e10vk
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, 2010
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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 (State or other jurisdiction of incorporation or organization)
651 Campus Drive St. Paul, Minnesota (Address of principal executive offices)
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41-1698056 (I.R.S. Employer Identification No.)
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (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, 2009, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $49,227,511 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 23, 2010 was 15,694,291.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrants 2010
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 Systems 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°, CSI,
CSI logo, Lumen Library,
ViperWire, ViperWire Advance,
ViperSlide, and ViperTrack. We have
applied for federal registration of certain marks, including
ViperCaddy, Predator 360°, and
Stealth 360°. 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. PAD is
a progressive disease, and, if left untreated, can lead to limb
amputation or death.
Our primary products, the Diamondback
360°®
PAD System (Diamondback 360°) and the Diamondback Predator
360°tm
PAD System (Predator 360°), are catheter-based platforms
capable of treating a broad range of plaque types in leg
arteries both above and below the knee and address many of the
limitations associated with existing treatment alternatives. We
refer to the Diamondback 360° and the Predator 360°
collectively in this report as the Diamondback
Systems. 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. We commenced commercial launch of the
Predator 360° in April 2009. As of June 30, 2010, the
Diamondback Systems have been utilized in an estimated 29,000
procedures. We intend to leverage the capabilities of the
Diamondback Systems to expand into the interventional coronary
market.
In addition to the Diamondback Systems, we are expanding our
product portfolio through internal product development and
establishment of business relationships. We now offer multiple
accessory products designed to complement the use of the
Diamondback Systems, and we have entered into distribution
agreements with Medtronic, Inc. and Asahi-Intecc, Ltd.
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.
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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 Systems represent 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 Systems each use
single-use catheters that incorporate a flexible drive shaft
with an offset diamond grit coated crown. Physicians position
the crown at the site of an arterial plaque-containing lesion
and remove the plaque by causing the crown to orbit against it,
creating a smooth lumen, or channel, in the vessel. The
Diamondback Systems are designed to differentiate between hard
plaque and soft, 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 (moderately hard)
and/or
calcified (extremely hard) plaque due to PAD lose their
compliance which makes other therapies such as angioplasty,
stenting, surgical bypass and atherectomy problematic. The
Diamondback Systems sand plaque into small particles and restore
both blood flow and vessel compliance. The particles created by
the Diamondback Systems 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 Systems can typically treat the diseased
arteries with less than two to three minutes of sanding time,
potentially reducing the overall procedure time.
We believe that the Diamondback Systems offer the following key
benefits:
Strong
Safety Profile
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Differential Sanding Reduces Risk of Adverse
Events. The Diamondback Systems are designed to
differentiate between hard plaque and soft compliant arterial
tissue. Arteries are composed of three tissue layers. The
diamond grit coated offset crown at the working end of the
devices engages and removes plaque from the artery wall with
minimal likelihood of penetrating or damaging the fragile, inner
layer of the arterial wall because soft, compliant tissue flexes
away from the crown. Furthermore, the Diamondback Systems have
rarely penetrated even the middle or outer layers of the
arterys wall. 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 middle 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 Systems sand 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 Systems allow 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 treated by the Diamondback 360°. 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 Diamondback 360° in the
OASIS trial successfully met the FDAs study endpoints.
Because the Predator 360° mechanism of action is identical
to that of the Diamondback 360°, no additional efficacy
trials were required by the FDA for 510(k) clearance of the
Predator 360°.
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Treats Difficult, Fibrotic and Calcified
Lesions. The Diamondback Systems enable
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
Systems 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 devices.
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 Systems creates a smooth surface inside the lumen.
We believe that the smooth lumens created by the devices
increase the velocity of blood flow and decrease 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 Systems employ techniques similar to those used
in angioplasty, which are familiar to interventional
cardiologists, vascular surgeons and interventional radiologists
who are trained in endovascular techniques. The devices
simple user interfaces require minimal additional training. The
devices 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
orbital technology and differential sanding process of the
Diamondback Systems allows for a single insertion to treat
lesions, in most cases. Because the particles of plaque sanded
away are of such small sizes, the Diamondback Systems do not
require a collection reservoir that needs to be repeatedly
emptied or cleaned during the procedure. Rather, the Diamondback
Systems allow 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 Systems
have a short treatment time. Treatment with the Diamondback
360° typically ranges from three to six minutes, while
treatment time with the Predator 360° is typically
shorter ranging from 90 seconds to three minutes.
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Single Crown Can Create Various Lumen Sizes Limiting Hospital
Inventory Costs. The orbital mechanism of action
with the Diamondback Systems 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 Systems 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 Systems through our direct sales
force, which targets interventional cardiologists, vascular
surgeons and interventional radiologists. As a key element of
our strategy, we focus on educating and training physicians on
the Diamondback Systems through our direct sales force and
during seminars where physician industry leaders discuss case
studies and treatment techniques using the devices.
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Collect Additional Clinical Evidence on Benefits of the
Diamondback Systems. Physicians are increasingly
requesting clinical study evidence to allow them to make the
best treatment decisions to achieve the best possible short-term
and long-term outcomes for their patients. We are focused on
collecting and using clinical evidence to demonstrate the
advantages of the Diamondback Systems and drive physician
acceptance. We have conducted four clinical trials to
demonstrate the safety and efficacy of the Diamondback 360°
in treating PAD, involving 935 patients, including PAD I
and PAD II pilot trials, our pivotal OASIS trial and our CONFIRM
DIAMONDBACK Registry. In addition, we have completed enrollment
in 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. Finally, we are
currently enrolling up to 1,200 patients in the CONFIRM
PREDATOR Registry. In this registry, we will collect acute
clinical data to further demonstrate the ability of the Predator
360° to rapidly and effectively treat lesions above and
below the knee.
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Expand Product Portfolio within the Market for Treatment of
Peripheral Arteries. In addition to the
Diamondback Systems, we are expanding our product portfolio. We
now offer multiple accessory devices designed to complement the
use of the Diamondback Systems. We continue to market the
following products:
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ViperSlide®
Lubricant an exclusive lubricant designed to
optimize the smooth operation of the Diamondback Systems
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ViperTrack®
Radiopaque Tape a radiopaque tape to assist in
measuring lesion lengths and marking lesion locations
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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 Systems 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 that investigated the safety of the Diamondback
360o
device in treating calcified coronary artery lesions. Results
successfully met both safety and efficacy endpoints. An
investigational device exemption, or IDE, application has been
approved by the FDA for ORBIT II, a pivotal 429 patient
trial in the United States to evaluate the safety and
effectiveness of the Diamondback
360o in
treating severely calcified coronary lesions. Patient enrollment
in ORBIT II is currently underway.
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Pursue Strategic Acquisitions and
Partnerships. We have ongoing agreements with
both Medtronic, 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 Systems. Medtronic, Inc.
recently acquired Invatec, Inc, and we continue to market these
balloons under a new agreement with Medtronic, Inc. that expires
on September 30, 2010 unless renewed. 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, other strategic
partnerships, and the financial viability of marketing the
Diamondback Systems internationally.
Our
Product
Components
of the Diamondback Systems
The Diamondback Systems each use a single-use, low-profile
catheter that travels over our proprietary ViperWire
Advancetm
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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ViperWire Advance Guidewire. The ViperWire
Advance is the second generation of the ViperWire. The ViperWire
Advance was designed to offer an improved ability to maneuver
through tortuous, twisting blood vessels and cross challenging
lesions. The Diamondback Systems travel over this wire to the
lesion and operate on this wire. 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 Systems are plaque
modification through differential sanding and plaque removal.
Plaque Modification through Differential
Sanding. The Diamondback Systems were designed to
allow the devices to differentiate between soft compliant and
harder diseased arterial tissue. This property is consistent
with sanding material such as the diamond grit used in the
Diamondback Systems. The diamond preferentially engages and
sands harder material. The Diamondback Systems also treat soft
plaque, which is still harder 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 Systems sand the lesion but are designed not to
damage more compliant parts of the artery. The mechanism is a
function of the centrifugal force generated by the Diamondback
Systems as they rotate. As the crown moves outward, the
centrifugal force is offset by the counterforce exerted by the
arterial
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wall. If the tissue is compliant, it flexes away, rather than
generating an opposing force that would allow the Diamondback
Systems to engage and sand the wall. Diseased tissue provides
resistance and is able to generate an opposing force that allows
the Diamondback Systems 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 systems operate 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 systems allow the user to choose between
three rotational speeds.
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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. The Diamondback 360°
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 Predator 360° crown is
available in the solid configuration and is constructed to allow
the crown to engage and treat the lesion more rapidly when
shorter procedure times are desired. Both the Diamondback
360° and Predator 360° crowns are available in
multiple sizes, including 1.25, 1.50, 1.75, 2.00 and 2.25
millimeter diameters. For both devices, the catheter length is
135 centimeters, which addresses procedural approach and target
lesion locations both above and below the knee.
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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 Systems as platforms that can be used to
develop additional products by adjusting one or more of the
speed, crown and shaft variables.
Applications
The Diamondback Systems 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 Systems are effective in both diffuse
and calcified vessels. This was demonstrated in the OASIS trial,
where 94.5% of lesions treated with the Diamondback 360°
were behind or 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 products are also being used to treat lesions
above the knee. The Millennium Research Group estimates that
there will be
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approximately 258,600 endovascular procedures to treat
above-the-knee
PAD in 2011 and that there will be approximately 71,220
endovascular procedures to treat
below-the-knee
PAD in 2011.
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 agreed to accept the
data from the India trial to support an IDE submission. The FDA
granted unconditional approval in April 2010 to begin the ORBIT
II coronary study in the United States. The pivotal trial will
initially enroll up to 100 patients at as many as 50
U.S. sites, with the potential to enroll up to
429 patients.
Clinical
Trials and Studies for Our Products
CSI is committed to providing relevant clinical evidence to
allow physicians to select and utilize the best treatment
options for their patients. We have conducted four clinical
trials to demonstrate the safety and efficacy of the Diamondback
360° in treating PAD, enrolling a total of
935 patients in our PAD I and PAD II pilot trials, our
pivotal OASIS trial, and our recently completed CONFIRM
DIAMONDBACK Post-Market Registry. We have 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
completed enrollment in two post-market, randomized feasibility
studies to further differentiate the performance of the
Diamondback 360° from conventional balloon angioplasty.
Last, we are currently enrolling up to 1,200 patients in
our CONFIRM PREDATOR Post-Market Registry.
The common metrics used to evaluate the efficacy of plaque
modification and 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. PAD I also 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 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.
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In the OASIS trial, 94.5% of lesions treated were behind or
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 than 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.
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
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 May 2010, enrollment was completed in the COMPLIANCE
360° clinical trial, the first of two PAD post-market
studies we initiated in calendar 2009. This prospective,
randomized, multi-center study evaluates the clinical benefits
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. Fifty patients were
enrolled at nine U.S. medical centers. The study is based
on a six-month clinical endpoint; results will be reported
subsequent to completion of six-month
follow-up
and data analysis.
In April 2010, enrollment was completed in the CALCIUM
360o
study, a prospective, randomized, multi-center study, which
compares 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. Fifty patients were enrolled at eight
U.S. medical centers. Acute clinical results are being
analyzed, and the first report of results
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occurred at the Transcatheter Cardiovascular Therapeutics
Meeting in September 2010 in Washington, DC. This study will
follow patients out to 12 months and results will be
reported at six and 12 month intervals.
CONFIRM
Post-Market Clinical Study Series
CSI is conducting the CONFIRM Post-Market Clinical Study Series,
which will further evaluate acute, long-term, and economic
parameters related to the use of the Diamondback Systems. The
CONFIRM I Registry currently consists of two arms: CONFIRM
DIAMONDBACK and CONFIRM PREDATOR.
Enrollment of 728 patients in the CONFIRM DIAMONDBACK
Post-Market Registry was completed in March 2010. In this
prospective registry, 1,138 lesions were treated by 84
investigators at 57 institutions with the Diamondback 360°.
Patient characteristics were as follows: 81.6% were smokers,
60.0% were diabetic, and 89.7% had hypertension. Lesions treated
were above the knee (46.5%), behind the knee (17.5%), and below
the knee (36.0%). Lesions were long and calcified. Lesions were
treated with the Diamondback 360° followed by low pressure
balloon angioplasty, if desired. An average residual stenosis of
10.5% was achieved following treatment, which is consistent with
that achieved in PAD I, PAD II, and OASIS. Bail-out
stenting, or stenting required due to tears in the vessel wall,
occurred in 2.2% of lesions, which is also consistent with the
2.5% reported in OASIS. This is lower than the 35 to 40%
bail-out stent rate reported in the literature for patients
treated with high pressure balloon angioplasty alone in this
type of challenging patient population. Final results were
reported at the Transcatheter Cardiovascular Therapeutics
Meeting in September 2010 in Washington, DC.
Enrollment of up to 1,200 patients in the prospective
CONFIRM PREDATOR Post-Market Registry commenced in August 2010.
CONFIRM PREDATOR will evaluate clinical performance of the
Predator 360°. Consecutive patients will be enrolled at up
to 200 sites in the United States. Data on acute clinical
performance and short-term economic parameters will be collected
during this study. We anticipate enrollment will be complete by
about March 31, 2010.
Data from CONFIRM I will be used to design future studies in the
CONFIRM series to further evaluate long-term durability and
economic parameters associated with use of the Diamondback
Systems.
Sales and
Marketing
We market and sell the Diamondback Systems through a direct
sales force in the United States. 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 Systems;
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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
Our research and development efforts are focused in the
development of products to penetrate our three key target
markets:
below-the-knee,
above-the-knee
and coronary vessels. Research and development expenses for
fiscal 2010, fiscal 2009 and fiscal 2008 were
$10.3 million, $14.7 million and $16.1 million,
respectively.
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Manufacturing
We use internally-manufactured and externally-sourced components
to manufacture the Diamondback Systems. 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 principal manufacturing facility
in Minnesota allows for finished goods of approximately 8,000
devices 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.
Our Pearland, Texas facility is 46,000 square feet, and
includes a custom-built clean room and production space for
future expansion of value-add processes, including machining and
electronics assembly. The facility, when it becomes fully
staffed and equipped, will have the capacity to produce
approximately 75,000 units per shift annually. This
facility has finished goods storage capacity of greater than
15,000 units of the Diamondback Systems and other accessory
products.
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 2012.
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. A
third recall, initiated in 2009 and completed in 2010, involved
the ViperSheath, which is owned and manufactured by Thomas
Medical Products. As the distributor for the ViperSheath, we
were required to recall all unused units from our customers and
return them to Thomas Medical Products. All of the unused
ViperSheaths were captured and subsequently destroyed by Thomas
Medical Products, with FDA observance.
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 Systems. 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
Systems 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.
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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 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.
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 Systems compete 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, Covidien,
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 Systems
compete 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 July 31, 2010, we held 26 issued U.S. patents
and have 43 U.S. patent applications pending, as well as 59
issued or granted foreign patents and 51 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 Systems. 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 nine registered
U.S. trademarks, five registered marks in Europe, and have
three U.S. and five Canadian 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
13
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.
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 Systems.
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.
14
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
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. We were granted 510(k) clearance of the Predator 360°
in March 2009.
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.
15
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. The FDA granted unconditional
approval in April 2010 to begin the ORBIT II coronary study in
the United States. The pivotal trial will initially enroll up to
100 patients at as many as 50 U.S. sites, with the
potential to enroll up to 429 patients.
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. 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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16
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.
17
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.
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.
18
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.
Employees
As of June 30, 2010, we had 287 employees, 246 of
which are
full-time
employees, including 42 employees in manufacturing,
146 employees in sales, 11 employees in marketing,
five employees in clinical, 21 employees in general and
administrative, and 21 employees in research and
development. 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 may 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 $23.9 million in fiscal 2010,
$31.9 million in fiscal 2009, and $39.2 million in
fiscal 2008. As of June 30, 2010, we had an accumulated
deficit of approximately $151.3 million. We commenced
commercial sales of the Diamondback 360° 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
Systems and additional expenses as we seek to develop and
commercialize future versions of the Diamondback Systems 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, our operating losses could continue.
We may
be unable to sustain our revenue growth.
Our revenue has grown in each of the two complete fiscal years
since we commenced commercial sales of the Diamondback 360°
in September 2007. Our ability to continue to increase our
revenues in future periods will depend on our ability to
increase sales of the Diamondback Systems and new and improved
products we introduce, including growing our customer base and
reorders of the Diamondback Systems from those customers. We may
not be able to generate, sustain or increase revenues on a
quarterly or annual basis. If we cannot achieve or sustain
revenue growth for an extended period, our financial results
will be adversely affected and our stock price may decline.
Economic
conditions may adversely affect our business.
Adverse worldwide economic conditions may have adverse
implications on our business. For example, our customers
ability to borrow money from their existing lenders or to obtain
credit from other sources to fund operations may be impaired
resulting in a decrease in sales. Although we review our
customers financial condition and ability to pay on an
ongoing basis and we maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments and such losses have
historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to
experience the same loss rates that we have in the past. A
significant change in the liquidity or financial condition of
our customers could cause unfavorable trends in our receivable
collections and additional allowances may be required, which
could adversely affect our operating results. Adverse worldwide
economic conditions may also adversely impact our
suppliers ability to provide us with materials and
components, which could adversely affect our business and
operating results. In addition, uncertainty about current global
economic conditions could increase the volatility of our stock
price.
19
We
have a limited history selling the Diamondback Systems, which
are currently our primary products, and our inability to market
these products successfully would have a material adverse effect
on our business and financial condition.
Although we also sell a variety of ancillary products, the
Diamondback Systems are our primary products and we are largely
dependent on them. We have limited experience in the commercial
manufacture and marketing of these products. Our ability to
generate revenue will depend upon our ability to further
successfully commercialize the Diamondback Systems and to
develop, manufacture and receive required regulatory clearances
and approvals and patient reimbursement for treatment with
future versions of the Diamondback Systems. As we continue to
commercialize the Diamondback Systems, we may 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 Systems 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. If we fail to
successfully develop, commercialize and market the Diamondback
Systems or any future versions of these products that we
develop, our business will be materially adversely affected.
The
Diamondback Systems and future products may never achieve broad
market acceptance.
The Diamondback Systems 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;
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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 Systems 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 Systems
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 Systems 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.
20
Our
future growth depends on physician adoption of the Diamondback
Systems, 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
referring physicians are not educated about PAD in general and
the existence of the Diamondback Systems in particular, they may
not refer patients to interventional cardiologists, vascular
surgeons or interventional radiologists for the procedure using
the Diamondback Systems, 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 Systems, which could affect the acceptance
of our products 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 Systems 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
provided to patients. We can give no assurance that these
third-party payors will provide adequate reimbursement for use
of the Diamondback Systems to permit hospitals and doctors to
consider the products cost-effective for patients requiring PAD
treatment, or that current reimbursement levels for the
Diamondback Systems 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 products 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 Systems. In order to
position the Diamondback Systems for acceptance by third-party
payors, we may have to agree to lower prices than we might
otherwise charge.
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. It is uncertain whether the
Diamondback Systems 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
Systems is limited or not available, the acceptance of the
Diamondback Systems and, consequently, our business will be
substantially harmed.
Healthcare
reform legislation could adversely affect our revenue and
financial condition.
There have been and continue to be proposals by the federal
government, state governments, regulators and third-party payors
to control healthcare costs and, more generally, to reform the
U.S. healthcare system. Certain of these proposals could
limit the prices we are able to charge for our products or the
amounts of reimbursement available for our products and could
limit the acceptance and availability of our products. The
adoption of some or all of these proposals, including the recent
federal legislation, could adversely affect our revenue and
financial condition.
21
On March 23, 2010, President Obama signed the Patient
Protection and Affordable Care Act, or the Patient Act. The
impact on the healthcare industry of the Patient Act is
extensive and includes, among other things, having the federal
government assume a larger role in the healthcare system,
expanding healthcare coverage of United States citizens and
mandating basic healthcare benefits. Elements of this
legislation, such as comparative effectiveness research, an
independent payment advisory board, payment system reforms,
including shared savings pilots and other provisions, could
meaningfully change the way healthcare is developed and
delivered, and may materially impact numerous aspects of our
business. These changes may impact reimbursement for health care
services, including reimbursement to hospitals and physicians.
States may also enact further legislation that impacts Medicaid
payments to hospitals and physicians. In addition, the Centers
for Medicare & Medicaid Services, the Federal agency
responsible for administering the Medicare program, may
establish new payment levels for hospitals and physicians in
line with the new legislation, which could increase or decrease
payment to such entities. The healthcare reform legislation and
any future legislative and regulatory initiatives could
adversely affect demand for our products and have a material
adverse impact on our revenues. Any healthcare reforms enacted
in the future may, like the Patient Act, be phased in over a
number of years but, if enacted, could reduce our revenues,
increase our costs, or require us to revise the ways in which we
conduct business or put us at risk for loss of business. Our
results of operations, our financial position and cash flows
could be materially adversely affected by changes under the
Patient Act and changes under any federal or state legislation
adopted in the future.
The Patient Act also imposes significant new taxes on medical
device makers. These taxes will result in a significant increase
in the tax burden on our industry, which could have a material,
negative impact on our results of operations and our cash flows.
As rules and regulations are developed under the new law, there
may be exemptions created for certain types or classes of
products. We may find, however, that there are no exemptions
applicable to our products. This tax will impact our cost of
doing business and may ultimately lower our profit margins.
Additionally, the increased cost of business caused by this tax
may hinder our ability to spend money on research and
development of our products. We may be required to increase the
prices of our devices to offset the additional cost of the tax.
Medicaid and health insurance providers may place a cap on the
reimbursement for purchases of our devices that will not allow
us to offset the cost of the tax. We may ultimately lose
customers who are unwilling or unable to pay the increased
costs, which could adversely affect our business and operating
results.
We
have limited data and experience regarding the safety and
efficacy of the Diamondback Systems. 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 these
products.
Our success depends on the acceptance of the Diamondback Systems
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 Systems in a
large number of patients are not known and the results of
short-term clinical use of the Diamondback Systems do not
necessarily predict long-term clinical benefit or reveal
long-term adverse effects. If the results obtained from any
future clinical trials or clinical or commercial experience
indicate that the Diamondback Systems are not as safe or
effective as other treatment options or as current short-term
data would suggest, adoption of these products 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 Systems 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
Systems.
We
face significant competition and may be unable to sell the
Diamondback Systems 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, Covidien, Spectranetics,
22
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 Systems 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 Systems 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 Systems or
will need to depend on third parties to manufacture the
products.
We have limited experience in commercially manufacturing the
Diamondback Systems and have no experience manufacturing these
products 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 Systems or future products in
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 Systems 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 may 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.
23
The forecasts of demand we use to determine order quantities and
lead times for components purchased from outside suppliers may
be incorrect. 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 Systems 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
Systems. 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, 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;
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price fluctuations;
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our suppliers may make errors in manufacturing components;
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our suppliers may discontinue production of components;
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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;
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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.
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Other than existing, unfulfilled purchase orders or obligations
we have met, 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. If we lost one of these suppliers and were unable
to obtain an
24
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.
Consolidation
in the healthcare industry could lead to demands for price
concessions or the exclusion of some suppliers from our market
segment, which could have an adverse effect on our business,
financial condition or results of operations.
The cost of healthcare has risen significantly over the past
decade and numerous initiatives and reforms by legislators,
regulators and third-party payors to curb these costs have
resulted in a consolidation trend in the healthcare industry.
This in turn has resulted in greater pricing pressures and the
exclusion of certain suppliers from important market segments as
group purchasing organizations, independent delivery networks
and large single accounts continue to consolidate purchasing
decisions for some of our hospital customers. We expect that
market demand, government regulation, third-party reimbursement
policies, government contracting requirements, and societal
pressures will continue to change the worldwide healthcare
industry, resulting in further business consolidations and
alliances among our customers and competitors, which may reduce
competition, exert downward pressure on the prices of our
products and adversely impact our business, financial condition
or results of operations.
We may
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 may 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 full-time
employees on January 1, 2007 to 157
full-time employees on June 30, 2010, and we expect to
continue to grow our sales and marketing force in the future. We
also expect to significantly expand our manufacturing operations
to meet anticipated growth in demand for our products. Rapid
expansion in personnel may result in less experienced people
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 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 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 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.
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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 Systems;
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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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Disruptions in the global financial markets, including the
bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the
United States and other governments and the related liquidity
crisis, considerably disrupted the credit and capital markets at
the end of 2008 and have not fully recovered since then. To
date, our loan arrangements with Silicon Valley Bank and
Partners for Growth remain available to us. In the event we need
or desire additional financing, we may be unable to obtain it by
borrowing money in the credit markets or raising money in the
capital markets.
We
face a risk of non-compliance with the financial covenants in
our loan and security agreements with Silicon Valley Bank and
Partners for Growth.
We are party to loan and security agreements with Silicon Valley
Bank and Partners for Growth. These agreements require us to
maintain, among other things, a monthly specified liquidity
ratio and a monthly adjusted earnings before interest, taxes,
depreciation and amortization, or EBITDA, level. The agreements
contain customary events of default, including, among others,
the failure to comply with certain covenants or other
agreements. Upon the occurrence and during the continuation of
an event of default, amounts due under the agreements may be
accelerated by Silicon Valley Bank or Partners for Growth. We
were not in compliance with some of the financial covenants
contained in our prior loan agreement with Silicon Valley Bank
during certain months in the year ended June 30, 2010,
which Silicon Valley Bank waived and were subsequently changed
in our amended and restated loan and security agreement with
Silicon Valley Bank. If we are unable to meet the financial or
other covenants under the current loan and security agreements
or negotiate future waivers or amendments of such covenants,
events of default could occur under the agreements. Upon the
occurrence and during the continuance of an event of default
under the agreements, Silicon Valley Bank and Partners for
Growth have available a range of remedies customary in these
circumstances, including declaring all outstanding debt,
together with accrued and unpaid interest thereon, to be due and
payable, foreclosing on the assets securing the agreements
and/or
ceasing to provide additional loans, which could have a material
adverse effect on us.
The
restrictive covenants in our loan and security agreements could
limit our ability to conduct our business and respond to
changing economic and business conditions and may place us at a
competitive disadvantage relative to other companies that are
subject to fewer restrictions.
Our loan and security agreements with Silicon Valley Bank and
Partners for Growth limit our ability to, among other things:
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transfer all or any part of our business or properties;
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permit or suffer a change in control;
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merge or consolidate, or acquire any entity;
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incur additional indebtedness or liens with respect to any of
their properties;
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pay dividends or make any other distribution on or purchase of,
any of our capital stock;
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make investments in other companies; or
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engage in related party transactions.
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The restrictive covenants under these agreements could limit our
ability to obtain future financing, withstand a future downturn
in our business or the economy in general or otherwise conduct
necessary corporate activities. The financial and restrictive
covenants contained in the agreements could also adversely
affect our ability to respond to changing economic and business
conditions and place us at a competitive disadvantage relative
to other companies that may be subject to fewer restrictions.
Transactions that we may view as important opportunities, such
as acquisitions, may be subject to the consent of Silicon Valley
Bank and Partners for Growth, which consents may be withheld or
granted subject to conditions specified at the time that may
affect the attractiveness or viability of the transaction.
We do
not intend to market the Diamondback Systems internationally in
the near future, which will limit our potential revenue from
these products.
While we plan to continue to evaluate the financial viability of
marketing the Diamondback Systems internationally, we currently
do not intend to market the Diamondback Systems 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 these products 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 Systems or other
products internationally.
We are
dependent on our senior management team and highly skilled
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, 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
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.
27
Risks
Related to Government Regulation
Our
ability to market the Diamondback Systems 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 Systems received FDA 510(k) clearances 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 Systems beyond this use and could affect our
growth. While off-label uses of medical devices are common and
the FDA does not regulate 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 Systems for off-label uses. In
addition, we cannot make comparative claims regarding the use of
the Diamondback Systems 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 Systems 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. We recently
submitted an investigational device exemption, or IDE,
application 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, which application
the FDA approved. Clinical trials are complex, expensive, time
consuming, uncertain and subject to substantial and
unanticipated delays. 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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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.
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We may
become subject to regulatory actions if we are found to have
promoted the Diamondback Systems for unapproved
uses.
If the FDA determines that our promotional materials, training
or other activities constitute promotion of our products for
unapproved uses, 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 products 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 Systems 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.
In addition, a third recall, initiated in 2009 and completed in
2010, involved the ViperSheath, which is owned and manufactured
by Thomas Medical Products. As the distributor for the
ViperSheath, we were required to recall all unused units from
our customers and return them to Thomas Medical Products. Any
additional recalls of our products or products that we
distribute 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 Systems 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 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. We are also responsible for the quality of
components received by our suppliers. Failure 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
29
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 Systems 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 Systems may
result in injuries that lead to product liability suits, which
could be costly to our business. The Diamondback Systems are 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 Systems
for off-label applications. The off-label use of the Diamondback
Systems may be more likely to result in complications that have
serious consequences, including, in certain circumstances, in
death.
We may
face risks related to product liability claims, which could
exceed the limits of available insurance coverage.
If the Diamondback Systems are defectively designed,
manufactured or labeled, contain defective components or are
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 products 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.
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.
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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 for non-compliance.
We have entered into consulting agreements with physicians,
including some who may make referrals to us or order our
products. 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 products 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. 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.
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. 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. We cannot ensure that our corporate
compliance program is or will be in compliance with all
potentially applicable regulations.
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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. Our testing, or the
subsequent testing by our independent registered public
accounting firm, when and if 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 these requirements 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 July 31, 2010, we
had a portfolio of 26 issued U.S. patents and 59 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
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
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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 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
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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 Systems;
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volume and timing of orders for the Diamondback Systems 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.
If
equity research analysts do not publish research or reports
about our business or if they issue unfavorable research or
downgrade our 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 our company, we could lose
visibility in the market, which in turn could cause our stock
price to decline.
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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 our
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 our 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
that began April 1, 2010. We have leased this facility
through March 2020. This facility will primarily accommodate
additional manufacturing activities.
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We believe that our current premises 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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We are a 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 us and former employees of
FoxHollow currently employed by us, which complaint was
subsequently amended. In July 2010, ev3 Inc. was acquired and
became an indirect wholly-owned subsidiary of Covidien plc.
The complaint, as amended, 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
confidential information and 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 that we aided
and abetted FoxHollow employees breach their duty of
loyalty, 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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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.
We are defending this litigation vigorously, and believe that
the outcome of this litigation will not have a materially
adverse effect on our business, operations, cash flows or
financial condition. We have not recognized any expense related
to the settlement of this matter as we believe an adverse
outcome of this action is not probable. 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 managements time and efforts from
the operation of business.
Executive
Officers of the Registrant.
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
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Scott Kraus
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Vice President of Sales
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Paul Koehn
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Vice President of Manufacturing
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Robert J. Thatcher
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Executive Vice President
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Paul Tyska
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Vice President of Business Development
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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
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 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
38
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.
PART II
|
|
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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|
|
|
|
|
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Common Stock
|
|
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High
|
|
Low
|
|
Fiscal Year Ended June 30, 2010
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
11.15
|
|
|
$
|
6.77
|
|
Second quarter
|
|
|
7.39
|
|
|
|
3.78
|
|
Third quarter
|
|
|
5.65
|
|
|
|
4.10
|
|
Fourth quarter
|
|
|
5.53
|
|
|
|
4.37
|
|
Fiscal Year Ended June 30, 2009
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.30
|
|
|
$
|
11.60
|
|
Second quarter
|
|
|
12.70
|
|
|
|
2.80
|
|
Third quarter (through February 25, 2009)
|
|
|
10.30
|
|
|
|
6.60
|
|
Third quarter (from February 26, 2009 through
March 31, 2009)
|
|
|
10.15
|
|
|
|
4.78
|
|
Fourth quarter
|
|
|
7.97
|
|
|
|
5.60
|
|
The number of record holders of our common stock on
September 23, 2010 was approximately 518. No cash dividends
have been previously paid on our common stock and none are
anticipated during fiscal year 2011. We are restricted from
paying dividends under our Loan and Security Agreements with
Silicon Valley Bank and Partners for Growth.
Recent
Sales of Unregistered Securities
During the fiscal year ended June 30, 2010, we issued and
sold 879 unregistered shares of our common stock pursuant to
warrant exercises with exercise price of $8.83 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.
As reported in our
Form 8-K
filed with the SEC on April 20, 2010, we issued a warrant
to Partners for Growth III, L.P. (PFG) on
April 14, 2010, which allows PFG to purchase
147,330 shares of our common stock at a price per share of
$5.43. The Warrant was issued in a private transaction 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.
39
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.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
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. 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 primary products, the Diamondback 360° PAD
System (Diamondback 360°) and the Diamondback Predator
360° (Predator 360°), are catheter-based platforms
capable of treating a broad range of plaque types in leg
arteries both above and below the knee and address many of the
limitations associated with existing treatment alternatives. We
also intend to pursue approval of our products for coronary use.
We refer to the Diamondback 360° and the Predator 360°
collectively in this report as the Diamondback
Systems.
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 (the Merger Agreement).
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. Replidyne was a biopharmaceutical company focused on
discovering, developing, in-licensing and commercializing
anti-infective products.
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 adjusted. 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.
CSI 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 Systems.
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 commercial introduction of the Diamondback
360° in the United States in
40
September 2007. We were granted 510(k) clearance of the Predator
360° in March 2009. We market the Diamondback Systems in
the United States through a direct sales force and expend
significant capital on our sales and marketing efforts to expand
our customer base and utilization per customer. We assemble at
our facilities the single-use catheter used in the Diamondback
Systems 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.
As of June 30, 2010, we had an accumulated deficit of
$151.3 million. We expect our losses to continue but
generally decline as revenue grows from continued
commercialization activities, development of additional product
enhancements, accumulation of clinical data on our products, and
further regulatory submissions. To date, we have financed our
operations primarily through the private placement of equity
securities and completion of the merger.
FINANCIAL
OVERVIEW
Revenues. We derive substantially all of our
revenues from the sale of Diamondback Systems and other
ancillary products. The Diamondback Systems each use 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,
ViperTracktm
Radiopaque Tape, and
ViperCaddytm
Guide Wire Management. We also have ongoing agreements with both
Medtronic, Inc. and Asahi-Intecc, Ltd. In April 2009, we signed
a sales agency agreement with Invatec, Inc. to distribute the
Invatec balloon catheter line. Medtronic, Inc. recently acquired
Invatec, Inc, and we continue to market these balloons under a
new agreement with Medtronic, Inc. that expires on
September 30, 2010 unless renewed. In August 2009, we
signed an exclusive distribution agreement with Asahi-Intecc,
Ltd. to market its peripheral guide wire line in the United
States.
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,
and professional fees.
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, patent expenses, 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 reflected 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) was
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.
41
Gain (Impairment) on Investments. Gain
(impairment) on investments reflects the change in the fair
value of investments.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock. Decretion (accretion) of redeemable
convertible preferred stock reflected 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) was 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. At
June 30, 2010, we had federal net operating loss
carryforwards of $109.1 million. These net operating loss
carryforwards are available to offset taxable income through
2030 and will begin to expire in 2011. We also had various state
net operating loss carryforwards to offset future state taxable
income. These net operating loss carryforwards typically will
have the same expirations as our federal net operating loss
carryforwards.
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 FASB guidance that 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 fair 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.
42
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.
Stock-Based Compensation. We 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. 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:
|
|
|
|
|
our common stocks volatility;
|
|
|
|
the length of our options lives, which is based on future
exercises and cancellations;
|
|
|
|
the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
|
|
|
|
the risk-free rate of return; and
|
|
|
|
future dividends.
|
Prior to the consummation of the merger, we used comparable
public company data to determine volatility for option grants.
Expected volatility is now based on the historical volatility of
our stock. 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
43
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. Prior to the merger, we
recorded 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. We recorded changes in the 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. In accordance with
FASB guidance, the freestanding warrant that was related to our
redeemable convertible preferred stock was classified as a
liability on the balance sheet 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).
Legal Proceedings. In accordance with FASB
guidance, we record a liability in our consolidated financial
statements related to legal proceedings when a loss is known or
considered probable and the amount can be reasonably estimated.
If the reasonable estimate of a known or probable loss is a
range, and no amount within the range is a better estimate than
any other, the minimum amount of the range is accrued. If a loss
is possible, but not known or probable, and can be reasonably
estimated, the estimated loss or range of loss is disclosed in
the notes to the consolidated financial statements. In most
cases, significant judgment is required to estimate the amount
and timing of a loss to be recorded. Our significant legal
proceedings are discussed in Note 12 to the consolidated
financial statements. While it is not possible to predict the
outcome for the matter discussed in Note 12 to the
consolidated financial statements, we believe 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.
44
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,
|
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Revenues
|
|
$
|
64,829
|
|
|
$
|
56,461
|
|
|
|
14.8
|
%
|
|
$
|
56,461
|
|
|
$
|
22,177
|
|
|
|
154.6
|
%
|
Cost of goods sold
|
|
|
15,003
|
|
|
|
16,194
|
|
|
|
(7.4
|
)
|
|
|
16,194
|
|
|
|
8,927
|
|
|
|
81.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,826
|
|
|
|
40,267
|
|
|
|
23.7
|
|
|
|
40,267
|
|
|
|
13,250
|
|
|
|
203.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
62,447
|
|
|
|
59,822
|
|
|
|
4.4
|
|
|
|
59,822
|
|
|
|
35,326
|
|
|
|
69.3
|
|
Research and development
|
|
|
10,278
|
|
|
|
14,678
|
|
|
|
(30.0
|
)
|
|
|
14,678
|
|
|
|
16,068
|
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
72,725
|
|
|
|
74,500
|
|
|
|
(2.4
|
)
|
|
|
74,500
|
|
|
|
51,394
|
|
|
|
45.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(22,899
|
)
|
|
|
(34,233
|
)
|
|
|
(33.1
|
)
|
|
|
(34,233
|
)
|
|
|
(38,144
|
)
|
|
|
(10.3
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,435
|
)
|
|
|
(2,350
|
)
|
|
|
(38.9
|
)
|
|
|
(2,350
|
)
|
|
|
(7
|
)
|
|
|
33,471.4
|
|
Interest income
|
|
|
402
|
|
|
|
3,380
|
|
|
|
(88.1
|
)
|
|
|
3,380
|
|
|
|
1,167
|
|
|
|
189.6
|
|
Decretion (accretion) of redeemable convertible preferred stock
warrants
|
|
|
|
|
|
|
2,991
|
|
|
|
|
|
|
|
2,991
|
|
|
|
(916
|
)
|
|
|
426.5
|
|
Gain (impairment) on investments
|
|
|
150
|
|
|
|
(1,683
|
)
|
|
|
(108.9
|
)
|
|
|
(1,683
|
)
|
|
|
(1,267
|
)
|
|
|
32.8
|
|
Other
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,005
|
)
|
|
|
2,338
|
|
|
|
(143.0
|
)
|
|
|
2,338
|
|
|
|
(1,023
|
)
|
|
|
328.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(23,904
|
)
|
|
|
(31,895
|
)
|
|
|
(25.0
|
)
|
|
|
(31,895
|
)
|
|
|
(39,167
|
)
|
|
|
(18.6
|
)
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
|
|
|
|
22,781
|
|
|
|
|
|
|
|
22,781
|
|
|
|
(19,422
|
)
|
|
|
217.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(23,904
|
)
|
|
$
|
(9,114
|
)
|
|
|
162.3
|
%
|
|
$
|
(9,114
|
)
|
|
$
|
(58,589
|
)
|
|
|
(84.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Year Ended June 30, 2010 with Fiscal Year Ended
June 30, 2009
Revenues. Revenues increased by
$8.4 million, or 14.8%, from $56.5 million for the
year ended June 30, 2009 to $64.8 million for the year
ended June 30, 2010. This increase was attributable to a
$6.1 million, or 11.8%, increase in sales of Diamondback
Systems and a $2.3 million, or 45.0%, increase in sales of
supplemental and other revenue during the year ended
June 30, 2010 compared to the year ended June 30,
2009. Supplemental products include our Viper product line and
distribution partner products, some of which have been
introduced over the last year. Currently, all of our revenues
are in the United States; however, we may potentially sell
internationally in the future. We expect our revenue to increase
as we continue to increase the number of physicians using the
devices, increase the usage per physician, continue to focus on
physician education programs, introduce new and improved
products, and generate clinical data.
Cost of Goods Sold. Cost of goods sold
decreased by $1.2 million, or 7.4%, from $16.2 million
for the year ended June 30, 2009 to $15.0 million for
the year ended June 30, 2010. This decrease in cost of
goods sold resulted in an increase to gross margin of six
percentage points, from 71% for the year ended June 30,
2009 to 77% for the year ended June 30, 2010. These amounts
represent the cost of materials, labor and overhead for
single-use catheters, guidewires, control units, and other
supplemental products. The increase in gross margin from the
year ended June 30, 2009 to June 30, 2010 was
primarily due to manufacturing efficiencies, product cost
reductions, and a favorable product mix resulting in a reduction
in shipments of lower margin control units. Cost of goods sold
for
45
the years ended June 30, 2010 and 2009 includes $548,000
and $475,000, respectively, for stock-based compensation. We
expect that gross margin will stay fairly consistent in the
future as sales volumes increase, although quarterly
fluctuations could occur based on production volumes, timing of
new product introductions, sales mix, pricing changes, or other
unanticipated circumstances.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by $2.6 million, or 4.4%, from
$59.8 million for the year ended June 30, 2009 to
$62.4 million for the year ended June 30, 2010. The
primary reasons for the increase included increased sales and
marketing expenses of $4.8 million from building our sales
organization along with additional education programs, partially
offset by reduced consulting and professional services,
primarily from a $1.7 million write-off of previously
capitalized initial public offering costs in fiscal 2009.
Selling, general, and administrative expenses for the years
ended June 30, 2010 and 2009 includes $7.3 million and
$5.7 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, but at a rate less than revenue
growth.
Research and Development Expenses. Research
and development expenses decreased by $4.4 million, or
30.0%, from $14.7 million for the year ended June 30,
2009 to $10.3 million for the year ended June 30,
2010. Research and development expenses relate to specific
projects to improve our product or expand into new markets, such
as the development of electric versions of the Diamondback
Systems, shaft designs, crown designs, and PAD and coronary
clinical trials. The reduction in these expenses related to the
decreased numbers and sizes of PAD development projects in
fiscal 2010, as well as the timing of those projects. Research
and development expenses for the year ended June 30, 2010
and 2009 includes $1.3 million and $612,000, 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 generally expect to incur research and
development expenses at or above amounts incurred for the year
ended June 30, 2010, but lower as a percentage of revenue.
Fluctuations could occur based on the number of projects and
studies and the timing of expenditures.
Interest Expense. Interest expense decreased
by $1.0 million, from $2.4 million for the year ended
June 30, 2009 to $1.4 million for the year ended
June 30, 2010. The decrease was primarily due to
significantly reduced amortization of the debt discount during
the year ended June 30, 2010 from the refinancing of debt
in April 2009.
Interest Income. Interest income decreased by
$3.0 million, from $3.4 million for the year ended
June 30, 2009 to $402,000 for the year ended June 30,
2010. The decrease was due to $2.8 million recorded during
the year ended June 30, 2009 related to accepting the UBS
offer to repurchase our auction rate securities, establishing an
auction rate securities put option agreement.
Decretion of Redeemable Convertible Preferred Stock
Warrants. Decretion of redeemable convertible
preferred stock warrants reflects the change in estimated fair
value of preferred stock warrants at the balance sheet dates.
Decretion of redeemable convertible preferred stock warrants for
the year ended June 30, 2009 was $3.0 million. There
was no decretion of redeemable convertible preferred stock
warrants during the year ended June 30, 2010 because all
preferred stock was converted to common stock in conjunction
with the merger.
Gain (Impairment) on Investments. Gain
(impairment) on investments was $150,000 and
($1.7) million for the years ended June 30, 2010 and
2009, respectively. Impairment on investments was due to the
change in the fair value of auction rate securities investments
in both periods. On June 30, 2010, all the auction rate
securities had been redeemed by the issuers at par value or
repurchased by UBS at par value pursuant to an agreement reached
with UBS in 2008. Due to the redemption and repurchase, there
will be no gain (impairment) on investments related to these
securities in future periods.
Decretion of Redeemable Convertible Preferred
Stock. Decretion of redeemable convertible
preferred stock reflected the change in estimated fair value of
preferred stock at the balance sheet dates. Decretion of
redeemable convertible preferred stock for the year ended
June 30, 2009 was $22.8 million. There was no
decretion of redeemable convertible preferred stock during the
year ended June 30, 2010 because all preferred stock was
converted to common stock in conjunction with the merger.
46
Net Loss Available to Common Stockholders. Net
loss available to common stockholders for year ended
June 30, 2010 was $23.9 million, or ($1.62) per basic
and diluted share, compared to $9.1 million, or ($1.13) per
basic and diluted share for the year ended June 30, 2009.
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 Diamondback Systems during
the year ended June 30, 2009 compared to two quarters in
the year ended June 30, 2008.
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 supplemental products. The
increase in gross margin from the year ended June 30, 2008
to June 30, 2009 is primarily due to increased volume and
manufacturing efficiencies. Cost of goods sold for the years
ended June 30, 2009 and 2008 includes $475,000 and
$232,000, respectively, for stock-based compensation.
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 organization, 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 organization, 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.
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 timing of coronary clinical trial costs,
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.
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 amortization of the debt
discount of $1.2 million and interest on outstanding debt
facilities of $1.1 million. Interest on debt facilities was
primarily the result of entering into a loan and security
agreement with Silicon Valley Bank in September 2008.
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 no further decretion
(accretion) has been recorded for these warrants since the
merger.
47
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 auction rate securities 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 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
no further decretion (accretion) has been recorded for these
shares since the merger.
Net Loss Available to Common Stockholders. Net
loss available to common stockholders for year ended
June 30, 2009 was $9.1 million, or ($1.13) per basic
and diluted share, compared to $58.6 million, or ($13.25)
per basic and diluted share for the year ended June 30,
2008.
NON-GAAP FINANCIAL
INFORMATION
To supplement our consolidated condensed financial statements
prepared in accordance with GAAP, our management uses a non-GAAP
financial measure referred to as Adjusted EBITDA.
The following table sets forth, for the periods indicated, a
reconciliation of Adjusted EBITDA to the most comparable
U.S. GAAP measure expressed as dollar amounts (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Loss from operations
|
|
$
|
(22,899
|
)
|
|
$
|
(34,233
|
)
|
Add: Stock-based compensation
|
|
|
9,094
|
|
|
|
6,771
|
|
Add: Depreciation and amortization
|
|
|
599
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(13,206
|
)
|
|
$
|
(26,994
|
)
|
|
|
|
|
|
|
|
|
|
The improvement in Adjusted EBITDA of $13.8 million, or
51.1%, is primarily the result of improvement in the loss from
operations. The loss from operations was significantly impacted
by increases in revenue and gross margin, and a decrease in
operating expenses, as discussed above.
Adjusted EBITDA was also impacted by an increase in stock-based
compensation and depreciation and amortization. Stock-based
compensation increased $2.3 million, or 34.3%, from
$6.8 million for the year ended June 30, 2009 to
$9.1 million for the year ended June 30, 2010.
Stock-based compensation increased as a result of increased
stock grants from headcount growth and charges for extending the
terms of certain expired stock options. Depreciation and
amortization increased as a result of additional investment in
capital equipment.
Use
and Economic Substance of Non-GAAP Financial Measures Used
and Usefulness of Such
Non-GAAP
Financial Measures to Investors
We use Adjusted EBITDA as a supplemental measure of performance
and believe this measure facilitates operating performance
comparisons from period to period and company to company by
factoring out potential differences caused by depreciation and
amortization expense and non-cash charges such as stock-based
compensation. Our management uses Adjusted EBITDA to analyze the
underlying trends in our business, assess the performance of our
core operations, establish operational goals and forecasts that
are used to allocate resources and evaluate our performance
period over period and in relation to our competitors
operating results. Additionally, our management is partially
evaluated on the basis of Adjusted EBITDA when determining
achievement of their incentive compensation performance targets.
We believe that presenting Adjusted EBITDA provides investors
greater transparency to the information used by our management
for its financial and operational decision-making and allows
investors to see our results through the eyes of
management. We also believe that providing this information
better enables our investors to
48
understand our operating performance and evaluate the
methodology used by our management to evaluate and measure such
performance. Adjusted EBITDA is also used to measure performance
in our financial covenants as required by Silicon Valley Bank
and Partners for Growth.
The following is an explanation of each of the items that
management excluded from Adjusted EBITDA and the reasons for
excluding each of these individual items:
|
|
|
|
|
Stock-based compensation. We exclude
stock-based compensation expense from our non-GAAP financial
measures primarily because such expense, while constituting an
ongoing and recurring expense, is not an expense that requires
cash settlement. Our management also believes that excluding
this item from our non-GAAP results is useful to investors to
understand its impact on our operational performance, liquidity
and ability to make additional investments in the company, and
it allows for greater transparency to certain line items in our
financial statements.
|
|
|
|
Depreciation and amortization expense. We
exclude depreciation and amortization expense from our non-GAAP
financial measures primarily because such expenses, while
constituting ongoing and recurring expenses, are not expenses
that require cash settlement and are not used by our management
to assess the core profitability of our business operations. Our
management also believes that excluding these items from our
non-GAAP results is useful to investors to understand our
operational performance, liquidity and ability to make
additional investments in the company.
|
Material
Limitations Associated with the Use of Non-GAAP Financial
Measures and Manner in which We Compensate for these
Limitations
Non-GAAP financial measures have limitations as analytical tools
and should not be considered in isolation or as a substitute for
our financial results prepared in accordance with GAAP. Some of
the limitations associated with our use of these non-GAAP
financial measures are:
|
|
|
|
|
Items such as stock-based compensation do not directly affect
our cash flow position; however, such items reflect economic
costs to us and are not reflected in our Adjusted EBITDA and
therefore these non-GAAP measures do not reflect the full
economic effect of these items.
|
|
|
|
Non-GAAP financial measures are not based on any comprehensive
set of accounting rules or principles and therefore other
companies may calculate similarly titled non-GAAP financial
measures differently than we do, limiting the usefulness of
those measures for comparative purposes.
|
|
|
|
Our management exercises judgment in determining which types of
charges or other items should be excluded from the non-GAAP
financial measures we use.
|
We compensate for these limitations by relying primarily upon
our GAAP results and using non-GAAP financial measures only
supplementally.
LIQUIDITY
AND CAPITAL RESOURCES
We had cash and cash equivalents of $23.7 million and
$33.4 million at June 30, 2010 and 2009, respectively.
During the year ended June 30, 2010, net cash used in
operations amounted to $13.6 million. As of June 30,
2010, we had an accumulated deficit of $151.3 million. We
have historically funded our operating losses primarily from the
issuance of common and preferred stock, convertible promissory
notes, and debt.
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.
At June 30, 2009, we had trading investments with a fair
value of $20.0 million that consisted solely of 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. At June 30, 2009,
the par value of the auction rate securities totaled
$23.0 million. These securities were not liquid, as we had
an inability to sell the securities due to continued failed
auctions. We had previously obtained a margin loan from UBS Bank
USA, which was secured by
49
the $23.0 million par value of our auction rate securities.
The outstanding balance on this loan at June 30, 2009 was
$22.9 million. On June 30, 2010, all the auction rate
securities had been redeemed by the issuers at par value or
repurchased by UBS at par value pursuant to an agreement reached
with UBS in 2008. Proceeds from the redemptions and repurchase
were used to pay off the margin loan in full at June 30,
2010.
Loan
and Security Agreement with Silicon Valley Bank
On March 29, 2010, we entered into an amended and restated
loan and security agreement with Silicon Valley Bank. The
agreement includes a $10.0 million term loan and a
$15.0 million line of credit. The terms of each of these
loans are as follows:
|
|
|
|
|
The $10.0 million term loan has a fixed interest rate of
9.0% and a final payment amount equal to 1.0% 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 3.0% of the principal amount, upon
prepayment or the occurrence and continuance of an event of
default.
|
|
|
|
The $15.0 million line of credit has a two year maturity
and a floating interest rate equal to Silicon Valley Banks
prime rate, plus 2.0%, with an interest rate floor of 6.0%.
Interest on borrowings is due monthly and the principal balance
is due at maturity. Borrowings on the line of credit are based
on (a) 80% of eligible domestic receivables, plus
(b) the lesser of 40% of eligible inventory or 25% of
eligible domestic receivables or $2.5 million, minus
(c) to the extent in effect, certain loan reserves as
defined in the agreement. 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, and cancellation fees. The agreement
provides that initially 50% of the outstanding principal balance
of the $10.0 million term loan reduces available borrowings
under the line of credit. Upon the achievement of certain
financial covenants, the amount reducing available borrowings
will be reduced to zero. There was not an outstanding balance on
the line of credit at June 30, 2010.
|
Prior to the amendment and restatement, our loan and security
agreement with Silicon Valley Bank included a $3.0 million
term loan, a $10.0 million accounts receivable line of
credit, and a $5.5 million term loan that reduced the
availability of funds on the accounts receivable line of credit.
Borrowings from Silicon Valley Bank are secured by all of our
assets. The borrowings are subject to prepayment penalties and
financial covenants, including maintaining certain liquidity and
fixed charge coverage ratios and certain three-month EBITDA
targets. We were in compliance with all financial covenants as
of June 30, 2010. 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.
Loan
and Security Agreement with Partners for Growth
On April 14, 2010, we entered into a loan and security
agreement with Partners for Growth III, L.P. (PFG). The
agreement provides that PFG will make loans to us up to
$4.0 million. The agreement has a five-year maturity until
April 14, 2015. The loans bear interest at a floating per
annum rate equal to 2.75% above Silicon Valley Banks prime
rate, and such interest is payable monthly. The principal
balance of and any accrued and unpaid interest on any notes are
due on the maturity date and may not be prepaid by us at any
time in whole or in part.
Under the agreement, PFG provided us with an initial loan of
$1.5 million on April 15, 2010. In addition, for a
period of one year until April 14, 2011, we may request up
to $2.5 million of additional proceeds from time to time,
in minimum increments of $250,000. After this period, we may
only request additional proceeds (in increments of not less than
$250,000) equal to the aggregate principal amount converted into
our common stock through an optional conversion or mandatory
conversion. At any time prior to the maturity date, PFG may at
its option convert any amount into our common stock at the
conversion price set forth in each note, which conversion price
will be
50
subject to adjustment upon certain events as provided in such
note. The initial agreement has a conversion price of $5.43,
which equaled the
ten-day
volume weighted average price per share of our common stock
prior to the date of the agreement. We may also effect at any
time a mandatory conversion of amounts, subject to certain
terms, conditions and limitations provided in the agreement,
including a requirement that the
ten-day
volume weighted average price of our common stock prior to the
date of conversion is at least 15% greater than the conversion
price. We also may reduce the conversion price to a price that
represents a 15% discount to the
ten-day
volume weighted average price of our common stock to satisfy
this condition and effect a mandatory conversion. The balance
outstanding on the convertible loan at June 30, 2010 was
$1.5 million.
The loans are secured by certain of our assets, and the
agreement contains customary covenants limiting our ability to,
among other things, incur debt or liens, make certain
investments and loans, effect certain redemptions of and declare
and pay certain dividends on our stock, permit or suffer certain
change of control transactions, dispose of collateral, or change
the nature of our business. In addition, the PFG loan and
security agreement contains financial covenants requiring us to
maintain certain liquidity and fixed charge coverage ratios, and
certain
three-month
EBITDA targets. We were in compliance with all financial
covenants as of June 30, 2010. If we do not comply with the
various covenants, PFG may, subject to various customary cure
rights, decline to provide additional loans, require
amortization of the loan over its remaining term, or require the
immediate payment of all amounts outstanding under the loan and
foreclose on any or all collateral, depending on which financial
covenants are not maintained.
In connection with the execution of the PFG loan and security
agreement, we issued a warrant to PFG on April 14, 2010,
which allows PFG to purchase 147,330 shares of our common
stock at a price per share of $5.43, which price was based on
the ten-day
volume weighted average price per share of our common stock
prior to the date of the agreement. The warrant vests with
respect to 50% on the issue date, and thereafter, vests pro rata
from time to time according to a percentage equal to
(a) the additional loans actually drawn until
April 14, 2011, divided by (b) $2.5 million. The
warrant expires on the fifth anniversary of the issue date,
subject to earlier expiration in accordance with the terms.
Cash and Cash Equivalents. Cash and cash
equivalents was $23.7 million and $33.4 million at
June 30, 2010 and 2009, respectively. This decrease is
primarily attributable net cash used in operations during the
year ended June 30, 2010.
Investments. Investments totaled
$20.0 million at June 30, 2009, and consisted solely
of 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 auction
rate securities were all redeemed or repurchased as of
June 30, 2010.
Operating Activities. Net cash used in
operating activities improved 54% to $13.6 million from
$29.7 million for the years ended June 30, 2010 and
2009, respectively. For the years ended June 30, 2010 and
2009, we had a net loss of $23.9 million and
$31.9 million, respectively. Changes in working capital
accounts also contributed to the net cash used in the years
ended June 30, 2010 and 2009. Significant changes in
working capital during these periods included:
|
|
|
|
|
Cash (used in) accounts receivable of $(1.1) million and
$(3.7) million during the years ended June 30, 2010
and 2009, respectively. The reduction in amount used between
periods is due to lower revenue growth in fiscal year 2010.
|
|
|
|
Cash (used in) provided by inventories of $(1.0) million
and $407,000 during the years ended June 30, 2010 and 2009,
respectively. For the year ended June 30, 2010, cash (used
in) inventories was primarily due to the timing of inventory
purchases and sales. For the year ended June 30, 2009, cash
provided by inventories was due to improved inventory management.
|
|
|
|
Cash provided by prepaid expenses and other current assets of
$6,000 and $2.4 million during the years ended
June 30, 2010 and 2009, respectively. For the year ended
June 30, 2010, cash provided by prepaid expenses and other
current assets was primarily due to payment timing of vendor
deposits and other expenditures. For the year ended
June 30, 2009, cash provided by prepaid expenses and other
current assets was primarily due to payment timing of vendor
deposits and assets acquired in the merger with Replidyne.
|
51
|
|
|
|
|
Cash (used in) accounts payable of $(1.4) million and
$(1.1) million during the years ended June 30, 2010
and 2009, respectively. For the year ended June 30, 2010
and 2009, cash (used in) accounts payable was primarily due to
timing of purchases, vendor payments, and accounts payable
acquired in the merger with Replidyne.
|
|
|
|
Cash provided by (used in) accrued expenses and other
liabilities of $3.8 million and $(268,000) during the years
ended June 30, 2010 and 2009, respectively. For the year
ended June 30, 2010, cash provided by accrued expenses and
other liabilities was primarily due to receipt of
$3.5 million in net cash incentives under the agreement to
establish a manufacturing facility in Texas. For the year ended
June 30, 2009, cash (used in) accrued expenses and other
liabilities was primarily due to timing of payments and accruals
acquired in the merger with Replidyne.
|
Investing Activities. Net cash provided by
investing activities was $21.8 million and
$36.0 million for the years ended June 30, 2010 and
2009, 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 years ended June 30,
2010 and 2009, we sold investments in the amount of
$23.0 million and $50,000, respectively. The balance of
cash provided by (used in) investing activities primarily
related to the purchase of property and equipment and patents.
Purchases of property and equipment and patents used cash of
$1.2 million and $1.4 million for the years ended
June 30, 2010 and 2009, respectively.
Financing Activities. Net cash (used in)
provided by financing activities was $(17.9) million and
$19.5 million in the years ended June 30, 2010 and
2009, respectively. Cash provided by financing activities during
these periods included:
|
|
|
|
|
proceeds from long-term debt of $5.9 million and
$19.8 million during the years ended June 30, 2010 and
2009, respectively;
|
|
|
|
employee stock purchase plan purchases of $1.2 million
during the year ended June 30, 2010; and
|
|
|
|
exercise of stock options and warrants of $285,000 and $525,000
during the years ended June 30, 2010 and 2009, respectively.
|
Cash used in financing activities in these periods included:
|
|
|
|
|
payment of long-term debt of $25.3 million and $945,000
during the years ended June 30, 2010 and 2009, 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, 2010, we believe
our current cash and cash equivalents and available debt will be
sufficient to fund working capital requirements, capital
expenditures and operations for at least the next
12 months. 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, 2010
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)
|
|
$
|
5,503
|
|
|
$
|
913
|
|
|
$
|
1,565
|
|
|
$
|
840
|
|
|
$
|
2,185
|
|
Purchase commitments(2)
|
|
|
6,546
|
|
|
|
6,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt maturities(3)
|
|
|
10,899
|
|
|
|
3,613
|
|
|
|
7,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,948
|
|
|
$
|
11,072
|
|
|
$
|
8,851
|
|
|
$
|
840
|
|
|
$
|
2,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
(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.
RECENT
ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued further guidance regarding
additional disclosures relating to fair value of transfers in
and out of Levels 1 and 2 and for activity in Level 3
and clarifies certain other existing disclosure requirements.
This guidance had no impact on our financial position, results
of operations or cash flows.
In October 2009, the FASB issued guidance providing principles
for allocation of consideration among multiple-elements, and
accounting for separate deliverables under such an arrangement.
The guidance introduces an estimated selling price method for
valuing the elements of a bundled arrangement if vendor-specific
objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure
requirements. This standard is effective on a prospective basis
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010.
Alternatively, adoption may be on a retrospective basis, and
early application is permitted. We do not expect the adoption of
this standard will have a material impact on our consolidated
financial position, results of operations or cash flows.
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 us with the
Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or
to be made by us). Forward-looking statements include all
statements based on future expectations. This
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, including the use of the Diamondback Systems to
treat coronary lesions and the potential market for this
application; our clinical trials; our plan to continue to
evaluate distribution agreements, licensing transactions and
other strategic partnerships; the possibility that we may sell
internationally in the future; our expectations that we will
achieve our first profitable quarter during fiscal year 2011,
our losses will continue but generally decline, our revenue will
increase, gross margin will stay fairly consistent in the
future, our selling, general and administrative expenses will
increase, but at a rate less than revenue growth, and that we
will incur research and development expenses at or above amounts
incurred for the year ended June 30, 2010, but lower as a
percentage of revenue; and the sufficiency of our current and
anticipated financial resources. 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
53
developments in the U.S. and foreign countries; the
experience of physicians regarding the effectiveness and
reliability of the Diamondback Systems; the potential for
unanticipated delays in enrolling medical centers and patients
for clinical trials; dependence on market growth; the reluctance
of physicians to accept new products; the impact of competitive
products and pricing; approval of products for reimbursement and
the level of reimbursement; 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 inability to expand
our sales and marketing organization and research and
development efforts; 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, 2010 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.
54
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
55
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, 2010 and 2009, and the
results of its operations and its cash flows for each of the
three years in the period ended June 30, 2010, 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, 2010
F-1
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,717
|
|
|
$
|
33,411
|
|
Accounts receivable, net
|
|
|
9,394
|
|
|
|
8,474
|
|
Inventories
|
|
|
4,319
|
|
|
|
3,369
|
|
Prepaid expenses and other current assets
|
|
|
1,048
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
38,478
|
|
|
|
46,052
|
|
Auction rate securities put option
|
|
|
|
|
|
|
2,800
|
|
Investments, trading
|
|
|
|
|
|
|
20,000
|
|
Property and equipment, net
|
|
|
1,964
|
|
|
|
1,719
|
|
Patents, net
|
|
|
1,712
|
|
|
|
1,363
|
|
Other assets
|
|
|
180
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,334
|
|
|
$
|
72,370
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
3,613
|
|
|
$
|
25,823
|
|
Accounts payable
|
|
|
3,353
|
|
|
|
4,751
|
|
Deferred grant incentive
|
|
|
1,181
|
|
|
|
|
|
Accrued expenses
|
|
|
6,569
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,716
|
|
|
|
36,174
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
7,286
|
|
|
|
4,379
|
|
Deferred grant incentive
|
|
|
2,208
|
|
|
|
|
|
Other liabilities
|
|
|
409
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
9,903
|
|
|
|
5,864
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,619
|
|
|
|
42,038
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value at June 30, 2010 and
2009; authorized 100,000,000 common shares at June 30, 2010
and 2009; issued and outstanding 15,148,549 at June 30,
2010 and 14,113,904 at June 30, 2009, respectively
|
|
|
15
|
|
|
|
14
|
|
Additional paid in capital
|
|
|
157,718
|
|
|
|
146,455
|
|
Common stock warrants
|
|
|
11,305
|
|
|
|
11,282
|
|
Accumulated deficit
|
|
|
(151,323
|
)
|
|
|
(127,419
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
17,715
|
|
|
|
30,332
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
42,334
|
|
|
$
|
72,370
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share and
|
|
|
|
share amounts)
|
|
|
Revenues
|
|
$
|
64,829
|
|
|
$
|
56,461
|
|
|
$
|
22,177
|
|
Cost of goods sold
|
|
|
15,003
|
|
|
|
16,194
|
|
|
|
8,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,826
|
|
|
|
40,267
|
|
|
|
13,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
62,447
|
|
|
|
59,822
|
|
|
|
35,326
|
|
Research and development
|
|
|
10,278
|
|
|
|
14,678
|
|
|
|
16,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
72,725
|
|
|
|
74,500
|
|
|
|
51,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(22,899
|
)
|
|
|
(34,233
|
)
|
|
|
(38,144
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,435
|
)
|
|
|
(2,350
|
)
|
|
|
(7
|
)
|
Interest income
|
|
|
402
|
|
|
|
3,380
|
|
|
|
1,167
|
|
Decretion (accretion) of redeemable convertible preferred stock
warrants
|
|
|
|
|
|
|
2,991
|
|
|
|
(916
|
)
|
Gain (impairment) on investments
|
|
|
150
|
|
|
|
(1,683
|
)
|
|
|
(1,267
|
)
|
Other
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,005
|
)
|
|
|
2,338
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(23,904
|
)
|
|
|
(31,895
|
)
|
|
|
(39,167
|
)
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
|
|
|
|
22,781
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(23,904
|
)
|
|
$
|
(9,114
|
)
|
|
$
|
(58,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.62
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(13.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
14,748,293
|
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Cardiovascular
Systems, Inc.
Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
(Loss)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
Income
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/forfeiture of restricted stock awards, net
|
|
|
686,509
|
|
|
|
|
|
|
|
5,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,015
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,255
|
|
|
|
|
|
Exercise of stock options and warrants at $1.55-$8.83 per share
|
|
|
38,192
|
|
|
|
|
|
|
|
288
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
285
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan Activity
|
|
|
309,944
|
|
|
|
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,635
|
|
|
|
|
|
To adjust common stock to par value
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,904
|
)
|
|
|
|
|
|
|
(23,904
|
)
|
|
|
(23,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010
|
|
|
15,148,549
|
|
|
$
|
15
|
|
|
$
|
157,718
|
|
|
$
|
11,305
|
|
|
$
|
(151,323
|
)
|
|
$
|
|
|
|
$
|
17,715
|
|
|
$
|
(23,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,904
|
)
|
|
$
|
(31,895
|
)
|
|
$
|
(39,167
|
)
|
Adjustments to reconcile net loss to net cash used in operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
549
|
|
|
|
417
|
|
|
|
264
|
|
Provision for doubtful accounts
|
|
|
137
|
|
|
|
95
|
|
|
|
164
|
|
Amortization of patents
|
|
|
51
|
|
|
|
53
|
|
|
|
29
|
|
(Decretion) accretion of redeemable convertible preferred stock
warrants
|
|
|
|
|
|
|
(2,991
|
)
|
|
|
916
|
|
Amortization of debt discount
|
|
|
257
|
|
|
|
1,228
|
|
|
|
|
|
Stock-based compensation
|
|
|
9,094
|
|
|
|
6,771
|
|
|
|
7,381
|
|
Amortization of discount on investments
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
(Gain) impairment on investments
|
|
|
(150
|
)
|
|
|
1,683
|
|
|
|
1,267
|
|
Gain on auction rate securities put option
|
|
|
|
|
|
|
(2,800
|
)
|
|
|
|
|
Changes in assets and liabilities, net of merger
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,057
|
)
|
|
|
(3,672
|
)
|
|
|
(5,061
|
)
|
Inventories
|
|
|
(950
|
)
|
|
|
407
|
|
|
|
(2,726
|
)
|
Prepaid expenses and other assets
|
|
|
6
|
|
|
|
2,362
|
|
|
|
(1,323
|
)
|
Accounts payable
|
|
|
(1,398
|
)
|
|
|
(1,100
|
)
|
|
|
3,631
|
|
Accrued expenses and other liabilities
|
|
|
3,799
|
|
|
|
(268
|
)
|
|
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
(13,566
|
)
|
|
|
(29,710
|
)
|
|
|
(31,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(794
|
)
|
|
|
(957
|
)
|
|
|
(720
|
)
|
Purchases of investments
|
|
|
|
|
|
|
|
|
|
|
(31,314
|
)
|
Sales of investments
|
|
|
22,950
|
|
|
|
50
|
|
|
|
19,988
|
|
Costs incurred in connection with patents
|
|
|
(400
|
)
|
|
|
(436
|
)
|
|
|
(397
|
)
|
Cash acquired in Replidyne merger, net of transaction costs paid
|
|
|
|
|
|
|
37,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
21,756
|
|
|
|
36,026
|
|
|
|
(12,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
30,296
|
|
Payment of offering costs
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
Issuance of common stock under employee stock purchase plan
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
Issuance of convertible preferred stock warrants
|
|
|
|
|
|
|
75
|
|
|
|
|
|
Exercise of stock options and warrants
|
|
|
285
|
|
|
|
525
|
|
|
|
1,865
|
|
Proceeds from long-term debt
|
|
|
5,911
|
|
|
|
19,845
|
|
|
|
16,398
|
|
Payments on long-term debt
|
|
|
(25,277
|
)
|
|
|
(945
|
)
|
|
|
(4,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(17,884
|
)
|
|
|
19,500
|
|
|
|
43,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(9,694
|
)
|
|
|
25,816
|
|
|
|
(313
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
33,411
|
|
|
|
7,595
|
|
|
|
7,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
23,717
|
|
|
$
|
33,411
|
|
|
$
|
7,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
$
|
|
|
|
$
|
(22,781
|
)
|
|
$
|
19,422
|
|
Conversion of Series A warrants to common warrants
|
|
|
|
|
|
|
1,069
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
97
|
|
|
|
1,814
|
|
|
|
|
|
Beneficial conversion feature on convertible debt
|
|
|
97
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants prior to merger
|
|
|
|
|
|
|
8,217
|
|
|
|
|
|
Conversion of redeemable convertible preferred stock to common
stock
|
|
|
|
|
|
|
75,456
|
|
|
|
|
|
Expiration of common warrants
|
|
|
71
|
|
|
|
76
|
|
|
|
|
|
Adjustment of common stock to par value
|
|
|
1
|
|
|
|
39,864
|
|
|
|
|
|
Amendment of restricted stock units
|
|
|
517
|
|
|
|
|
|
|
|
|
|
Capitalized financing costs included in accounts payable and
accrued expenses
|
|
|
|
|
|
|
|
|
|
|
358
|
|
Net unrealized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,161
|
|
|
$
|
1,051
|
|
|
$
|
7
|
|
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 incorporated in 1989
(CSI-MN), in accordance with the terms of the
Agreement and Plan of Merger and Reorganization, dated as of
November 3, 2008 (the Merger Agreement).
Pursuant to the Merger Agreement, CSI-MN continued after the
merger as the surviving corporation and a wholly-owned
subsidiary of Replidyne. At the effective time of the merger,
Replidyne, Inc. 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 Companys primary
products, the Diamondback 360° PAD System and the
Diamondback Predator 360° PAD System, are catheter-based
platforms capable of treating a broad range of plaque types in
leg arteries both above and below the knee and address many of
the limitations associated with existing treatment alternatives.
Prior to the merger, Replidyne was a biopharmaceutical company
focused on discovering, developing, in-licensing and
commercializing innovative anti-infective products.
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.
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
F-6
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses. The following table shows allowance for doubtful
accounts activity for the fiscal years ended June 30, 2010
and 2009:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2008
|
|
$
|
164
|
|
Provision for doubtful accounts
|
|
|
95
|
|
Write-offs
|
|
|
(6
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
253
|
|
Provision for doubtful accounts
|
|
|
279
|
|
Write-offs
|
|
|
(129
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
403
|
|
|
|
|
|
|
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
At June 30, 2009, we had investments with a fair value of
$20,000 that consisted solely of 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, or FFELP. These securities were not
liquid, as we had an inability to sell the securities due to
continued failed auctions.
At June 30, 2009, the Company had accepted an offer from
UBS AG (UBS), providing rights related to the
Companys ARS (the Rights). The Rights
permitted the Company to require UBS to purchase the
Companys ARS at par value at any time during the period of
June 30, 2010 through July 2, 2012. At June 30,
2009, the Company had recorded $2,800 as the fair value of the
auction rate securities put option asset. 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 asset. The
put option did not meet the definition of a derivative
instrument. Therefore, the Company elected to measure the put
option at fair value for recognized financial assets, in order
to match the changes in the fair value of the ARS.
The Company had previously obtained a margin loan from UBS Bank
USA for the full par value of the ARS. On June 30, 2010,
the auction rate securities had been redeemed at par value by
issuers or repurchased by UBS at par value pursuant to the
Rights. Proceeds were used to pay off the margin loan as
required by the Rights agreement. See Note 4 for additional
information.
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.
F-7
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 manufacturing and office space under
operating lease agreements. The leases contain rent escalation
clauses for which the lease expense is recognized on a
straight-line basis over the terms of the leases. Rent expense
that is recognized but not yet paid is included in 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.
FASB guidance around arrangements with multiple deliverables
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.
F-8
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008
|
|
$
|
12
|
|
Provision
|
|
|
559
|
|
Claims
|
|
|
(506
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
65
|
|
Provision
|
|
|
257
|
|
Claims
|
|
|
(206
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
116
|
|
|
|
|
|
|
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 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 fair value
guidance issued by the FASB, which provides a framework for
measuring fair value under Generally Accepted Accounting
Principles and expands disclosures about fair value
measurements. In February 2008, the FASB provided a one-year
deferral on the effective date of the guidance for non-financial
assets and non-financial liabilities, except those that are
recognized or disclosed in the
F-9
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial statements at least annually. This guidance did not
have a material impact on the Companys financial position
or consolidated results of operations for the year ended
June 30, 2010.
The fair value guidance classifies 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
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, 2010. Assets are measured on
a recurring basis if they are remeasured at least annually:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
|
|
|
|
Available-for-
|
|
|
Trading
|
|
|
Securities Put
|
|
|
Conversion
|
|
|
|
Sale Securities
|
|
|
Securities
|
|
|
Option
|
|
|
Option
|
|
|
Balance at June 30, 2008
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
2,800
|
|
|
$
|
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments
|
|
|
|
|
|
|
(20,150
|
)
|
|
|
(2,800
|
)
|
|
|
|
|
Gain on investments
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
Issuance of conversion option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The conversion option is related to the loan and security
agreement with Partners for Growth (see Note 4). The option
pricing model used to determine the value of the conversion
option included various inputs including historical volatility,
stock price simulations, and assessed behavior of the Company
and Partners for Growth based on those simulations.
As of June 30, 2010, 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
The Company recognizes 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
F-10
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Prior to the merger, the Company recorded the current estimated
fair value of its convertible preferred stock on a quarterly
basis based on the fair market value of that stock as determined
by management and the 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. 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 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
In accordance with FASB guidance, the freestanding warrant that
was related to the Companys redeemable convertible
preferred stock was classified as a liability on the balance
sheet 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).
Recent
Accounting Pronouncements
In January 2010, the FASB issued further guidance regarding
additional disclosures relating to fair value of transfers in
and out of Levels 1 and 2 and for activity in Level 3
and clarifies certain other existing disclosure requirements.
This guidance had no impact on the Companys consolidated
financial position, results of operations or cash flows.
In October 2009, the FASB issued guidance providing principles
for allocation of consideration among multiple-elements, and
accounting for separate deliverables under such an arrangement.
The guidance introduces an estimated selling price method for
valuing the elements of a bundled arrangement if vendor-specific
objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure
requirements. This standard is effective on a prospective basis
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010.
Alternatively, adoption may be on a retrospective basis, and
early application is permitted. The Company does not expect the
adoption of this standard will have a material impact on its
consolidated financial position, results of operations or cash
flows.
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 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
F-11
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 FASB guidance, 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. According to FASB guidance, the total estimated
purchase price was 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 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.
F-12
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
$370 and $651 at June 30, 2010 and 2009, respectively,
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, 2010 and
2009, resulting in $75 and $281, respectively, in prepaid
expenses and other current assets and $295 and $370,
respectively, in other assets on the balance sheet.
The Company has recorded a current and long-term liability
totaling $1,391 and $2,389 at June 30, 2010 and 2009,
respectively, related to Replidynes lease on the vacated
office and production facility. The lease currently requires
monthly base rent payments of $53 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, 2010 and 2009, resulting in $1,099 and $998,
respectively, in accrued expenses and $292 and $1,391,
respectively, in other liabilities on the balance sheet.
|
|
3.
|
Selected
Consolidated Financial Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
9,797
|
|
|
$
|
8,727
|
|
Less: Allowance for doubtful accounts
|
|
|
(403
|
)
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,394
|
|
|
$
|
8,474
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,256
|
|
|
$
|
1,536
|
|
Work in process
|
|
|
282
|
|
|
|
348
|
|
Finished goods
|
|
|
2,781
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,319
|
|
|
$
|
3,369
|
|
|
|
|
|
|
|
|
|
|
F-13
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
3,085
|
|
|
$
|
2,313
|
|
Furniture
|
|
|
168
|
|
|
|
168
|
|
Leasehold improvements
|
|
|
131
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,384
|
|
|
|
2,590
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,420
|
)
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,964
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,114
|
|
|
$
|
1,715
|
|
Less: Accumulated amortization
|
|
|
(402
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,712
|
|
|
$
|
1,363
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, future estimated amortization of
patents and patent licenses will be:
|
|
|
|
|
2011
|
|
$
|
54
|
|
2012
|
|
|
53
|
|
2013
|
|
|
53
|
|
2014
|
|
|
53
|
|
2015
|
|
|
53
|
|
Thereafter
|
|
|
1,446
|
|
|
|
|
|
|
|
|
$
|
1,712
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
Salaries and bonus
|
|
$
|
1,620
|
|
|
$
|
1,453
|
|
Commissions
|
|
|
1,753
|
|
|
|
1,441
|
|
Accrued vacation
|
|
|
1,624
|
|
|
|
1,198
|
|
Merger related lease obligation
|
|
|
1,099
|
|
|
|
1,079
|
|
Other
|
|
|
473
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,569
|
|
|
$
|
5,600
|
|
|
|
|
|
|
|
|
|
|
F-14
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loan
and Security Agreement with Silicon Valley Bank
On March 29, 2010, the Company entered into an amended and
restated loan and security agreement with Silicon Valley Bank.
The agreement includes a $10,000 term loan and a $15,000 line of
credit. The terms of each of these loans are as follows:
|
|
|
|
|
The $10,000 term loan has a fixed interest rate of 9.0% and a
final payment amount equal to 1.0% 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 3.0% of the principal
amount, upon prepayment or the occurrence and continuance of an
event of default. In connection with entering into the
agreement, the Company amended a warrant previously granted to
Silicon Valley Bank. The warrants provide an option to purchase
8,493 shares of common stock at an exercise price of $5.48
per share. This warrant is immediately exercisable and expires
ten years after the date of amendment. The balance outstanding
on the term loan at June 30, 2010 was $10,000.
|
|
|
|
The $15,000 line of credit has a two year maturity and a
floating interest rate equal to Silicon Valley Banks prime
rate, plus 2.0%, with an interest rate floor of 6.0%. Interest
on borrowings is due monthly and the principal balance is due at
maturity. Borrowings on the line of credit are based on
(a) 80% of eligible domestic receivables, plus (b) the
lesser of 40% of eligible inventory or 25% of eligible domestic
receivables or $2,500, minus (c) to the extent in effect,
certain loan reserves as defined in the agreement. 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, and cancellation
fees. The agreement provides that initially 50% of the
outstanding principal balance of the $10,000 term loan reduces
available borrowings under the line of credit. Upon the
achievement of certain financial covenants, the amount reducing
available borrowings will be reduced to zero. There was not an
outstanding balance on the line of credit at June 30, 2010.
|
Prior to the amendment and restatement, the Companys loan
and security agreement with Silicon Valley Bank included a
$3,000 term loan, a $10,000 accounts receivable line of credit,
and a $5,500 term loan that reduced the availability of funds on
the accounts receivable line of credit.
Borrowings from Silicon Valley Bank are secured by all of the
Companys assets. The borrowings are subject to prepayment
penalties and financial covenants, including maintaining certain
liquidity and fixed charge coverage ratios, and certain
three-month EBITDA targets. The Company was in compliance with
all financial covenants as of June 30, 2010. 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 the Companys financial status or otherwise. Any
non-compliance by the Company under the terms of 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.
Loan
and Security Agreement with Partners for Growth
On April 14, 2010, the Company entered into a loan and
security agreement with Partners for Growth III, L.P. (PFG). The
agreement provides that PFG will make loans to the Company up to
$4,000. The agreement has a
five-year
maturity until April 14, 2015. The loans bear interest at a
floating per annum rate equal to 2.75% above Silicon Valley
Banks prime rate, and such interest is payable monthly.
The principal balance of and any accrued and unpaid interest on
any notes are due on the maturity date and may not be prepaid by
the Company at any time in whole or in part.
F-15
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the agreement, PFG provided the Company with an initial
loan of $1,500 on April 15, 2010. In addition, for a period
of one year until April 14, 2011, the Company may request
up to $2,500 of additional proceeds from time to time, in
minimum increments of $250. After this period, the Company may
only request additional proceeds (in increments of not less than
$250) equal to the aggregate principal amount converted into the
Companys common stock through an optional conversion or
mandatory conversion. At any time prior to the maturity date,
PFG may at its option convert any amount into the Companys
common stock at the conversion price set forth in each note,
which conversion price will be subject to adjustment upon
certain events as provided in such note. The initial note has a
conversion price of $5.43, which equaled the
ten-day
volume weighted average price per share of the Companys
common stock prior to the date of the agreement. The Company may
also effect at any time a mandatory conversion of amounts,
subject to certain terms, conditions and limitations provided in
the agreement, including a requirement that the
ten-day
volume weighted average price of the Companys common stock
prior to the date of conversion is at least 15% greater than the
conversion price. The Company may reduce the conversion price to
a price that represents a 15% discount to the
ten-day
volume weighted average price of our common stock to satisfy
this condition and effect a mandatory conversion. The balance
outstanding on the convertible loan at June 30, 2010 was
$1,500.
The loans are secured by certain of the Companys assets,
and the agreement contains customary covenants limiting the
Companys ability to, among other things, incur debt or
liens, make certain investments and loans, effect certain
redemptions of and declare and pay certain dividends on its
stock, permit or suffer certain change of control transactions,
dispose of collateral, or change the nature of its business. In
addition, the PFG loan and security agreement contains financial
covenants requiring the Company to maintain certain liquidity
and fixed charge coverage ratios, and certain three-month EBITDA
targets. The Company was in compliance with all financial
covenants at June 30, 2010. If the Company does not comply
with the various covenants, PFG may, subject to various
customary cure rights, decline to provide additional loans,
require amortization of the loan over its remaining term, or
require the immediate payment of all amounts outstanding under
the loan and foreclose on any or all collateral, depending on
which financial covenants are not maintained.
In connection with the execution of the PFG loan and security
agreement, the Company issued a warrant to PFG on April 14,
2010, which allows PFG to purchase 147,330 shares of the
Companys common stock at a price per share of $5.43, which
price was based on the
ten-day
volume weighted average price per share of the Companys
common stock prior to the date of the agreement. The warrant
vests with respect to 50% on the issue date, and thereafter,
vests pro rata from time to time according to a percentage equal
to (a) the additional loans actually drawn until
April 14, 2011, divided by (b) $2,500. The warrant
expires on the fifth anniversary of the issue date, subject to
earlier expiration in accordance with the terms.
Loan
Payable
At June 30, 2009, the Company maintained a margin loan with
UBS Bank USA with maximum available borrowings, including
interest, equal to the $22,950 par value of auction rate
securities held. The margin loan bore interest at variable rates
that equaled 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
did not exceed interest income earned on the auction rate
securities. The loan was due on demand and UBS Bank would have
required the Company to repay it in full from the proceeds
received from a public equity offering where net proceeds exceed
$50,000. The outstanding balance on this loan at June 30,
2009 was $22,893.
On June 30, 2010, all of the Companys auction rate
securities were redeemed at par value by the issuers or
repurchased by UBS at par value pursuant to the Rights agreement
reached with UBS in November 2008. Proceeds were used to pay off
the margin loan as required by the Rights agreement.
F-16
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of June 30, 2010, debt maturities (including debt
discount) were as follows:
|
|
|
|
|
2011
|
|
$
|
3,613
|
|
2012
|
|
|
3,812
|
|
2013
|
|
|
3,474
|
|
|
|
|
|
|
Total
|
|
$
|
10,899
|
|
Less: Current Maturities
|
|
|
(3,613
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
7,286
|
|
|
|
|
|
|
During the year ended June 30, 2010, the Company entered
into a loan and security agreement with Partners for Growth III,
L.P. (PFG). In connection with this agreement the Company issued
PFG warrants to purchase 147,330 shares of the
Companys common stock at an exercise price of $5.43 per
share. Half of the warrants are immediately exercisable, and the
remaining half may become exercisable as additional funds are
drawn during the first 12 months of the agreement. The
exercisable warrants were assigned a value of $97 for accounting
purposes, and expire five years after issuance. See Note 4
for additional information.
During the year ended June 30, 2009, 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.
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.
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.
F-17
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, 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
|
|
Warrants issued
|
|
|
147,330
|
|
|
$
|
5.43
|
|
Warrants exercised
|
|
|
(879
|
)
|
|
$
|
1.55
|
|
Warrants expired
|
|
|
(25,880
|
)
|
|
$
|
1.55 - 14.16
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2010
|
|
|
3,236,696
|
|
|
$
|
5.43 - 9.28
|
|
|
|
|
|
|
|
|
|
|
The following assumptions were utilized in determining the fair
value of warrants issued under the Black-Scholes model:
|
|
|
|
|
|
|
Year Ended
|
|
|
June 30,
|
|
|
2010
|
|
Weighted average fair value of warrants granted
|
|
$
|
1.95
|
|
Risk-free interest rates
|
|
|
1.39
|
%
|
Expected life
|
|
|
2.5 years
|
|
Expected volatility
|
|
|
55.9
|
%
|
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 includes a
renewal provision whereby the number of shares shall
automatically be increased on the first day of each fiscal year
ending July 1, 2017, by the lesser of
(i) 970,500 shares, (ii) 5% of the outstanding
common
F-18
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares on such date, or (iii) a lesser amount determined by
the board of directors. On July 1, 2010, the number of
shares available for grant was increased by 757,427 under the
2007 Plan renewal provision. The Company also maintains the 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. 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 terminated
90 days after termination.
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 a director 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.
F-19
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
|
Options(a)
|
|
Exercise Price
|
|
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 obtained through merger
|
|
|
239,716
|
|
|
$
|
31.11
|
|
Options exercised
|
|
|
(66,903
|
)
|
|
$
|
7.90
|
|
Options forfeited or expired
|
|
|
(367,369
|
)
|
|
$
|
21.92
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
3,707,882
|
|
|
$
|
10.43
|
|
Options granted
|
|
|
58,551
|
|
|
$
|
7.70
|
|
Options exercised
|
|
|
(37,313
|
)
|
|
$
|
8.36
|
|
Options forfeited or expired
|
|
|
(372,127
|
)
|
|
$
|
9.34
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010
|
|
|
3,356,993
|
|
|
$
|
10.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the effect of options granted, exercised, forfeited or
expired from the 1991 Plan, 2003 Plan, 2007 Plan, 2006 Replidyne
plan and options granted outside the stock option plans
described above. |
Options outstanding and exercisable at June 30, 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Remaining
|
|
|
|
Remaining
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
Number of
|
|
Average
|
|
|
Outstanding
|
|
Contractual
|
|
Exercisable
|
|
Contractual
|
Exercise Price
|
|
Shares
|
|
Life (Years)
|
|
Shares
|
|
Life (Years)
|
|
$5.01
|
|
|
12,940
|
|
|
|
9.43
|
|
|
|
12,940
|
|
|
|
9.43
|
|
$7.90
|
|
|
502,219
|
|
|
|
6.93
|
|
|
|
413,806
|
|
|
|
6.88
|
|
$8.75
|
|
|
92,844
|
|
|
|
8.68
|
|
|
|
46,423
|
|
|
|
8.68
|
|
$8.83
|
|
|
1,108,950
|
|
|
|
5.97
|
|
|
|
1,108,950
|
|
|
|
5.97
|
|
$9.28
|
|
|
45,611
|
|
|
|
4.41
|
|
|
|
45,611
|
|
|
|
4.41
|
|
$11.38
|
|
|
85,143
|
|
|
|
7.38
|
|
|
|
85,143
|
|
|
|
7.38
|
|
$12.15
|
|
|
1,120,107
|
|
|
|
5.67
|
|
|
|
901,744
|
|
|
|
5.34
|
|
$12.37
|
|
|
176,307
|
|
|
|
4.89
|
|
|
|
176,307
|
|
|
|
4.89
|
|
$13.98
|
|
|
111,421
|
|
|
|
7.63
|
|
|
|
111,421
|
|
|
|
7.63
|
|
$14.00
|
|
|
4,000
|
|
|
|
2.51
|
|
|
|
4,000
|
|
|
|
2.51
|
|
$16.40
|
|
|
6,000
|
|
|
|
2.51
|
|
|
|
6,000
|
|
|
|
2.51
|
|
$18.55
|
|
|
31,451
|
|
|
|
5.76
|
|
|
|
31,451
|
|
|
|
5.76
|
|
$18.60
|
|
|
60,000
|
|
|
|
1.66
|
|
|
|
60,000
|
|
|
|
1 66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,356,993
|
|
|
|
6.02
|
|
|
|
3,003,796
|
|
|
|
5.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options issued to employees and directors that are vested or
expected to vest at June 30, 2010, 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
|
|
|
3,041,436
|
|
|
|
6.02
|
|
|
$
|
10.49
|
|
|
$
|
|
|
Estimated pre-vesting forfeitures are considered in determining
stock-based compensation expense. As of June 30, 2010, the
Company estimated its forfeiture rate at 9.4%. As of
June 30, 2010, 2009, and 2008 the total compensation cost
for non-vested awards not yet recognized in the consolidated
statements of operations was $2,266, $5,820, and $6,316,
respectively, net of the effect of estimated forfeitures. These
amounts are expected to be recognized over a weighted-average
period of 0.61, 1.50 and 2.17 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,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Weighted average fair value of options granted
|
|
$1.23
|
|
$4.66
|
|
$5.78
|
Risk-free interest rates
|
|
1.32 - 2.07%
|
|
2.82%
|
|
2.45% - 4.63%
|
Expected life
|
|
2.5 - 5 years
|
|
6 years
|
|
3.5 - 6 years
|
Expected volatility
|
|
46.7 - 55.9%
|
|
55.5%
|
|
43.1% - 46.4%
|
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 2.5 to 6 years. Expected
volatility is based on the historical volatility of the stock of
companies within the Companys peer group and historical
volatility of the Companys stock.
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, 2010, 2009 and 2008 was $0,
$0, and $21,441, respectively. The aggregate intrinsic value for
exercisable options at June 30, 2010, 2009 and 2008 was $0,
$0, and $9,692, respectively. The total aggregate intrinsic
value of options exercised during the years ended June 30,
2010, 2009 and 2008 was $30, $387, and $1,435, respectively.
Shares supporting option exercises are sourced from new share
issuances.
F-21
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
Restricted stock awards granted
|
|
|
877,751
|
|
|
$
|
6.87
|
|
Restricted stock awards forfeited
|
|
|
(187,441
|
)
|
|
$
|
8.48
|
|
Restricted stock awards vested
|
|
|
(328,804
|
)
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2010
|
|
|
1,105,883
|
|
|
$
|
7.69
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2009, the Company granted
restricted stock units (RSUs) to members of the Board of
Directors. Restricted stock units represented the right to
receive cash 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 of the date that the director ceases to serve on the
Board. During the year ended June 30, 2010, the Company
amended all outstanding RSU Agreements to provide that payment
may be in the form of shares of the Companys common stock
or in cash at the Companys option. The estimated fair
value of restricted stock awards is recognized on a
straight-line basis over the vesting period. Restricted stock
unit activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Restricted stock unit outstanding at June 30, 2008
|
|
|
|
|
|
|
|
|
Restricted stock unit granted
|
|
|
42,238
|
|
|
$
|
8.75
|
|
Restricted stock unit forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit outstanding at June 30, 2009
|
|
|
42,238
|
|
|
$
|
8.75
|
|
Restricted stock unit granted
|
|
|
93,024
|
|
|
$
|
8.60
|
|
Restricted stock unit forfeited
|
|
|
(5,814
|
)
|
|
$
|
8.60
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit outstanding at June 30, 2010
|
|
|
129,448
|
|
|
$
|
8.65
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Restricted
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Purchase Plan
|
|
|
Units
|
|
|
Total
|
|
|
Cost of goods sold
|
|
$
|
323
|
|
|
$
|
205
|
|
|
$
|
20
|
|
|
$
|
0
|
|
|
$
|
548
|
|
Selling, general and administrative
|
|
|
3,405
|
|
|
|
3,382
|
|
|
|
378
|
|
|
|
107
|
|
|
|
7,272
|
|
Research and development
|
|
|
527
|
|
|
|
706
|
|
|
|
41
|
|
|
|
0
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,255
|
|
|
$
|
4,293
|
|
|
$
|
439
|
|
|
$
|
107
|
|
|
$
|
9,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
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, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
|
|
Options
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes shares available for grant under the
Companys various equity incentive plans:
|
|
|
|
|
|
|
Shares Available
|
|
|
|
for Grant(a)
|
|
|
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
|
|
Shares reserved
|
|
|
705,695
|
|
Shares granted
|
|
|
(936,302
|
)
|
Shares forfeited, expired or cancelled
|
|
|
255,942
|
|
|
|
|
|
|
Shares available for grant at June 30, 2010
|
|
|
110,173
|
|
|
|
|
|
|
|
|
|
(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
F-23
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
can be purchased each six-month period per year (twice per
year). The purchase price is equal to 85% of the lower of the
price at the beginning or the end of the respective period. The
ESPP allows for an annual increase in reserved shares on each
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, 2010, 151,485 shares were added
to plan. Employees purchased 309,944 shares at an average
price of $3.86 per share in the year ended June 30, 2010.
Shares reserved under the plan for the year ended June 30,
2011 totaled 160,838.
The components of the Companys overall deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
5,568
|
|
|
$
|
3,398
|
|
Accrued expenses
|
|
|
749
|
|
|
|
508
|
|
Inventories
|
|
|
510
|
|
|
|
488
|
|
Debt Warrant Amortization
|
|
|
563
|
|
|
|
466
|
|
Depreciation and amortization
|
|
|
19
|
|
|
|
|
|
Other
|
|
|
197
|
|
|
|
188
|
|
Research and development credit carryforwards
|
|
|
3,120
|
|
|
|
2,974
|
|
Net operating loss carryforwards
|
|
|
38,368
|
|
|
|
33,124
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
49,094
|
|
|
|
41,146
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(49,094
|
)
|
|
|
(41,117
|
)
|
|
|
|
|
|
|
|
|
|
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 may be limited in any one
year under Internal Revenue Code Section 382 due to
significant ownership changes, as defined under such Section, as
a result of the Companys equity financings. A summary of
the valuation allowances are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at June 30, 2008
|
|
$
|
29,353
|
|
Additions
|
|
|
11,764
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
41,117
|
|
Additions
|
|
|
8,191
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
49,308
|
|
|
|
|
|
|
As of June 30, 2010 and 2009, the Company had federal tax
NOL carryforwards of approximately $109,114 and $92,652,
respectively. These NOL carryforwards are available to offset
taxable income through 2030 and will
F-24
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
begin to expire in 2011. The Company also had various state NOL
carryforwards available to offset future state taxable income.
These state NOL carryforwards typically will have the same
expirations as our federal tax NOL carryforwards.
As of June 30, 2010 and 2009, the Company had approximately
$2,783 and $2,540 of federal research and development credit
carryforwards, respectively. As of June 30, 2010 and 2009,
the Company had approximately $685 and $624 of state research
and development credit carryforwards. The federal and state
research and development credit carryforwards will begin to
expire in 2024.
As required by FASB ASC Topic 740, Income Taxes, 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 percent
likelihood of being realized upon ultimate settlement with the
relevant tax authority. The Company recorded a liability
relating to unrecognized tax benefits of $347 at June 30,
2010. Due to the Company having a full valuation allowance, this
liability has been netted against the deferred tax asset. The
Company had no liabilities recorded related to unrecognized tax
benefits at June 30, 2009. The Company recognizes interest
and penalties related to uncertain tax provisions as part of the
provision for income taxes. The Company has not currently
reserved for any interest or penalties for such reserves due to
the Company being in an NOL position. The Company does not
expect to recognize any benefits from the unrecognized tax
benefits within the next twelve months. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance at July 1, 2009
|
|
$
|
|
|
Increases related to prior year tax positions
|
|
|
317
|
|
Increases related to current year tax positions
|
|
|
30
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
347
|
|
|
|
|
|
|
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, 2010, 2009, and 2008. The Company is not currently
under examination by any taxing jurisdiction.
|
|
8.
|
Commitment
and Contingencies
|
Operating
Leases
The Company leases manufacturing and office space and equipment
under various lease agreements which expire at various dates
through March 2020. Rental expenses were $659, $658, and $572
for the years ended June 30, 2010, 2009, and 2008,
respectively.
Future minimum lease payments under the agreements as of
June 30, 2010 are as follows:
|
|
|
|
|
2011
|
|
$
|
913
|
|
2012
|
|
|
920
|
|
2013
|
|
|
645
|
|
2014
|
|
|
415
|
|
2015
|
|
|
425
|
|
Thereafter
|
|
|
2,185
|
|
|
|
|
|
|
|
|
$
|
5,503
|
|
|
|
|
|
|
F-25
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts payable under the Companys Texas production
facility lease are included in the amounts above. A portion of
those rent payments may reduce the grant payable long-term
liability rather than being recorded as expense. See
Note 11 for additional information.
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, 2010, 2009, and 2008.
|
|
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,
and ($916) for the years ended June 30, 2009, and 2008,
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.
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, 2010.
F-26
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Texas
Production Facility
|
Effective on September 9, 2009, the Company entered into an
agreement with the Pearland Economic Development Corporation
(the PEDC) for the construction and lease of an
approximately 46,000 square foot production facility
located in Pearland, Texas. The facility will primarily serve as
an additional manufacturing location for the Company.
The lease agreement provides that the PEDC will lease the
facility and the land immediately surrounding the facility to
the Company for an initial term of ten years, beginning
April 1, 2010. Monthly fixed rent payments are $35 for each
of the first five years of the initial term and $38 for each of
the last five years of the initial term. The Company will also
be responsible for paying the taxes and operating expenses
related to the facility. The lease has been classified as an
operating lease for financial statement purposes. Upon an event
of default under the agreement, the Company will be liable for
the difference between the balance of the rent owed for the
remainder of the term and the fair market rental value of the
leased premises for such period.
The Company has the option to renew the lease for up to two
additional periods of five years each. If the Company elects to
exercise one or both of these options, the rent for such
extended terms will be set at the prevailing market rental rates
at such times, as determined in the agreement. After the
commencement date and until shortly before the tenth anniversary
of the commencement date, the Company will have the option to
purchase all, but not less than all, of the leased premises at
fair market value, as determined in the agreement. Further,
within six years of the commencement date and subject to certain
conditions, the Company has options to cause the PEDC to make
two additions or expansions to the facility of a minimum of
34,000 and 45,000 square feet each.
The Company and the PEDC previously entered into a Corporate Job
Creation Agreement dated June 17, 2009. The Job Creation
Agreement provided the Company with $2,975 in net cash incentive
funds. The Company believes it will be able to comply with the
conditions specified in the grant agreement. The PEDC will
provide the Company with an additional $1,700 of net cash
incentive funds in the following amounts and upon achievement of
the following milestones:
|
|
|
|
|
$1,020, upon the hiring of the 75th full-time employee at the
facility; and
|
|
|
|
$680, upon the hiring of the 125th full-time employee at the
facility.
|
In order to retain all of the cash incentives, beginning one
year and 90 days after the commencement date, the Company
must not have fewer than 25 full-time employees at the
facility for more than 120 consecutive days. Failure to meet
this requirement will result in an obligation to make
reimbursement payments to the PEDC as outlined in the agreement.
The Company will not have any reimbursement requirements after
60 months from the effective date of the agreement.
The Job Creation Agreement also provides the Company with a net
$1,275 award, of which $510 will be funded by a grant from the
State of Texas for which the Company has applied through the
Texas Enterprise Fund program. As of June 30, 2010, $340
has been received. The PEDC has committed, by resolution, to
guarantee the award and will make payment to the Company for the
remaining $765. As of June 30, 2010, $213 has been
received. The grant from the State of Texas is subject to
reimbursement if the Company fails to meet certain job creation
targets through 2014 and maintain these positions through 2020.
The Company has presented the net cash incentive funds as a
current and long-term liability on the balance sheet. The
liabilities will be reduced over a 60 month period and
recorded as an offset to expenditures incurred using a
systematic methodology that is intended to reduce the majority
of the liabilities in the first 24 months of the agreement.
As of June 30, 2010, $139 in expenses has reduced the
deferred grant incentive liabilities, resulting in a remaining
current liability of $1,181 and long-term liability of $2,208.
F-27
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. In July 2010, ev3 Inc. was acquired
and became an indirect wholly-owned subsidiary of Covidien plc.
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
confidential information and 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 that the Company aided and abetted FoxHollow
employees breach their duty of loyalty, 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 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 it believes 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.
F-28
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available in basic calculation
|
|
$
|
23,904
|
|
|
$
|
31,895
|
|
|
$
|
39,167
|
|
Accretion (decretion) of redeemable convertible preferred
stock(a)
|
|
|
|
|
|
|
(22,781
|
)
|
|
|
19,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
23,904
|
|
|
$
|
9,114
|
|
|
$
|
58,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
14,748,293
|
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
Effect of dilutive stock options and warrants(b)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
14,748,293
|
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted
|
|
$
|
(1.62
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(13.25
|
)
|
|
|