans become exercisable over
periods established at the date of grant. The option exercise
price is generally not less than the estimated fair market value
of the Companys common stock at the date of grant, as
determined by the Companys management and board of
directors. In addition, the Company has granted nonqualified
stock options to employees, directors and consultants outside of
the Plans.
In estimating the value of the Companys common stock prior
to the merger for purposes of granting options and determining
stock-based compensation expense, the Companys management
and board of directors conducted stock valuations using two
different valuation methods: the option pricing method and the
probability weighted expected return method. Both of these
valuation methods took into consideration the following factors:
financing activity, rights and preferences of the Companys
preferred stock, growth of the executive management team,
clinical trial activity, the FDA process, the status of the
Companys commercial launch, the Companys mergers and
acquisitions and public offering processes, revenues, the
valuations of comparable public companies, the Companys
cash and working capital amounts, and additional objective and
subjective factors relating to the Companys business. The
Companys management and board of directors set the
exercise prices for option grants based upon their best estimate
of the fair market value of the common stock at the time they
made such grants, taking into account all information available
at those times. In some cases, management and the board of
directors made retrospective assessments of the valuation of the
common stock at later dates and determined that the fair market
value of the common stock at the times the grants were made was
different than the exercise prices established for those grants.
In cases in which the fair market was higher than the exercise
price, the Company recognized stock-based compensation expense
for the excess of the fair market value of the common stock over
the exercise price.
Following the merger, the Companys stock valuations are
based upon the market price for the common stock.
Stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options(a)
|
|
|
Exercise Price
|
|
|
Options outstanding at June 30, 2006
|
|
|
1,180,004
|
|
|
$
|
6.08
|
|
Options granted
|
|
|
1,696,984
|
|
|
$
|
8.72
|
|
Options exercised
|
|
|
(42,055
|
)
|
|
$
|
1.55
|
|
Options forfeited or expired
|
|
|
(61,367
|
)
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2007
|
|
|
2,773,566
|
|
|
$
|
7.67
|
|
Options granted
|
|
|
1,871,089
|
|
|
$
|
11.14
|
|
Options exercised
|
|
|
(244,242
|
)
|
|
$
|
5.07
|
|
Options forfeited or expired
|
|
|
(597,289
|
)
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
|
3,803,124
|
|
|
$
|
10.19
|
|
Options granted
|
|
|
99,314
|
|
|
$
|
9.13
|
|
Options exercised
|
|
|
(59,524
|
)
|
|
$
|
8.12
|
|
Options forfeited or expired
|
|
|
(205,032
|
)
|
|
$
|
9.32
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
3,637,882
|
|
|
$
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the effect of options granted, exercised, forfeited or
expired from the 1991 Plan, 2003 Plan, 2007 Plan, and options
granted outside the stock option plans described above. |
F-21
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options outstanding and exercisable at June 30, 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$7.90
|
|
|
600,885
|
|
|
|
8.10
|
|
|
$
|
7.90
|
|
|
|
295,971
|
|
|
|
8.09
|
|
|
$
|
7.90
|
|
$8.75
|
|
|
92,844
|
|
|
|
9.68
|
|
|
$
|
8.75
|
|
|
|
|
|
|
|
|
|
|
$
|
8.75
|
|
$8.83
|
|
|
1,276,093
|
|
|
|
4.00
|
|
|
$
|
8.83
|
|
|
|
946,523
|
|
|
|
4.00
|
|
|
$
|
8.83
|
|
$9.28
|
|
|
78,931
|
|
|
|
0.79
|
|
|
$
|
9.28
|
|
|
|
78,931
|
|
|
|
0.79
|
|
|
$
|
9.28
|
|
$11.38
|
|
|
85,143
|
|
|
|
8.38
|
|
|
$
|
11.38
|
|
|
|
85,143
|
|
|
|
8.38
|
|
|
$
|
11.38
|
|
$12.15
|
|
|
1,184,807
|
|
|
|
8.49
|
|
|
$
|
12.15
|
|
|
|
683,382
|
|
|
|
8.51
|
|
|
$
|
12.15
|
|
$12.37
|
|
|
176,307
|
|
|
|
1.56
|
|
|
$
|
12.37
|
|
|
|
176,307
|
|
|
|
1.56
|
|
|
$
|
12.37
|
|
$13.98
|
|
|
111,421
|
|
|
|
8.63
|
|
|
$
|
13.98
|
|
|
|
111,421
|
|
|
|
8.63
|
|
|
$
|
13.98
|
|
$18.55
|
|
|
31,451
|
|
|
|
6.75
|
|
|
$
|
18.55
|
|
|
|
31,451
|
|
|
|
6.75
|
|
|
$
|
18.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,637,882
|
|
|
|
6.36
|
|
|
$
|
10.24
|
|
|
|
2,409,129
|
|
|
|
5.90
|
|
|
$
|
10.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued to employees and directors that are vested or
expected to vest at June 30, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
Number of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|
Shares
|
|
Life (Years)
|
|
Price
|
|
Value
|
|
Options vested or expected to vest
|
|
|
3,295,921
|
|
|
|
6.36
|
|
|
$
|
10.24
|
|
|
$
|
|
|
An additional requirement of SFAS No. 123(R) is that
estimated pre-vesting forfeitures be considered in determining
stock-based compensation expense. As of June 30, 2009,
2008, and 2007, the Company estimated its forfeiture rate at
9.4%, 5.0%, and 5.0%, respectively. As of June 30, 2009,
2008, and 2007, the total compensation cost for non-vested
awards not yet recognized in the consolidated statements of
operations was $5,820, $6,316, and $2,367, respectively, net of
the effect of estimated forfeitures. These amounts are expected
to be recognized over a weighted-average period of 1.50, 2.17,
and 2.72 years, respectively.
Options typically vest over three years. An employees
unvested options are forfeited when employment is terminated;
vested options must be exercised at or within 90 days of
termination to avoid forfeiture. The Company determines the fair
value of options using the Black-Scholes option pricing model.
The estimated fair value of options, including the effect of
estimated forfeitures, is recognized as expense on a
straight-line basis over the options vesting periods. The
following assumptions were used in determining the fair value of
stock options granted under the Black-Scholes model:
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Weighted average fair value of options granted
|
|
$4.66
|
|
$5.78
|
|
$1.66
|
Risk-free interest rates
|
|
2.82%
|
|
2.45%-4.63%
|
|
4.56%-5.18%
|
Expected life
|
|
6 years
|
|
3.5-6 years
|
|
3.5-6 years
|
Expected volatility
|
|
55.5%
|
|
43.1%-46.4%
|
|
43.8%-45.1%
|
Expected dividends
|
|
None
|
|
None
|
|
None
|
The risk-free interest rate for periods within the five and ten
year contractual life of the options is based on the
U.S. Treasury yield curve in effect at the grant date and
the expected option life of 3.5 to 6 years. Expected
volatility is based on the historical volatility of the stock of
companies within the Companys peer group.
F-22
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. The aggregate intrinsic value for
outstanding options at June 30, 2009, 2008 and 2007 was $0,
$21,441, and $5,181, respectively. The aggregate intrinsic value
for exercisable options at June 30, 2009, 2008 and 2007 was
$0, $9,692, and $4,417, respectively. The total aggregate
intrinsic value of options exercised during the years ended
June 30, 2009 and 2008 was $387 and $1,435, respectively.
Shares supporting option exercises are sourced from new share
issuances.
On December 12, 2007, the Company granted 501,425
performance based incentive stock options to certain executives.
The options originally were to become exercisable in full on the
third anniversary of the date of grant provided that the Company
had completed its initial public offering of common stock or a
change of control transaction before December 31, 2008 and
would terminate on the tenth anniversary of the date of the
grant. For this purpose, change of control
transaction was defined as an acquisition of the Company
through the sale of substantially all of the Companys
assets and the consequent discontinuance of its business or
through a merger, consolidation, exchange, reorganization or
similar transaction. On December 12, 2008, the Company
amended the vesting terms of these options to delete the
aforementioned vesting terms and to provide instead that the
exercisability of the options was to be conditioned upon the
closing of the merger and that the options would vest to the
extent of 50% of the total shares subject to the first
anniversary of the merger and for the remaining 50% on the
second anniversary of the merger. The Company has calculated
compensation expense of $4,716 related to the stock options that
is expected to be recognized over the vesting period. The
Company began recording stock-based compensation expense related
to the performance based incentive stock options effective at
the closing of the merger, the time at which it became probable
that the options would vest.
The Company also maintains its 2006 Equity Incentive Plan (the
2006 Plan), relating to Replidyne activity prior to
the merger in February 2009. A total of 794,641 shares were
originally reserved under the 2006 Plan but effective with the
merger no additional options will be granted under it. Options
granted under the 2006 Plan were either incentive or
nonqualified stock options. Incentive stock options were only
granted to Replidyne employees. Nonqualified stock options were
granted by Replidyne to its employees, directors, and
nonemployee consultants. Generally, options granted under the
2006 Plan expired ten years from the date of grant and vested
over four years. Vested options granted to employees terminate
90 days after termination.
Stock option activity since the date of merger is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options outstanding at February 25, 2009
|
|
|
239,716
|
|
|
$
|
31.11
|
|
Options granted
|
|
|
|
|
|
$
|
|
|
Options exercised
|
|
|
(7,379
|
)
|
|
$
|
6.13
|
|
Options forfeited or expired
|
|
|
(162,337
|
)
|
|
$
|
37.83
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
70,000
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$14.00
|
|
|
4,000
|
|
|
|
3.51
|
|
|
$
|
14.00
|
|
|
|
4,000
|
|
|
|
3.51
|
|
|
$
|
14.00
|
|
$16.40
|
|
|
6,000
|
|
|
|
3.51
|
|
|
$
|
16.40
|
|
|
|
6,000
|
|
|
|
3.51
|
|
|
$
|
16.40
|
|
$18.60
|
|
|
60,000
|
|
|
|
2.66
|
|
|
$
|
18.60
|
|
|
|
60,000
|
|
|
|
2.66
|
|
|
$
|
18.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
2.78
|
|
|
$
|
18.15
|
|
|
|
70,000
|
|
|
|
2.78
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. There was no aggregate intrinsic
value for outstanding options or exercisable options under the
former Replidyne plan at June 30, 2009. The total aggregate
intrinsic value of options exercised during the years ended
June 30, 2009 was $6.
As of June 30, 2009, the Company had granted 1,075,605
restricted stock awards. The fair value of each restricted stock
award was equal to the fair market value of the Companys
common stock at the date of grant. Vesting of restricted stock
awards range from one to three years. The estimated fair value
of restricted stock awards, including the effect of estimated
forfeitures, is recognized on a straight-line basis over the
restricted stocks vesting period. Restricted stock award
activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Restricted stock awards outstanding at June 30, 2007
|
|
|
|
|
|
$
|
|
|
Restricted stock awards granted
|
|
|
543,481
|
|
|
$
|
14.67
|
|
Restricted stock awards forfeited
|
|
|
(18,008
|
)
|
|
$
|
14.36
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2008
|
|
|
525,473
|
|
|
$
|
14.68
|
|
Restricted stock awards granted
|
|
|
532,124
|
|
|
$
|
9.08
|
|
Restricted stock awards forfeited
|
|
|
(106,765
|
)
|
|
$
|
14.06
|
|
Restricted stock awards vested
|
|
|
(206,455
|
)
|
|
$
|
14.52
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2009
|
|
|
744,377
|
|
|
$
|
10.81
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2009, the Company granted
restricted stock units to members of the Board of Directors.
Restricted stock units represent the right to receive payment
from the Company equal in value to the market price per share of
Company stock on date of payment. Restricted stock unit payments
would occur on the six month anniversary after a Director
terminates from the Board. A total of 42,238 restricted stock
units were granted at the applicable market price of $8.75. The
aggregate restricted stock unit liability of $323,086 has been
included in accrued expenses in the balance sheet at
June 30, 2009.
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
Stock
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Purchase Plan
|
|
|
Total
|
|
|
Cost of goods sold
|
|
$
|
199
|
|
|
$
|
274
|
|
|
$
|
2
|
|
|
$
|
475
|
|
Selling, general and administrative
|
|
|
1,786
|
|
|
|
3,862
|
|
|
|
36
|
|
|
|
5,684
|
|
Research and development
|
|
|
276
|
|
|
|
331
|
|
|
|
5
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,261
|
|
|
$
|
4,467
|
|
|
$
|
43
|
|
|
$
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Total
|
|
|
Cost of goods sold
|
|
$
|
91
|
|
|
$
|
141
|
|
|
$
|
232
|
|
Selling, general and administrative
|
|
|
5,957
|
|
|
|
895
|
|
|
|
6,852
|
|
Research and development
|
|
|
181
|
|
|
|
116
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,229
|
|
|
$
|
1,152
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2007:
|
|
|
|
|
|
|
Stock
|
|
|
|
Options
|
|
|
Selling, general and administrative
|
|
$
|
327
|
|
Research and development
|
|
|
63
|
|
|
|
|
|
|
Total
|
|
$
|
390
|
|
|
|
|
|
|
The following summarizes shares available for grant under the
Companys various equity incentive plans:
|
|
|
|
|
|
|
Shares Available
|
|
|
|
for Grant(a)
|
|
|
Shares available for grant at June 30, 2006
|
|
|
404,213
|
|
Shares reserved
|
|
|
1,617,500
|
|
Shares granted
|
|
|
(1,696,984
|
)
|
Shares forfeited, expired or cancelled
|
|
|
51,663
|
|
|
|
|
|
|
Shares outstanding at June 30, 2007
|
|
|
376,392
|
|
Shares reserved
|
|
|
1,941,000
|
|
Shares granted(b)
|
|
|
(2,369,280
|
)
|
Shares forfeited, expired or cancelled
|
|
|
70,953
|
|
|
|
|
|
|
Shares available for grant at June 30, 2008
|
|
|
19,065
|
|
Shares reserved
|
|
|
575,444
|
|
Shares granted
|
|
|
(631,438
|
)
|
Shares forfeited, expired or cancelled
|
|
|
121,767
|
|
|
|
|
|
|
Shares available for grant at June 30, 2009
|
|
|
84,838
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes the effect of shares granted, exercised, forfeited or
expired related to activity from shares granted outside the
stock option plans described above. Excludes share forfeitures
from grants not under the 2007 plan. |
|
(b) |
|
Excludes a grant of 45,290 shares outside of plans |
Employee
Stock Purchase Plan
The Company maintains an employee stock purchase plan (ESPP).
The plan provides eligible employees the opportunity to acquire
common stock in accordance with Section 423 of the Internal
Revenue Code of 1986. Stock can be purchased each six-month
period per year (twice per year), however the initial period is
from June 1, 2009 through December 31, 2009. The
purchase price is equal to 85% of the lower of the price at the
beginning or the end of the respective period. Shares reserved
under the plan at June 30, 2009 totaled 192,087. The ESPP
allows for an annual increase in reserved shares on July 1 equal
to the lesser of (i) one percent of the outstanding common
shares outstanding, or (ii) 180,000 shares, provided
that the Board of Directors may designate a smaller amount of
shares to be reserved. On July 1, 2009, 141,139 shares
were added to plan.
F-25
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys overall deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
3,398
|
|
|
$
|
2,053
|
|
Accrued expenses
|
|
|
508
|
|
|
|
154
|
|
Inventories
|
|
|
488
|
|
|
|
358
|
|
Debt warrant amortization
|
|
|
466
|
|
|
|
|
|
Other
|
|
|
188
|
|
|
|
575
|
|
Research and development credit carryforwards
|
|
|
2,974
|
|
|
|
2,192
|
|
Net operating loss carryforwards
|
|
|
33,124
|
|
|
|
24,041
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
41,146
|
|
|
|
29,373
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Accelerated depreciation and amortization
|
|
|
(29
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(29
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(41,117
|
)
|
|
|
(29,353
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has established valuation allowances to fully offset
its deferred tax assets due to the uncertainty about the
Companys ability to generate the future taxable income
necessary to realize these deferred assets, particularly in
light of the Companys historical losses. The future use of
net operating loss carryforwards is dependent on the Company
attaining profitable operations, and will be limited in any one
year under Internal Revenue Code Section 382 (IRC
Section 382) due to significant ownership changes, as
defined under the Code Section, as a result of the
Companys equity financings. A summary of the valuation
allowances are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2007
|
|
$
|
16,889
|
|
Additions
|
|
|
12,464
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
29,353
|
|
Additions
|
|
|
11,764
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
41,117
|
|
|
|
|
|
|
At June 30, 2009, the Company had net operating loss
carryforwards for federal and state income tax reporting
purposes of approximately $108,166 which will expire at various
dates through fiscal 2029.
The Company adopted the provisions of FIN 48, Accounting
for Uncertainty in Income Taxes, on July 1, 2007. Under
FIN 48, the Company recognizes the financial statement
benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, the
Company applied FIN 48 to all tax positions for which the
statute of limitations remained open. The Company did not record
any adjustment to the liability for unrecognized income tax
benefits or accumulated deficit for the cumulative effect of the
adoption of FIN 48.
F-26
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the amount of unrecognized tax benefits as of
June 30, 2009 and 2008 was zero. There have been no
material changes in unrecognized tax benefits since July 1,
2007, and the Company does not anticipate a significant change
to the total amount of unrecognized tax benefits within the next
12 months. The Company recognizes penalties and interest
accrued related to unrecognized tax benefits in income tax
expense for all periods presented. The Company did not have an
accrual for the payment of interest and penalties related to
unrecognized tax benefits as of June 30, 2009 or 2008.
The Company is subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant
judgment to apply. The Company is potentially subject to income
tax examinations by tax authorities for the tax years ended
June 30, 2009, 2008 and 2007. The Company is not currently
under examination by any taxing jurisdiction.
|
|
8.
|
Commitment
and Contingencies
|
Operating
Lease
The Company leases manufacturing and office space and equipment
under various lease agreements which expire at various dates
through November 2012. Rental expenses were $658, $572 and $341
for the years ended June 30, 2009, 2008 and 2007,
respectively.
Future minimum lease payments under the agreements as of
June 30, 2009 are as follows:
|
|
|
|
|
2010
|
|
$
|
478
|
|
2011
|
|
|
482
|
|
2012
|
|
|
480
|
|
2013
|
|
|
202
|
|
|
|
|
|
|
|
|
$
|
1,642
|
|
|
|
|
|
|
The Company offers a 401(k) plan to its employees. Eligible
employees may authorize up to $16 of their annual compensation
as a contribution to the plan, subject to Internal Revenue
Service limitations. The plan also allows eligible employees
over 50 years old to contribute an additional $6 subject to
Internal Revenue Service limitations. All employees must be at
least 21 years of age to participate in the plan. The
Company did not provide any employer matching contributions for
the years ended June 30, 2009, 2008 and 2007.
|
|
10.
|
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
Warrants
|
The Company issued 3,081,375 shares of Series A
redeemable convertible preferred stock during fiscal 2007, no
par value, for total proceeds of $27,000. In addition,
Series A convertible preferred stock warrants were issued
to purchase 436,710 shares of Series A redeemable
convertible preferred stock in connection with the sale of the
Series A redeemable convertible preferred stock. The
Series A convertible preferred stock warrants have a
purchase price of $8.83 per share with a five-year term and were
assigned an initial value of $1,767 for accounting purposes
using the Black-Scholes model. The change in value of the
Series A convertible preferred stock warrants due to
decretion (accretion) as a result of remeasurement was $2,991,
($916), and ($1,327) for the years ended June 30, 2009,
2008 and 2007, respectively, and is included in the consolidated
statements of operations.
As of June 30, 2007, the Company had sold
652,377 shares of
Series A-1
redeemable convertible preferred stock, no par value, for total
proceeds of $8,271, net of offering costs of $34. During the
period from July 2007 to September 2007, the Company sold an
additional 808,843 shares of
Series A-1
redeemable convertible preferred stock for total proceeds of
$10,282, net of offering costs of $14.
F-27
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 17, 2007, the Company completed the sale of
1,412,591 shares of Series B redeemable convertible
preferred stock for total proceeds of $19,963, net of offering
costs of $37.
In connection with the closing of the merger at
February 25, 2009, and preparation of the Companys
financial statements as of June 30, 2008, the
Companys management and Board of Directors established
what it believed to be a fair market value of the Companys
Series A,
Series A-1,
and Series B redeemable convertible preferred stock. This
determination was based on concurrent significant stock
transactions with third parties and a variety of factors,
including the Companys business milestones achieved and
future financial projections, the Companys position in the
industry relative to its competitors, external factors impacting
the value of the Company in its marketplace, the stock
volatility of comparable companies in its industry, general
economic trends and the application of various valuation
methodologies.
Changes in the current market value of the Series A,
Series A-1,
and Series B redeemable convertible preferred stock were
recorded as decretion (accretion) of redeemable convertible
preferred stock and as accumulated deficit in the consolidated
statements of changes in stockholders equity (deficiency)
and in the consolidated statements of operations as decretion
(accretion) of redeemable convertible preferred stock.
Immediately prior to the merger with Replidyne, each share of
CSI-MNs Series A,
A-1, and B
convertible preferred stock automatically converted into
approximately one share of CSI-MNs common stock pursuant
to an agreement with the preferred stockholders. In addition,
immediately prior to the merger, warrants to purchase shares of
CSI-MN Series A and B convertible preferred stock were
converted into warrants to purchase CSI-MN common stock
outstanding at the effective time of the merger.
Subsequent to the merger with Replidyne, the Company has
5,000,000 preferred shares authorized. There are no preferred
shares issued or outstanding at June 30, 2009.
ev3
Legal Proceedings
The Company is party to a legal proceeding with ev3 Inc., ev3
Endovascular, Inc. and FoxHollow Technologies, Inc., together
referred to as the Plaintiffs, which filed a complaint on
December 28, 2007 in the Ramsey County District Court for
the State of Minnesota against the Company and former employees
of FoxHollow currently employed by the Company, which complaint
was subsequently amended.
The complaint, as amended, alleges the following:
|
|
|
|
|
That certain of the Companys employees (i) violated
provisions in their employment agreements with their former
employer FoxHollow, barring them from misusing FoxHollow
confidential information and from soliciting or encouraging
employees of FoxHollow to join the Company, and
(ii) breached a duty of loyalty owed to FoxHollow.
|
|
|
|
That the Company and certain of its employees misappropriated
trade secrets of one or more of the Plaintiffs.
|
|
|
|
That all defendants engaged in unfair competition and conspired
to gain an unfair competitive and economic advantage for the
Company to the detriment of the Plaintiffs.
|
|
|
|
That (i) the Company tortiously interfered with the
contracts between FoxHollow and certain of the Companys
employees by allegedly procuring breaches of the
non-solicitation encouragement provision in those
agreements, and (ii) one of the Companys employees
tortiously interfered with the contracts between certain of the
Companys employees and FoxHollow by allegedly procuring
breaches of the confidential information provision in those
agreements.
|
The Plaintiffs seek, among other forms of relief, an award of
damages in an amount greater than $50, a variety of forms of
injunctive relief, exemplary damages under the Minnesota Trade
Secrets Act, and recovery of their
F-28
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
attorney fees and litigation costs. Although the Company has
requested the information, the Plaintiffs have not yet disclosed
what specific amount of damages they claim.
The Company is defending this litigation vigorously, and
believes that the outcome of this litigation will not have a
materially adverse effect on the Companys business,
operations, cash flows or financial condition. The Company has
not recognized any expense related to the settlement of this
matter as an adverse outcome of this action is not probable. If
the Company is not successful in this litigation, it could be
required to pay substantial damages and could be subject to
equitable relief that could include a requirement that the
Company terminate or otherwise alter the terms or conditions of
employment of certain employees, including certain key sales
personnel who were formerly employed by FoxHollow. In any event,
the defense of this litigation, regardless of the outcome, could
result in substantial legal costs and diversion of
managements time and efforts from the operation of
business.
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted earnings per
common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available in basic calculation
|
|
$
|
31,895
|
|
|
$
|
39,167
|
|
|
$
|
15,596
|
|
Accretion (decretion) of redeemable convertible preferred
stock(a)
|
|
|
(22,781
|
)
|
|
|
|