UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission file number: 000-52082
CARDIOVASCULAR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1225 Old Highway 8 Northwest
St. Paul, Minnesota
(Address of principal executive offices)
41-1698056
(I.R.S. Employer
Identification No.)
55112-6416
(Zip Code)
Registrant’s telephone number, including area code:
(651) 259-1600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, One-tenth of One Cent ($0.001)
Par Value Per Share
Name of each exchange on which registered
The Nasdaq Stock Market LLC
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 þ
No o
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes þ
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Emerging growth company o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
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, 2017 , the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $761.7 million
based on the closing sale price as reported on the Nasdaq Global Market.
The number of shares of the registrant’s common stock outstanding as of August 17, 2018 was 33,505,560 .
Portions of the proxy statement for the registrant’s 2018 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III
of this report.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Page No.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business
Executive Officers of the Registrant
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
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17
18
29
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30
30
31
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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 website, http://www.csi360.com , as soon as reasonably
practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission (“SEC”). We are not including the
information on our website as a part of, or incorporating it by reference into, this Form 10-K.
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file
electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov . We file annual reports, quarterly reports, proxy
statements, and other documents with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any
materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1. Business.
Special Note Regarding Forward Looking Statements
PART I
This Form 10-K 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 Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking
statements are based on our management’s 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,” “intend,” “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 that are described more fully by us in Part I, Item 1A and Part II, Item 7 of this Form
10-K and in our other filings with the Securities and Exchange Commission. You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this Form 10-K. You should read this Form 10-K 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
Cardiovascular Systems, Inc. (“CSI”) was incorporated in Delaware in 2000. Our principal executive office is located at 1225 Old Highway 8 Northwest, St. Paul,
Minnesota 55112. Our telephone number is (651) 259-1600, and our website is www.csi360.com . The information contained in or accessible through our website
is not incorporated by reference into, and should not be considered part of, this Form 10-K.
We have received 22 federal registrations in the U.S. Patent and Trademark Office (“USPTO”) of certain marks, including “CSI ® ” (a first and second), “CSI ®
(Stylized)” (a first and second), “CSIQ ® ”, “CSIQ (Stylized)”, “DIAMONDBACK ® ”, “DIAMONDBACK 360 ® ” (a first and second), “DIAMONDBACK 360 ®
(Stylized)”, “GLIDEASSIST ® ”, “STAY A STEP AHEAD OF PAD ® ”, “STEALTH 360 ® ”, “TAKE A STAND AGAINST AMPUTATION ® ”, “TAKE A
STAND AGAINST AMPUTATION ® (Stylized), “VIPERWIRE ® ”, “VIPERWIRE ADVANCE ® ”, “VIPERWIRE ADVANCE ® (Stylized)”, “VIPERSLIDE ® ”,
VIPERSLIDE ® (Stylized)”, “VIPERTRACK ® ” and “VIPERTRACK ® (Stylized)”. We have applied for federal trademark registration with the USPTO of certain
marks, including “VIPERCATH”, “ZILIENT”, and “ZILIENT (Stylized)”. 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 technology company leading the way in the effort to successfully treat patients suffering from peripheral and coronary artery diseases, including
those with arterial calcium, the most difficult form of arterial disease to treat. We are committed to clinical rigor, constant innovation and a defining drive to set the
industry standard to deliver safe and effective medical devices that improve the lives of patients facing this difficult disease state. We have developed a patented
orbital atherectomy systems (“OAS”) for both peripheral and coronary commercial applications. The primary base of our business is catheter-based platforms
capable of treating a broad range of vessel sizes and plaque types, including calcified plaque, and address many of the limitations associated with other treatment
alternatives. To date, over 392,000 of our OAS devices have been sold to leading institutions across the United States and Japan.
Peripheral
Our peripheral arterial disease (“PAD”) products are catheter-based platforms capable of treating a broad range of plaque types in leg arteries both above and
below the knee, including calcified plaque, and address many of the limitations associated with other existing surgical, catheter and pharmacological treatment
alternatives. The micro-invasive devices use small access sheaths that can provide procedural benefits and allow physicians to treat PAD patients in even the small
and tortuous vessels located below the knee and facilitate access through alternative sites in the ankle, foot and wrist, as well as in the groin.
1
The United States Food and Drug Administration (“FDA”) granted 510(k) clearance for the following PAD products as a therapy in patients with PAD. We refer to
these products in this Form 10-K as the “Peripheral OAS.”
FDA 510(k) Clearance
Granted
Product
August 2007
March 2009
March 2011
Diamondback 360 Peripheral (1)
Predator 360 (1)
Stealth 360 ® Peripheral OAS (“Stealth 360”)
February 2014
Diamondback 360 60cm Peripheral
April 2015
Diamondback 360 Low Profile Peripheral
October 2015
October 2015
June 2017
June 2017
Diamondback 360 1.50 Peripheral
Diamondback 360 2.00 Peripheral
Diamondback 360 200cm Peripheral
Diamondback 360 180cm Peripheral
(1) We are not currently marketing this product.
Commercial
Introduction
September 2007
April 2009
March 2011
April 2014
July 2015
January 2016
January 2016
February 2018
February 2018
Sales of Peripheral OAS during the fiscal year ended June 30, 2018 represented 68% of revenue.
In January 2018, we announced that we entered into an original equipment manufacturer agreement with Integer Holdings Corporation to manufacture our
ZILIENT™ guidewires. The full U.S. market launch of the ZILIENT peripheral guidewires began in early fiscal 2019. We anticipate that additional ZILIENT
guidewires for coronary interventions and radial peripheral interventions will become available in the future.
In February 2018, we announced that the first patients were treated using our FDA-cleared extended length Diamondback 360 Peripheral OAS to treat PAD. The
extended length makes it easier for physicians to reach and treat lower limb PAD lesions through the radial artery in the wrist, providing an alternative access point
and more options to treat complicated and at-risk patients. We are currently in a limited market release with an anticipated full commercial launch in fiscal 2019.
Coronary
Our coronary arterial disease (“CAD”) product, the Diamondback 360 Coronary OAS (“Coronary OAS”), is a catheter-based platform designed to facilitate stent
delivery in patients with CAD who are acceptable candidates for percutaneous transluminal coronary angioplasty or stenting due to de novo , severely calcified
coronary artery lesions. The Coronary OAS design is similar to technology used in our Peripheral OAS, customized specifically for the coronary application.
In October 2013, we received premarket approval (“PMA”) from the FDA to market the Coronary OAS as a treatment for severely calcified coronary arteries and
we commenced a commercial launch that same month. Sales of Coronary OAS during the fiscal year ended June 30, 2018 represented approximately 23% of
revenue.
In January 2018, we announced our relationship with OrbusNeich ® to be the exclusive U.S. distributor of OrbusNeich balloon products. In March 2018, the FDA
granted 510(k) clearance for the OrbusNeich 1.0mm Sapphire ® II Pro coronary balloon (“1.0mm balloon”). The 1.0mm balloon, the first and only 1.0mm
coronary balloon available in the United States, offers industry-leading entry and crossing profiles and is precision engineered for crossing and treating extremely
tight and complex lesions. We anticipate OrbusNeich’s full coronary balloon product portfolio will become available in the United States during fiscal 2019 and
fiscal 2020.
In addition to the Peripheral and Coronary OAS, we offer multiple accessory products required for use with the Peripheral and Coronary OAS. Sales of accessory
products, primarily guide wires, represented 9% of revenue during the fiscal year ended June 30, 2018 .
International
In November 2016, we signed an exclusive distribution agreement with Medikit Co., Ltd. to sell our Coronary and Peripheral OAS in Japan. In March 2017, we
received approval from Japan’s Ministry of Health, Labor and Welfare (“MHLW”) for our Coronary OAS Micro Crown. In February 2018, the Coronary OAS
Micro Crown received reimbursement approval in Japan, followed by the first commercial sales in Japan. This represents the first international market for any of
our products, and most
2
importantly, an opportunity to provide physicians in Japan a cost-effective treatment option for the difficult-to-treat patient population with severely calcified
coronary lesions.
In October 2014, we received CE Mark for our Stealth 360 device. In July 2018, we entered into an exclusive Distribution Agreement with OrbusNeich to sell our
Peripheral and Coronary OAS outside of the United States and Japan. We expect that OrbusNeich will commence sales of our products in certain countries in
Southeast Asia, Europe and the Middle East during fiscal year 2019.
Market Overview
Peripheral
Artery
Disease
(“PAD”)
Peripheral artery disease is widespread and can be life threatening. The disease is characterized by narrowed, hardened arteries in the legs, limiting blood flow to
the legs and feet. If left untreated, PAD may continue to progress to Critical Limb Ischemia (“CLI”), a condition in which the amount of oxygenated blood being
delivered to the limb is insufficient to keep the tissue viable. CLI may lead to non-healing ulcers, infections, gangrene, limb amputation or death. According to
estimates by the American Heart Association (“AHA”), as many as 18 million Americans, mostly over the age of 65, have PAD. An aging population, coupled
with high rates of diabetes and obesity, is likely to continue to increase the prevalence of PAD. In many older PAD patients, particularly those with diabetes, PAD
is characterized by fibrotic (moderately hard) or calcified (extremely hard) plaque deposits that can be very challenging to treat. Although we believe the rate of
PAD diagnoses is increasing, we also believe that under-diagnosis continues, due to patient and physician awareness. Emphasis on PAD education from industry,
medical associations, insurance companies and other groups, coupled with publications in medical journals and public news channels, is increasing physician and
patient awareness of PAD risk factors, symptoms, and treatment options. Physicians manage a significant portion of the PAD diagnosed population by
recommending lifestyle changes, such as diet and exercise, and by prescribing prescription drugs, such as statins. While medications, diet and exercise may
improve blood flow, they do not treat the underlying vascular occlusions, and many patients have difficulty maintaining lifestyle changes. As a result of these
challenges, many medically managed patients develop more severe symptoms that require procedural intervention.
Coronary
Artery
Disease
(“CAD”)
Heart disease is the leading cause of death in both men and women in the United States. Coronary artery disease is the most common type of heart disease in the
United States and is a life-threatening condition. CAD occurs when a fatty material called plaque builds up on the walls of arteries that supply blood to the heart.
The plaque buildup causes the arteries to harden and narrow (atherosclerosis), reducing blood flow. The risk of CAD increases if a person has one or more of the
following: high blood pressure, abnormal cholesterol levels, diabetes, or family history of early heart disease. According to the AHA, 16.3 million people in the
United States (or 6.3% of the adult population) have CAD, the most common form of heart disease. According to the U.S. Centers for Disease Control and
Prevention, over 370,000 lives are claimed in the United States each year from CAD. According to estimates, significant arterial calcium is present in nearly 40%
of patients (Genereux et al., 2014; Bourantas et al., 2014), and severe calcium affects up to 20% of patients (Bourantas et al., 2014), undergoing a percutaneous
coronary intervention (“PCI”). Significant calcium contributes to poor outcomes and higher treatment costs in coronary interventions when traditional therapies are
used, including a significantly higher occurrence of death and major adverse cardiac events.
Our Peripheral OAS and Coronary OAS
Our orbital atherectomy systems represent a unique and innovative approach to the treatment of PAD and CAD that provide physicians and patients with a
procedure that addresses many of the limitations of other treatment alternatives. The Peripheral OAS and Coronary OAS devices are single-use catheters that
incorporate a control handle and flexible drive shaft with an eccentrically mounted diamond-coated crown. The peripheral device is often used for vessel
preparation to enable low pressure percutaneous transluminal angioplasty, including the use of drug-coated balloons (“DCB”), and results in lower use of bailout
stents. The coronary device is similarly used to prepare a vessel by treating severe calcium prior to stent delivery to help facilitate vessel access and stent expansion
and prevent malapposition of stent struts for optimal stent performance.
The OAS treats atherosclerotic plaque, which is harder than a normal vessel wall. The OAS is designed to differentiate between hard, diseased plaque and healthy,
compliant arterial tissue, a concept that we refer to as “differential sanding.” The diamond-coated crown preferentially engages and sands away harder material, but
is designed not to damage more compliant parts of the artery, which flex away from the crown. Physicians position the crown at the site of a lesion containing
arterial plaque and orbit the crown against it to sand away the superficial, or surface, plaque and create a smooth lumen, or channel, in the vessel. In addition, the
crown’s rotating eccentric mass and orbital motion deliver pulsatile mechanical energy into the vessel wall. These
3
pulsatile forces may break up deeper plaque and contribute to improving the compliance change of the diseased segment of the artery.
Components
of
the
OAS
Our OAS uses a single-use, low-profile catheter that travels over our proprietary ViperWire guide wires and is electrically powered by a small, portable saline
infusion pump that also helps cool the system and remove debris. The Peripheral OAS reduces plaque on peripheral vessel walls by using an orbiting, diamond-
coated crown within peripheral arteries. Similarly, the Coronary OAS uses the same method to reduce severely calcified plaque on coronary vessel walls within
coronary arteries in order to facilitate stent performance.
Catheter. The catheter for our OAS consists of:
•
•
•
an electrically-powered control handle, which allows movement of the crown and predictable crown location;
a flexible drive shaft with an eccentrically mounted diamond-coated crown, which tracks and orbits over the guide wire; and
a sheath, which covers the drive shaft and permits delivery of saline or medications to the treatment area.
ViperWire Advance Peripheral Guide Wire, ViperWire Advance Peripheral Guide Wire with Flex Tip and ViperWire Advance Coronary Guide Wire. The
ViperWire guide wires are required for using the OAS and were designed to offer the ability to maneuver through tortuous, twisting blood vessels and cross
challenging lesions. The OAS travels over this wire to the lesion and operates on this wire.
ViperSlide Lubricant. ViperSlide is an exclusive lubricant designed to optimize the smooth operation of the OAS.
Saline Infusion Pump. The saline infusion pump is a small, portable device that bathes the OAS shaft and crown and provides an electric power supply for the
operation of the catheter. The constant flow of saline during orbit reduces the risk of heat generation and improves the flush of particulates.
Mechanism
of
Action
The mechanism of action is a function of the centrifugal force generated by the eccentrically mounted crown as it rotates and orbits inside the vessel. As the speed
of the crown’s rotation increases, centrifugal force increases the crown’s radius of orbit and presses the diamond-coated crown against the lesion or plaque,
removing a small amount of plaque with each orbit. The centrifugal force exerted onto the vessel wall decreases as the orbital radius increases, reducing the
likelihood of adverse events during treatment. The characteristics of the orbit and the resulting lumen size can be adjusted by modifying the following two
variables:
•
•
Speed. An increase in speed creates a larger orbital radius, thus accommodating larger diameter vessels. Our Peripheral OAS allows the user to choose
between three rotational speeds. Our Coronary OAS Classic Crown allows the user to choose between two rotational speeds, in addition to engaging a
recently added Glide Assist ® feature, which is an innovative solution that facilitates device tracking, provides easier device repositioning, and provides
enhanced performance in challenging anatomies.
Crown Characteristics. The crowns for the OAS are designed with various weights (as determined by crown geometry and material density) and are
coated with diamond particles. The Peripheral OAS crowns are available in three configurations: classic, micro and solid. Physicians select crown sizes
and configurations based on several case criteria, including reference vessel size, lesion length and degree of stenosis, stenosis morphology, and anatomy
tortuosity. The crown for the Coronary OAS is available in two configurations: 1.25 millimeter Classic Crown (currently sold in the United States), and
the 1.25 millimeter Micro Crown (currently sold in Japan).
Centrifugal force propels the crown outward against the arterial wall as the crown rotates. This force is offset by the counterforce exerted by the arterial wall and
the guidewire. Normal arteries are compliant and have the ability to expand and contract as needed to supply blood flow. If the tissue is compliant, it flexes away,
minimizing the engagement of the diamond-grit and protecting the integrity of the healthy tissue. Diseased tissue is less flexible or non-compliant and provides
resistance to the centrifugal force, which generates an opposing force that enables the diamond-coated crown to engage and sand the plaque. The sanded plaque
and calcium are broken down into particles generally smaller than circulating red blood cells that are washed away downstream with the patient’s natural blood
flow.
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The small particle size and short treatment time minimizes the risk of vascular bed overload, or a saturation of the peripheral or coronary vessels with large
particles, which may cause slow or reduced blood flow. The small size of the particles allows them to be naturally cleared from the blood via various types of white
blood cells and macrophages.
We believe the OAS offers the following key benefits:
Strong
Safety
Profile
•
•
•
•
Differential Sanding Reduces Risk of Adverse Events . The OAS is designed to differentiate between hard, non-compliant plaque and soft, compliant
arterial tissue. Arteries are composed of three tissue layers (from inside to out): the intima, media, and adventitia. The eccentrically mounted diamond-
coated crown at the working end of the device engages and removes plaque from the artery wall with minimal likelihood of penetrating or damaging the
fragile intima, or inner layer of the arterial wall because soft, compliant tissue flexes away from the crown.
Eliminates Need for Distal Protection. The small size of the particles produced during sanding avoids the need for ancillary distal protection devices,
commonly used with directional cutting atherectomy devices. The small particulate size also significantly reduces the risk of macroembolization, or larger
pieces of removed plaque capable of blocking blood flow downstream.
Allows Continuous Blood Flow During Procedure. The OAS allows for continuous blood flow while orbiting, as well as constant flushing of particulates
during treatment. 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.
Benefits of Smaller Sheaths. The Diamondback 360 Peripheral OAS portfolio is uniquely compatible with 4 French (“Fr”) to 6Fr sheaths. Centrifugal
force enables the OAS to treat large vessels through small sheaths; for example, it can treat up to 5mm vessel through a 4Fr sheath. Smaller sheaths may
be associated with fewer bleeding complications, shortened post-procedure ambulation time and reduced radiation exposure.
Proven
Efficacy
•
Efficacy Demonstrated for Both Peripheral OAS and Coronary OAS.
◦
◦
Peripheral OAS - Our pivotal OASIS clinical trial was designed to evaluate the safety and effectiveness of the OAS in treating patients with
symptomatic PAD. Performance targets were established cooperatively with the FDA before the trial began. Despite 55% of the lesions consisting
of calcified plaque, the Diamondback 360 Peripheral OAS successfully met the study endpoints.
Coronary OAS - Our pivotal ORBIT II Coronary OAS trial was designed to evaluate the safety and efficacy of the OAS in treating de novo
severely calcified coronary lesions. The trial met both the primary safety and efficacy endpoints by significant margins. Preparation of severely
calcified plaque with the Coronary OAS not only helped facilitate stent delivery, but also improved both peri-procedural and 30-day clinical
outcomes compared with the outcomes of historic control subjects in this difficult-to-treat patient population.
•
•
Treats Difficult, Fibrotic and Calcified Lesions. The Peripheral OAS enables physicians to remove plaque from long, fibrotic, or calcified lesions, as well
as bifurcated lesions or lesions with softer plaque, in peripheral arteries both above and below the knee. In the coronary arteries, the Coronary OAS
enables physicians to treat complex, severely calcified lesions, enabling stent placement in these difficult to treat lesions. To date, the Coronary OAS is
the only FDA-approved device approved specifically for treatment of severely calcified coronary lesions.
Orbital Motion Improves Lesion Compliance. The orbiting action of the OAS removes the hard plaque in the artery by sanding, while the centrifugal
motion of the eccentrically mounted crown creates pulsatile forces. Compliance change is achieved as the OAS differentiates between hard, diseased
plaque and healthy, compliant arterial tissue, a concept that we refer to as “differential sanding.” The diamond-coated crown preferentially engages and
sands away harder material, but is designed to not damage more compliant healthy parts of the artery, which flex away from the crown. Physicians
position the crown at the site of a lesion containing arterial plaque and orbit the crown against it to sand away the superficial, or surface, plaque and create
a smooth lumen, or channel, in the vessel. In addition, the crown’s rotating eccentric mass and orbital motion deliver pulsatile mechanical energy into the
vessel wall. These pulsatile forces may break up deeper plaque and contribute to compliance change of the diseased segment of the artery.
5
Together, these mechanistic components sufficiently remove or modify hard plaque, allowing for low pressure balloon inflation. The orbital motion and
speed of the eccentrically mounted crown increases, thus allowing for continuous reduction of plaque with differential sanding and pulsatile forces, as the
opening of the lumen increases during the operation of the devices.
•
Differential Sanding Creates Smooth Lumens. The differential sanding of the OAS creates a smooth lumen surface, or channel, inside the vessel. We
believe that the smooth lumens created by the device increase the velocity of blood flow and decrease the resistance to blood flow, which may decrease
the potential for restenosis, or re-narrowing of the arteries.
Ease
of
Use
•
•
•
•
Set Up Time. Given the relative simplicity of the OAS, physicians and lab staff can usually set up and begin using the device in under two minutes.
Utilizes Familiar Techniques. Physicians using the OAS 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.
Single Crown Treats Multiple Lesions in Various Sized Vessels. Centrifugal force unique to the OAS allows for a single access site to treat multiple
lesions, in most cases. In the coronary arteries, Coronary OAS is the only atherectomy device able to treat 2.5 to 4mm vessels with one device through a
6Fr radial approach. In the peripheral vasculature, the OAS is capable of treating multiple lesions in multiple arteries through a single access site, thus
reducing the need for multiple devices or the need for multiple access sites.
No Need for Collection Reservoir. Because the particles of plaque sanded away are of such small sizes, the OAS does not require a collection reservoir
that needs to be repeatedly emptied or cleaned during the procedure, which would potentially add time and cost to the procedure.
Multiple
Applications
The unique OAS mechanism of action used in both the Peripheral OAS and Coronary OAS can be used to treat multiple anatomic locations.
•
•
•
Below-the-Knee and Behind-the-Knee Peripheral Artery Disease. Arteries below and behind the knee are small in diameter and may be diffusely
stenosed, calcified or both. Reaching and treating these small vessels requires a low profile, which most competitive devices do not offer. Behind-the-
knee, or popliteal, lesions also present challenges if a stent is used because stents frequently fracture in this area due to the forces exerted on the vessels
when the knee bends or flexes. The Diamondback 360 Peripheral OAS is effective in treating those vessels. The Peripheral OAS offers a shorter shaft
length (60cm), a smaller profile and a more flexible shaft than the predecessors for improved ease of use, and includes a 4-Fr catheter that enables
physicians to access lesions below-the-knee using retrograde access through arteries in the ankle or foot.
Above-the-Knee Peripheral Artery Disease. Arteries above the knee are typically longer, straighter and wider than below-the-knee vessels. Plaque in
these arteries may also be diffuse, fibrotic and calcific. Physicians often use higher speeds or larger crown sizes of our products to treat lesions above the
knee. Our newest Peripheral OAS innovation includes the addition of extended length OAS that can treat above-the-knee disease through trans-radial
access (access through the radial artery in the wrist). The ability to treat the larger above-the-knee arteries with OAS via the small trans-radial access sites
is made possible by the unique features of the OAS including its small crossing profile and ability to orbit at higher speeds for treatment of larger
vessels.
Coronary Artery Disease. The individuals more at risk for being diagnosed with CAD are those that are suffering from high blood pressure, abnormal
cholesterol levels, diabetes, renal insufficiency, or have a family history of heart disease. The pathogenesis of CAD is marked by the accumulation of a
fatty material called plaque on the walls of arteries that supply blood to the heart. The plaque buildup causes the arteries to harden and narrow
(atherosclerosis), reducing blood flow. The Coronary OAS is the only atherectomy device specifically indicated for severe coronary calcium.
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Cost
and
Time
Efficient
Procedure
•
•
•
•
Short Procedure Time. The OAS has a short treatment time, typically less than two minutes.
Single Crown Can Treat Various Lumen Sizes Helping Limit Hospital Costs. The OAS orbital mechanism of action allows one device to treat 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.
Trans-Radial Access Provides Multiple Benefits. The low profile of the OAS allows for trans-radial access with benefits to both physicians and patients.
Radial access can enable treatment of complex, calcified coronary and, often, peripheral arteries that are challenging to access. In addition, the radial
access site is associated with lower vascular and bleeding complication rates, faster patient recovery time, and the ability to treat bilateral disease in one
setting, address obese patients and work around previous, compromised access sites. For patients, this contributes to comfort during- and post-operation,
earlier ambulation, reduced risk of infection, and faster healing.
Retrograde Access Treatment Option Benefits. Many of the patients treated with the Peripheral OAS have advanced PAD and suffer from CLI. These
patients often have complex, calcified lesions in their lower leg, which are challenging to access and treat using the traditional femoral artery access site.
If left untreated, these cases may result in lower limb amputation. Our family of 1.25mm Peripheral OASs with 4Fr compatibility allows for more options
to treat those lesions by providing a low-profile system that is fully compatible with alternative access sites in the foot or ankle. Smaller sheaths have been
shown to reduce procedure times and decrease complications.
Our Strategy
Our goal is to be the leading provider of solutions for the treatment of PAD and CAD. We intend to broaden our product offering and expand to new international
markets. The key elements of our strategy include:
• Drive Adoption through Our Direct U.S. Sales Organization, Medical Education and Key Opinion Leaders. We expect to continue to drive adoption of the
OAS in both hospital and office-based lab settings through the strong support of a clinically knowledgeable direct U.S. sales force focused on the needs of
interventional cardiologists, vascular surgeons, interventional radiologists and their cath lab teams. A key element of our strategy is a focus on educating and
training physicians about disease states, our clinical data, and proper use and application of OAS technology through programs delivered via physician faculty,
our direct sales force and seminars where physician industry leaders discuss case studies and treatment techniques using the devices.
• Build a Strong Portfolio of Clinical Evidence on Safety, Effectiveness and Economic Benefits of the OAS. Physicians and payors are increasingly interested in
clinical and economic evidence to support decisions regarding optimal treatment of patients. We are focused on conducting robust clinical studies that provide
insight into and demonstrate the effectiveness of the OAS in treating complex peripheral and coronary artery disease. We believe that demonstrating the
clinical advantages and cost-effectiveness of our OAS technology is critical to support physician adoption of the OAS, drive best clinical practice, and sustain
ongoing reimbursement coverage for our devices.
• Enhance OAS and Expand Product Portfolio within the Market for Treatment of Peripheral and Coronary Arteries. In addition to continued innovation and
product development on our peripheral and coronary OAS platforms, we are growing our product portfolio to offer new accessories and devices that improve
outcomes and expand the patient population we can treat. See “Pursue Strategic Acquisitions and Partnerships” and “Research and Development Activities -
Development Activities” for descriptions of new products in development.
• Expand Internationally. In November 2016, we signed an exclusive distribution agreement with Medikit Co., Ltd. to sell the Diamondback 360 Coronary OAS
Micro Crown in Japan. In March 2017, we received approval of that device from Japan’s MHLW. In February 2018, we announced reimbursement approval
and our first commercially treated patient in Japan. This represented our first entry into the international market, and most importantly, an opportunity to
provide physicians in Japan with a cost-effective treatment option for the difficult-to-treat patient population with severely calcified coronary lesions.
In October 2014, we received CE Mark for our Stealth 360 Peripheral OAS device and we are planning to seek approval of other products in Europe.
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In July 2018, we entered into an exclusive Distribution Agreement with OrbusNeich to sell our coronary and peripheral OAS outside of the United States and
Japan. We expect that OrbusNeich will commence sales of our products in certain countries in Southeast Asia, Europe and the Middle East during our fiscal
year ending June 30, 2019, and we will closely collaborate with OrbusNeich on the timing of product introductions in each country under this Distribution
Agreement. OrbusNeich and its authorized sub-distributors will be responsible for selling our products, and we will focus our international efforts on
physician training and education on our products.
• Pursue Strategic Acquisitions and Partnerships . In addition to adding to our product portfolio through internal development efforts, we are opportunistically
seeking ways to expand our portfolio through acquisitions, distribution agreements, licensing transactions, manufacturing agreements and other strategic
partnerships to add new product lines and technologies that leverage our sales expertise and footprint or complement our strategic objectives. In January 2018,
we announced an exclusive U.S. distribution agreement with OrbusNeich to offer their full line of semi-compliant, non-compliant and specialty balloons for
both coronary and peripheral vascular procedures. Currently we are focused on offering their coronary balloons, including the Sapphire ® II Pro, which
obtained FDA clearance in March 2018 as the first and only 1.0mm coronary balloon available in the United States. In addition, we entered into an agreement
with Integer Holdings Corporation to manufacture our ZILIENT™ peripheral guidewires, which are designed to provide tip resilience and crossability in
challenging peripheral arterial lesions. Finally, we entered into an agreement with Aerolase Corp. for the co-development of a new laser atherectomy device
for physicians to use in more effectively treating multiple forms of arterial disease.
Research and Development Activities
Clinical
Studies
Summary
We study the most challenging patient populations and are committed to providing relevant clinical evidence that enables physicians to select and utilize the best
treatment options for their patients. A total of 6,121 subjects (4,788 PAD and 1,333 CAD) have been enrolled in our clinical studies as of June 30, 2018. Our
clinical studies incorporate rigorous long-term clinical and healthcare economic data that are critical to improving patient care and ongoing healthcare changes.
We have completed numerous clinical studies to demonstrate the safety and efficacy of the Peripheral OAS. Its unique mechanism of action differentiates the
Peripheral OAS from other endovascular PAD treatment options and in our clinical studies of patients with the most challenging lesions, the Peripheral OAS
consistently demonstrates successful lesion modification and durable results.
PAD Studies
The following PAD clinical studies were completed or in process during fiscal 2018:
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LIBERTY 360°. This prospective, observational, multi-center clinical study is evaluating the procedural and long-term clinical, quality of life and
economic outcomes of endovascular device interventions, including orbital atherectomy, for the treatment of PAD. We expect the results from this study
to increase our understanding of the clinical and economic outcomes of endovascular treatment for PAD patients, including those with the most advanced
form of the disease, Rutherford Class 6. Enrollment of 1,204 subjects at 51 sites in the United States was completed in February 2016.
LIBERTY 360° two-year data was presented in August 2018. The majority of devices used in the study were balloons and/or atherectomy, and the
Peripheral OAS was the most frequently used atherectomy device. The LIBERTY 360° data through two years demonstrated that peripheral interventions
can be used successfully across all Rutherford classes, including the most challenging Rutherford Class 6 subjects. Quality of life improved significantly
from baseline to two years in all Rutherford groups. An orbital atherectomy subanalysis of the LIBERTY 360° data indicated high freedom from major
amputation at two years in all Rutherford Classes (RC2-3, 99.1%; RC4-5, 94.5%; and RC6, 79.8%). Overall, the results of this novel all-comers PAD
study suggest that peripheral vascular intervention (“PVI”) is an alternative to “primary amputation” in Rutherford Class 6 patients. Additionally, data
from the LIBERTY 360° study provide further evidence to support PVI treatment in Rutherford 2-5 patients.
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OPTIMIZE BTK. This pilot, hypothesis generating, non-powered, multi-center, randomized clinical study conducted in Europe is designed to gather
preliminary exploratory data regarding the acute and long-term clinical outcomes of orbital atherectomy with adjunctive DCB angioplasty versus DCB
angioplasty alone in PAD patients with calcified, below-the-knee lesions. We completed enrollment of fifty evaluable patients in May 2018, and these
patients will be followed for up to two years.
CAD Studies
We have conducted two clinical studies to evaluate the safety and efficacy of the Coronary OAS Classic Crown device: the ORBIT I feasibility study and the
ORBIT II pivotal study. The safety and efficacy of the Coronary OAS Micro Crown device were evaluated in the COAST study.
The following CAD clinical study was in process during fiscal 2018:
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ECLIPSE. This post-market, randomized one-to-one, multi-center trial is designed to evaluate vessel preparation with Coronary OAS Classic Crown
compared to conventional angioplasty technique prior to drug-eluting stent implantation for the treatment of severely calcified lesions. Approximately
2,000 subjects will be enrolled at approximately 150 sites in the United States and subjects will be followed for up to two years. The co-primary endpoints
of acute minimum stent area (assessed by optical coherence tomography in a subset of equally randomized 500 subjects) and one-year target vessel failure
are powered to demonstrate superiority of OAS vessel preparation vs. conventional angioplasty.
Our clinical portfolio is expanding as we develop future studies to answer difficult questions about PAD and CAD treatment. Our clinical research continues to
highlight the safety and efficacy of the OAS and current and new research illustrates our versatility in the emerging vascular market.
Development
Activities
Our product research and development activities are dedicated to the development and commercialization of products that serve the peripheral and coronary
vascular disease space, with emphasis towards high margin products and complex arterial disease states treated by our primary customers. The focus and value
proposition of our products is to enable positive acute and long-term clinical outcomes, with efficiency and predictability, in challenging patient subsets.
Research and development resources have been strategically allocated between opportunities that maximize the clinical effectiveness and user satisfaction of our
OAS product line and the development of additional products that offer portfolio diversification and incremental revenue opportunities.
Specific to the peripheral vascular disease market, we will continue our commitment to patients suffering from CLI through a breadth of above-the-knee and
below-the-knee differentiated products that treat or uniquely expand the ability of our devices to treat obstructive lesions throughout the leg and foot. Most
recently, we launched a line of extended length Diamondback 360 products (180 cm and 200 cm) that are intended to accommodate patient anatomy and physician
preferred access methodology, for example radial access. Specific to the coronary vascular disease market, we are building a portfolio of differentiated products
that are used to treat complex CAD. We launched a new coronary OAS feature called GlideAssist. This feature is an innovative solution that facilitates device
tracking, provides easier device repositioning, and provides enhanced performance in challenging anatomies. We also recently launched our next generation saline
infusion pump. The pump is the reusable component of the system, and the next generation product has been updated to comply with new medical device standards
and address numerous user satisfaction opportunities. In addition, we entered into an agreement with Aerolase Corp. for the co-development of a new laser
atherectomy device for physicians to use to more effectively treat multiple forms of arterial disease, and we are developing a new temporary hemodynamic support
pump. Emphasis in both franchises is placed on novel and differentiated devices that address unmet or under-met clinical or technical needs.
Research and development expenses for the years ended June 30, 2018 , 2017 , and 2016 were $26.8 million , $22.9 million and $25.9 million , respectively.
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Sales and Marketing
We market and sell the majority of our products through a direct sales force in the United States. Revenues for the years ended June 30, 2018 , 2017 , and 2016
were $217.0 million , $204.9 million and $178.2 million , respectively. 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 directional or laser
atherectomy. Professional education is also a key element of our sales strategy.
We target our marketing efforts to practitioners through medical conferences, seminars, peer-reviewed journals and marketing materials. Our sales and marketing
program focuses on:
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clinical results showing safety and efficacy of our products;
educating physicians on the prevalence and complications of calcium in PAD and CAD; and
developing relationships with key opinion leaders.
We sell the majority of our products through direct shipment to hospitals or clinics.
We are party to a purchasing agreement with HealthTrust Purchasing Group, L.P. (“HPG”), which was renewed effective May 1, 2018 and expires on July 31,
2021. HPG acts as a group purchasing organization for the healthcare providers belonging to HPG as participants. Under the purchasing agreement, all of HPG’s
participants located in the United States or its territories are eligible to purchase our orbital atherectomy systems and related products at prices set forth in the
purchasing agreement. The purchasing agreement may be terminated at any time, without cause, by HPG upon at least 60 days’ prior written notice to us. Either
party may terminate the purchasing agreement upon the occurrence of a material breach by the other party that goes uncured within 30 days following receipt of
written notice of such breach. If the purchasing agreement with HPG were to be terminated, our financial results will be materially adversely affected.
Outside of the United States, sales of our products in Japan are through our exclusive distributor, Medikit. In July 2018, we entered into an exclusive distribution
agreement with OrbusNeich to sell our Peripheral OAS and Coronary OAS outside of the United States and Japan through OrbusNeich’s current sales and
distribution network. For the year ended June 30, 2018, $1.8 million of our revenue was from sales in Japan, while the remaining revenues were from sales in the
United States. For the years ended June 30, 2017 and 2016, all of our revenues were from sales in the United States.
We have observed some degree of seasonality in our business, as there tends to be a lower number of procedures that use our products during the three months
ending September 30. Interventional procedure volume usually grows throughout the course of the fiscal year, with the quarter ending June 30 usually representing
the highest volume of cases and, therefore, the highest amount of revenue generated by us during the course of the fiscal year.
Manufacturing
We use internally-manufactured and externally-sourced components to manufacture the OAS. Most of the externally-sourced components are available from
multiple suppliers; however, certain key components, including the diamond-grit-coated crown and our ViperSlide Lubricant, are single sourced. We have
strategies and arrangements in place for procuring our key components from alternative suppliers in the event that one or more of our single source suppliers were
to discontinue supplying us with a key component. 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. Upon return from the sterilizer, the product is held in inventory prior to shipping
to our customers.
We are located in a leased 125,000-square-foot corporate headquarters in Minnesota. This custom-designed building has space for more than 500 employees and
contains dedicated research and development, training and education, and manufacturing facilities. Depending on staffing, the facility has the annual capacity to
produce in excess of 75,000 devices per shift. The finished goods storage has capacity for approximately 20,000 devices and more than 500 saline infusion pumps,
as well as other accessory products.
Our leased 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 fully staffed and equipped, also has the annual capacity to produce approximately 75,000 devices
per shift. This facility has finished goods storage capacity for greater than 15,000 devices and other accessory products and over 500 saline infusion pumps.
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We believe that our facilities in Minnesota and Texas will provide adequate production, assembly, and warehousing capacity for the foreseeable future.
We are registered with the FDA as a medical device manufacturer and comply with the FDA’s Quality System Regulation (“QSR”). We have opted to maintain a
Quality Management System 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 in December 2018.
Under these registrations, our plants are audited by the FDA and our Notified Body. The Stealth 360 Peripheral OAS has received CE Mark. We are registered as a
Foreign Medical Device Manufacturer in Japan and our registration certificate renewal is due in June 2021.
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 (“CMS”). Medicare covers certain medical care expenses for eligible elderly and disabled individuals,
including a large percentage of the population with PAD and CAD who could be treated with the OAS. In addition, private insurers often follow the coverage and
reimbursement policies of Medicare. Consequently, Medicare’s coverage and reimbursement policies are important to our operations.
CMS establishes Medicare reimbursement coverage policy and payment rates for physician and facility healthcare services, including procedures using
atherectomy products. Obtaining and maintaining coding, coverage and payment for our products is critical for commercial success. We believe that physicians and
hospitals that treat PAD and CAD with the respective OAS will generally be eligible to receive reimbursement from Medicare, as well as private insurers, that is
adequate to cover the costs of OAS, associated materials, and physician’s services.
With respect to reimbursement outside of the United States, in February 2018, the Coronary OAS Micro Crown received reimbursement approval in Japan,
followed by the first commercial sales in Japan. In connection with our Distribution Agreement with OrbusNeich, we and OrbusNeich will seek reimbursement
approvals in other countries in connection with the commercial introductions of our products, to the extent that reimbursement is available and subject to local
rules and regulations.
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. Our OAS 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. Competitors in the stent and balloon angioplasty market segments include Abbott Laboratories,
Boston Scientific, Cook Medical, Johnson & Johnson, Becton Dickinson, and Medtronic. We also compete against manufacturers of atherectomy catheters and
other products designed to treat vascular disease, including Medtronic, Philips/Spectranetics, Boston Scientific, Ra Medical, Shockwave and Avinger, as well as
manufacturers that may enter the market due to the increasing demand for treatment of vascular disease. Other competitors include pharmaceutical companies that
manufacture drugs for the treatment of PAD and CAD and companies that provide products used by surgeons in peripheral and coronary bypass procedures.
Because of the size of the peripheral opportunities, competitors and potential competitors have historically dedicated significant resources to aggressively promote
their products. We believe that our Peripheral OAS and Coronary OAS compete primarily on the basis of:
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safety and efficacy, even in calcified plaque (or severely calcified plaque in the coronaries);
low profile and alternative access site capabilities;
predictable clinical performance;
availability of clinical data;
ease of use;
economic benefit;
key opinion leader support and customer base;
customer service and support.
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We are aware of a company, Cardio Flow, Inc., developing an atherectomy system that could potentially compete with our products. On August 27, 2012, we
entered into a Settlement Agreement with Lela Nadirashvili, the widow of Dr. Leonid Shturman, our founder, relating to the ownership of certain patents invented
by Dr. Shturman. We believe that Ms. Nadirashvili assigned her rights under the Settlement Agreement, including the right to utilize certain patents, to Cardio
Flow. On April 6, 2018, we filed a breach of contract action against Cardio Flow in Minnesota District Court in Ramsey County, Minnesota, alleging that Cardio
Flow has developed or is in the process of developing an atherectomy device that incorporates elements belonging exclusively to us, in violation of the Settlement
Agreement. We are seeking damages and a permanent injunction preventing Cardio Flow from taking further steps to develop or attempt to develop an
atherectomy device that incorporates the elements that belong exclusively to us. We are pursuing our claims against Cardio Flow vigorously.
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 June 2018, we held 52 issued U.S. patents and have 38 U.S. patent applications pending, as well as 175 granted foreign patents and
152 foreign patent applications pending, each of which corresponds to aspects of our U.S. patents and applications. Our issued U.S. patents expire between 2019
and 2035, and our patents covering the core technology begin to expire in 2023 while providing core technology coverage through 2035. We have many additional
patents relating to our core technology currently pending in the USPTO, which will extend our key covered subject matter and coverage dates significantly. Our
issued patents and patent applications relate primarily to the design and operation of interventional atherectomy devices, including the Peripheral OAS and
Coronary OAS. These patents and applications include claims covering key aspects of orbital 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 22 registered U.S. trademarks, 17 registered marks in the Madrid Protocol with protection granted within at least one of Australia, the
European Union, China, India, Japan, the United Kingdom, and Mexico, six registered marks in the European Union, 12 registered marks in Canada, eight
registered marks in India, four registered marks in Mexico, and nine registered marks in Hong Kong. We have multiple pending trademark applications worldwide.
We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary
information and other intellectual property by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-
disclosure and assignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from
bringing the proprietary rights of third parties to us. We also require confidentiality or material transfer agreements from third parties that receive our confidential
data or materials.
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 Peripheral OAS and Coronary
OAS.
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 (“FDCA”) and the FDA’s 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.
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 PMA.
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510(k) Clearance. To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device
is “substantially equivalent” to a predicate device legally marketed in the United States. A device is substantially equivalent if, with respect to the predicate device,
it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and the information submitted
demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. A showing of
substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process can exceed 90 days and may extend to a year or
more.
After a device has received 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, such as a
significant change in the design, materials, method of manufacture or intended use, will require a new 510(k) clearance or PMA (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 the modified device until 510(k) clearance or PMA is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.
We received 510(k) clearances for the Peripheral OAS as set forth under “Business Overview.”
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 FDA’s 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 facilities to
ensure compliance with the FDA’s 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 FDA’s satisfaction;
the data from preclinical studies and clinical trials may be insufficient to support approval;
the manufacturing process or facilities used may not meet applicable requirements; and
changes in FDA approval policies or adoption of new regulations may require additional data.
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 letter authorizing commercial marketing of the device for certain indications. If the FDA’s
evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny PMA or issue a not approvable letter. The FDA may also
determine that additional clinical trials are necessary, in which case the PMA may be delayed for several months or years while the trials are conducted and the
data submitted in an amendment to the PMA application. 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 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.
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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 Investigational Device Exemption (“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 product’s 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 FDA’s 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 investigational 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
FDA’s 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.
Continuing Regulation. After a device is cleared or approved for use 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;
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;
labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and
promotional activities;
• medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or
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serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if malfunctions were to recur;
corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections; and
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.
In addition, the FDA may require a company to conduct post market 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;
fines, injunctions and civil penalties;
product recall or seizure;
unanticipated expenditures;
delays in clearing or approving or refusal to clear or approve products;
withdrawal or suspension of FDA approval;
orders for physician notification or device repair, replacement or refund;
operating restrictions, partial suspension or total shutdown of production or clinical trials; or
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 requirements set forth in the QSR.
The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive
requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing and record keeping. The FDA
enforces the QSR through periodic announced and unannounced inspections that may include the manufacturing facilities of subcontractors. If the FDA believes
that we or any of our contract manufacturers or regulated suppliers is not in compliance with these requirements, it can shut down our manufacturing operations,
require recall of our products, refuse to clear or approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations
or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our
business.
Fraud
and
Abuse
Our operations are directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the FDCA,
the federal Anti-Kickback Statute and the False Claims Act. These laws may impact, among other things, our sales, marketing, education and clinical programs.
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 statute’s 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.
On June 28, 2016, we entered into a Settlement Agreement with the U.S. government, acting through the U.S. Attorney’s Office for the Western District of North
Carolina (the “DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services (the “OIG”) and Travis Thams to resolve
the DOJ investigation of whether we violated the False Claims Act. In connection with the resolution of this matter, we entered into a five-year corporate integrity
agreement (the “Corporate Integrity Agreement”) with the OIG. The Corporate Integrity Agreement requires that we maintain our existing compliance programs
and imposes certain expanded compliance-related requirements during the term of the Corporate Integrity Agreement, including establishment of specific
procedures and requirements regarding consulting activities, co-marketing activities and other interactions with healthcare professionals and healthcare institutions
and the sale and marketing of our products; ongoing monitoring, reporting, certification and training obligations; and the engagement of an independent review
organization to perform certain auditing and reviews and prepare certain reports regarding our compliance with federal health care programs.
The federal Physician Payments Sunshine Act, or the Sunshine Act, and certain state laws require persons to collect and report certain data on payments and other
transfers of value to physicians and teaching hospitals. It is widely anticipated that public reporting under the Sunshine Act and implementing Open Payment
regulations will result in increased scrutiny of the financial relationships between industry, physicians and teaching hospitals.
15
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, our internal business
processes are and will continue to 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. While harmonization
of global regulations has been pursued, requirements continue to differ significantly among countries. We expect this global regulatory environment will continue
to evolve, which could impact the cost, the time needed to approve, and, ultimately, our ability to maintain existing approvals or obtain future approvals for our
products. Regulations of the FDA and, as we continue our international expansions, regulatory agencies outside the United States, may impose extensive
compliance and monitoring obligations on us and our operations. Additionally, 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 the European Union, although actual implementation of 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 manufacturer’s quality system and manufacturing site, as well as review of the technical documentation used to support
application of the CE Mark to one’s product and possibly specific testing of the manufacturer’s 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.
In July 2016, we submitted an application to Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA”) for approval of our Coronary OAS Micro Crown
and received approval in March 2017. In February 2018, Japan became the first international market for any of our products. As part of our Japan
commercialization process we are subject to the requirements of the Japanese Act on Securing Quality, Efficacy and Safety of Pharmaceuticals, Medical Devices,
Regenerative and Cellular Therapy Products, Gene Therapy Products, and Cosmetics (the “PMD Act”). Our quality management system and products are subject
to review and examination by PMDA and subject to approval and enforcement by Japan’s MHLW. The critical suppliers named in our application are also subject
to this review and examination for the activities they perform for us. Non-compliance with the PMD Act could result in revocation or suspension of our license,
revocation of approvals, and criminal sanctions such as fines and/or imprisonment.
In July 2018, we entered into an exclusive distribution agreement with OrbusNeich to sell our Peripheral OAS and Coronary OAS outside of the United States and
Japan. In connection with the introduction of our products in each country under this distribution agreement, we will need to seek regulatory approvals of our
products under the rules and regulations applicable in each such country and we will be required to comply with ongoing requirements, which may be varied and
require us to expend substantial resources.
In addition, our international expansion, operations, distribution and sales will require us to comply with the U.S. Foreign Corrupt Practices Act and similar anti-
bribery laws in other jurisdictions and with U.S. and foreign export control, trade embargo and custom laws.
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. There are no regulated wastes requiring licensing in our Texas facility.
16
Employees
As of June 30, 2018 , we had 652 full-time employees. None of our employees are represented by a labor union or are parties to a collective bargaining agreement,
and we believe that our employee relations are good.
Executive
Officers
of
the
Registrant
The names, ages and positions of our current executive officers are as follows:
Name
Scott R. Ward
Jeffrey S. Points
Rhonda J. Robb
Laura J. Gillund
Alexander Rosenstein
Sandra M. Sedo
Age
58
41
50
57
46
54
Chairman, President and Chief Executive Officer
Position
Chief Financial Officer
Chief Operating Officer
Chief Talent Officer
General Counsel and Corporate Secretary
Chief Compliance Officer
Scott R. Ward, Chairman President and Chief Executive Officer. Mr. Ward has been a member of our Board of Directors since November 2013 and has served as
its Chairman since November 2014. Mr. Ward served as our Interim President and Chief Executive Officer beginning November 30, 2015, and on August 15,
2016, Mr. Ward was appointed as our President and Chief Executive Officer. Since 2013, Mr. Ward has been one of the Managing Directors at SightLine Partners.
Following his appointment as our President and Chief Executive Officer, Mr. Ward continues to be a Managing Director of Sightline Opportunity Management
Fund II, LLC and may provide limited advisory and consulting services to Sightline Partners in this capacity. From 1981 to 2010, Mr. Ward was employed by
Medtronic, Inc. and held a number of senior leadership positions. Mr. Ward was Senior Vice President and President of Medtronic’s CardioVascular business from
May 2007 to November 2010. Prior to that he was Senior Vice President and President of Medtronic’s Vascular business from May 2004 to May 2007, Senior Vice
President and President of Medtronic’s Neurological and Diabetes business, from February 2002 to May 2004, and President of Medtronic’s Neurological business
from January 2000 to January 2002. He was Vice President and General Manager of Medtronic’s Drug Delivery business from 1995 to 2000. Prior to that, Mr.
Ward led Medtronic’s Neurological Ventures in the successful development of new therapies. Mr. Ward serves on the boards of several private companies. Until
April 2016, Mr. Ward was the Chairman of the Board of Creganna Medical. Mr. Ward served as a member of the Board of Surmodics, Inc. from September 2010
to March 2015.
Jeffrey S. Points, Chief Financial Officer. Mr. Points joined us in September 2007 as Corporate Controller, became Senior Director and Controller in July 2013,
Corporate Controller and Treasurer in January 2015, Vice President, Corporate Controller and Treasurer in May 2017 and was promoted to Chief Financial Officer
in February 2018. From July 2005 to September 2007, Mr. Points was Assistant Controller at Empi, a manufacturer and provider of non-invasive medical products
for pain management and physical rehabilitation. From January 1998 to July 2005, Mr. Points held various leadership positions at CliftonLarsonAllen, a national
public accounting firm. Mr. Points also serves as a member of the Board of Directors for The Phoenix Residence, Inc.
Rhonda J. Robb, Chief Operating Officer. Ms. Robb joined us as Chief Operating Officer in January 2018. Prior to joining us, she held several positions at
Medtronic, most recently as Vice President and General Manager of the Heart Valve Therapies Business from 2014 to 2018. From 2009 to 2014, Ms. Robb was
Vice President and General Manager for Medtronic’s Catheter Based Therapies business. Ms. Robb was employed by Medtronic since 1990 and has served in
several other leadership roles, including Vice President of Global Marketing, Coronary and Peripheral; Director Global Marketing, Heart Failure/High Power
Therapies; and Director US Marketing, Cardiac Rhythm & Disease Management.
Laura J. Gillund, Chief Talent Officer. Ms. Gillund joined us in September 2013 as Vice President of Human Resources and Professional Development and was
promoted to Chief Talent Officer in April 2016. Previously, Ms. Gillund was Vice President of Human Resources for C.H. Robinson Worldwide, Inc. from August
2002 to May 2012. Ms. Gillund serves as a member of the Board of Allina Health System and as member of the Board of Directors of College Possible.
Alexander Rosenstein, General Counsel and Corporate Secretary. Mr. Rosenstein joined us in September 2014 as Corporate Legal and Compliance Counsel,
became Corporate Secretary in November 2014, and was promoted to General Counsel in
17
March 2015. From October 2005 to September 2014, Mr. Rosenstein was an attorney at Fredrikson & Byron, P.A., which provides legal services to us from time to
time, and from September 1998 to September 2005, he was an attorney practicing in New York City.
Sandra M. Sedo, Chief Compliance Officer. Ms. Sedo joined us in June 2016 as Corporate Compliance Officer and was promoted to Chief Compliance Officer in
July 2017. Prior to joining us, Ms. Sedo consulted for medical device companies in the legal and compliance areas. From 2005 to 2015, Ms. Sedo was employed by
Medtronic, Inc. in various legal and compliance roles, and prior to that was a partner at Dorsey & Whitney LLP, which provides legal services to us from time to
time.
Item 1A. Risk
Factors
.
Risks Relating to Our Business and Operations
We
have
a
history
of
net
losses
and
a
short
commercialization
experience,
and
we
may
continue
to
incur
losses.
We were profitable in fiscal 2018 but have incurred net losses in each prior fiscal year since our formation in 1989. For the years ended June 30, 2018 , 2017 , and
2016 , we had net income (losses) of $ 1.7 million , $(1.8) million , and $(56.0) million , respectively. As of June 30, 2018 , we had an accumulated deficit of
approximately $327.6 million . We commenced commercial sales of the Peripheral OAS in September 2007 and the Coronary OAS in October 2013, and our short
commercialization experience makes it difficult for us to predict future performance. We expect to continue to incur significant expenses for sales and marketing,
research and development, and manufacturing as we expand our product offering, launch our business in international markets and continue to commercialize the
Peripheral OAS and the Coronary OAS and develop and commercialize future versions of the Peripheral OAS, the Coronary OAS, and any future products.
Additionally, we expect that our general and administrative expenses will increase to support business growth. If we are unable to balance revenue growth and cost
management, our operating losses may continue.
We
may
be
unable
to
sustain
our
historical
revenue
growth.
Other than a 4.9% decline in revenue from sales of our Peripheral OAS during fiscal 2016, our revenue from sales of our OAS devices has grown in each of the
fiscal years since we began commercialization in September 2007. Our ability to increase our revenues in future periods will depend on our ability to increase sales
of the OAS and other products we introduce, which will, in turn, depend in part on our success in growing our customer base and reorders 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.
The
Peripheral
OAS,
the
Coronary
OAS
and
other
products
may
never
achieve
broad
market
acceptance.
The Peripheral OAS, Coronary OAS, and other products we develop or market now or in the future 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:
•
•
•
•
•
•
•
•
•
•
the actual and perceived effectiveness and reliability of our products;
the prevalence and severity of any adverse patient events involving our products;
the results of any clinical trials relating to use of our products;
the availability, relative cost and perceived advantages and disadvantages of alternative technologies or treatment methods for conditions treated by our
products;
the degree to which treatments using our products are approved for reimbursement by public and private insurers;
the degree to which physicians adopt our products;
the extent to which we are successful in educating physicians about PAD and CAD in general and the existence and benefits of our products in
particular;
the strength of our marketing and distribution infrastructure;
the level of education and awareness among physicians and hospitals concerning our products; and
our reputation among physicians and hospitals.
Failure of our products to significantly penetrate current or new markets would negatively impact our business, financial condition and results of operations.
18
Our
customers
may
not
be
able
to
achieve
adequate
reimbursement
for
using
the
Peripheral
OAS
and
the
Coronary
OAS
or
other
products,
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 our products to continue to 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. While third-party payors are currently providing reimbursement for
our products, we can give no assurance that these third-party payors will continue to provide adequate reimbursement for use of the Peripheral OAS and the
Coronary OAS and our other products to permit hospitals and doctors to consider the products cost-effective for patients requiring treatment, or that current
reimbursement levels for our products will continue. In addition, the overall amount of reimbursement available for PAD and CAD 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 our products. In order to position our
products 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
our current products or any future products we may develop will be viewed as sufficiently cost-effective to warrant adequate coverage and reimbursement levels.
In addition, in June 2016, we entered into a Settlement Agreement with the U.S. government, acting through the U.S. Attorney for the Western District of North
Carolina (the “DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services (the “OIG”), and Travis Thams, and a
five-year Corporate Integrity Agreement with the OIG. In the event of a breach of the Settlement Agreement or the Corporate Integrity Agreement, we could be
excluded from participation in federal health care programs. If third-party coverage and reimbursement for our products is limited or not available, the acceptance
of our products and, consequently, our business will be substantially harmed.
Healthcare
reform
legislation
could
adversely
affect
our
operating
results
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, some of which have been enacted into law, such as the Patient Protection and Affordable Care Act, or the Patient
Act. The Patient Act and any additional healthcare proposals and laws that may be enacted in the future could also 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 Patient Act and future
healthcare legislation could adversely affect our revenue and financial condition. The U.S. Congress has in the past considered legislation to repeal, modify or
replace the Patient Act. We cannot predict the outcome of these efforts and, as a result, we cannot predict the effect that any such repeal, modification or
replacement will have on our business and results of operations.
Our
financial
performance
may
be
adversely
affected
by
medical
device
tax
provisions
in
the
health
care
reform
legislation.
The imposition of the 2.3% medical device excise tax enacted as part of the Patient Act has adversely affected our financial results and has required, and will
continue to require, us to identify ways to reduce spending in other areas or raise additional capital to offset the increased expense. Although the excise tax has
been suspended by Congress until the end of 2019, its status is unclear for subsequent years. We have not been able to pass along the cost of the tax to our
customers or offset the cost of the tax through higher sales volumes resulting from the expansion of health insurance coverage and do not expect to be able to do so
in the future. Ongoing implementation of this legislation could have a material adverse effect on our results of operations and cash flows.
19
We
have
limited
data
and
experience
regarding
the
safety
and
efficacy
of
the
Peripheral
OAS
and
Coronary
OAS.
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.
Because our technology is relatively new in the treatment of PAD and CAD, we have performed clinical trials only with limited patient populations. The long-term
effects of using the Peripheral OAS and the Coronary OAS in a large number of patients have not been studied and the results of short-term clinical use of the
Peripheral OAS or the Coronary OAS do not necessarily predict long-term clinical benefits or reveal long-term adverse effects. We are conducting and developing
several clinical trials, and there are substantial risks and uncertainties involved in these trials. We must devote substantial resources to our clinical trials, clinical
trials often take several years to develop and conduct, there are difficulties involved in locating sites and patients to participate in our clinical trials, and the results
of every trial are uncertain until the trial is completed. These uncertainties could adversely impact our financial results, our reputation and the reputation of our
products.
Clinical trials conducted with the Peripheral OAS and the Coronary OAS 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 Peripheral OAS and the Coronary OAS and materially harm our business.
We
face
significant
competition,
must
innovate
to
stay
competitive,
and
may
be
unable
to
sell
the
Peripheral
OAS,
the
Coronary
OAS
or
any
other
products
at
profitable
levels.
The market for medical devices is highly competitive, dynamic and marked by rapid and substantial technological development and product innovation. Our ability
to compete depends on our ability to innovate successfully, and, while certain barriers exist to entry into our market, we cannot assure that new entrants or existing
competitors will not be able to develop products that compete directly with our products. We compete against very large and well-known stent and balloon
angioplasty device manufacturers, atherectomy catheter manufacturers, pharmaceutical companies, and companies that provide products used by surgeons in
peripheral and coronary bypass procedures. 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.
Our competitors may:
develop and patent processes or products earlier than we will;
obtain regulatory clearances or approvals for competing medical device products more rapidly than we will;
•
•
• market their products more effectively than we will;
sell their products at lower prices than we do; or
•
develop more effective or less expensive products or technologies that render our technology or products obsolete or non-competitive.
•
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. In addition, increased consolidation in the healthcare industry has resulted in companies with greater market power,
which increases competition for goods and services.
We experience significant competition on the pricing of our products and expect to continue to experience pressure from our customers to lower our prices. Our
customers may require lower pricing in connection with contract renewals or otherwise for us to continue to sell our products to them. In addition, if our
Purchasing Agreement with HealthTrust Purchasing Group, L.P. is terminated, our financial results will be materially adversely affected.
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
efforts
to
develop
new
products
may
not
be
successful
or
the
new
products
may
not
provide
the
revenue
we
expect.
We plan to add to our product portfolio through both internal development efforts and through acquisitions, distribution agreements, licensing transactions,
manufacturing agreements and other strategic partnerships. For example, we recently entered into an agreement with Aerolase Corp. for the co-development of a
new vascular laser device for physicians to use in more effectively treating multiple forms of arterial disease and we are developing a new temporary hemodynamic
support
20
pump.
These new products and technologies may fail to reach the market or may only have limited commercial success because of efficacy or safety concerns, failure to
achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, limited scope of approved uses, excessive costs to manufacture, failure to
establish or maintain intellectual property rights, or infringement of the intellectual property rights of others. Even if we successfully develop new products or
enhancements or new generations of our existing products, they may be quickly rendered obsolete by changing customer preferences, changing industry standards,
or competitors’ innovations. Innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice or
uncertainty over third-party reimbursement. We cannot provide certainty as to when or whether any of our products under development will be launched, whether
we will be able to develop, license, or otherwise acquire compounds or products, or whether any products will be commercially successful. Failure to launch
successful new products or technologies, or new indications or uses for existing products, may cause our products or technologies to become obsolete, causing our
revenues and operating results to suffer.
We
have
limited
commercial
manufacturing
experience
and
could
experience
difficulty
in
producing
the
Peripheral
OAS
and
the
Coronary
OAS
or
may
need
to
depend
on
third
parties
to
manufacture
the
products.
We have limited experience in commercially manufacturing the Peripheral OAS, even less experience in commercially manufacturing the Coronary OAS and no
experience manufacturing these products in the quantities 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 Peripheral OAS and the
Coronary OAS 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.
The forecasts of demand we use to determine order quantities and lead times for components purchased from outside suppliers may be incorrect. Our 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 Peripheral OAS and Coronary OAS and future products. 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 certain components of the Peripheral OAS and the Coronary OAS, including the diamond-grit-coated crown
and our ViperSlide Lubricant. In some cases, we do not have long-term supply agreements with, or guaranteed commitments from, our suppliers, including single
source suppliers. We depend on our suppliers to provide us and our customers with materials in a timely manner that meet our 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’ demands. These suppliers may cease producing the components we purchase from them or otherwise decide to cease doing business
with us.
Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our products would limit our ability to
manufacture our products and could have a material adverse effect on our business, financial condition and results of operations.
We
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 and other key personnel. Our success will depend on our ability to retain senior management and to attract and
retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, engineers and other highly skilled personnel and
to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists,
clinical and regulatory specialists and engineers could prevent us from achieving our objectives of continuing to grow our company. We do not carry key person
life insurance on any of our employees.
21
We
have
increased
the
size
of
our
organization
and
may
need
to
do
so
in
the
future,
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.
We have significantly expanded the size of our organization over the past three years, particularly in the number of sales and marketing personnel, and may need to
do so in the future. The growth we may experience in the future may provide challenges to our organization, requiring us to also rapidly expand other aspects of
our business, including our manufacturing operations. Rapid expansion in personnel may result in less experienced people producing and selling our products,
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
intend
to
sell
our
products
internationally
in
the
future,
but
we
may
experience
difficulties
in
obtaining
approval
to
do
so
or
in
successfully
marketing
our
products
internationally
even
if
approved.
Currently, substantially all of our revenues are in the United States, and in fiscal 2018, commercial sales of certain of our products commenced in Japan, which
became the first international market for our products. We intend to further expand our international sales in the future, both in Japan with Medikit and in the rest
of the world under our Distribution Agreement with OrbusNeich. There can be no guarantee that we will receive approval to sell our products in any additional
countries or that any of our approvals will be maintained, nor can there be any guarantee that any sales would result even if such approval is received. We will be
substantially reliant upon Medikit and OrbusNeich for our international sales, and any failure of such distributors to effectively sell our products could have a
material adverse effect on our international efforts and harm our financial position. In addition, we will incur substantial expenses in connection with international
expansion. Our inability to successfully enter international markets and manage business on a global scale could negatively affect our financial results.
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. Additional funds may not be available when we need them on terms that are acceptable
to us, or at all. 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. 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.
We
face
a
risk
of
non-compliance
with
the
financial
covenants
in
our
loan
and
security
agreement
with
Silicon
Valley
Bank.
We are party to a loan and security agreement with Silicon Valley Bank. This agreement requires us to maintain, among other things, either (i) minimum
unrestricted cash at Silicon Valley Bank and unused availability on our line of credit of at least $10.0 million or (ii) minimum trailing three-month Adjusted
EBITDA of $1.0 million and contains 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. If we are
unable to meet the financial or other covenants under the current loan and security agreement or negotiate future waivers or amendments of such covenants, events
of default could occur under the agreement. Upon the occurrence and during the continuance of an event of default under the agreement, Silicon Valley Bank has
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 agreement and/or ceasing to provide additional loans under our line of credit, which could have a material
adverse effect on us.
The restrictive covenants under this agreement 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 this agreement 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, which
consent may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.
We
lease
our
corporate
headquarters,
which
subjects
us
to
ongoing
payment
obligations
and
compliance
with
certain
covenants.
22
On March 30, 2017, we completed the sale of our corporate headquarters. In connection with such sale, we entered into a lease agreement for our corporate
headquarters, which has an initial term of fifteen years, with four consecutive renewal options of five years each. Under this lease, we are obligated to pay a base
annual rent in the first year of $1,637,500 with annual escalations of 3%. If we are unable to make such rent payments or comply with the other covenants
contained in the lease, the landlord could take certain actions against us, up to and including termination of the lease, which could have an adverse impact on our
business, results of operations or financial conditions.
Our
stock
price
is
volatile
and
subject
to
significant
fluctuations.
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. Our common stock traded as low as $20.58 and as high as $34.51 per
share during the 12-month period ended June 30, 2018 . Factors that may cause the market price of our common stock to fluctuate include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
announcements of technological or medical innovations for the treatment of vascular disease;
quarterly variations in our or our competitors’ results of operations;
failure to meet estimates or recommendations by securities analysts who cover our stock;
failure to meet our own financial estimates;
accusations that we have violated a law or regulation;
recalls of our products;
significant litigation;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
changes in accounting principles;
actual or anticipated changes in healthcare policy and reimbursement levels;
developments relating to our competitors and markets; and
general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
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.
Our
ability
to
use
our
net
operating
loss
carryforwards
and
certain
other
tax
attributes
may
be
limited.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use
its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or taxes may be
limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage
points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced an ownership change in the past and we may also
experience ownership changes in the future as a result of future transactions in our stock, some of which may be outside our control. As a result, if we earn net
taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset U.S. federal and state taxable income
or taxes may be subject to limitations.
An
interruption
in
or
breach
of
security
of
our
information
or
manufacturing
systems
could
cause
a
loss
of
business
or
damage
to
our
reputation.
We rely on information and communication systems in our manufacturing and in the conduct our business. If there is any failure or interruption of these systems,
such an incident could cause failures or disruptions in our customer relationship systems or product manufacturing. In addition, we could be subject to a cyber
incident, such as an intentional attack or an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our
operations, corrupt our data, or result in release of our confidential information. The occurrence of any failures, interruptions or cyber incidents could cause a loss
of business or damage to our reputation and have a material effect on our business, financial condition, results of operations and cash flows.
23
The
Tax
Cuts
and
Jobs
Act
of
2017
may
have
a
significant
impact
on
our
financial
condition
and
results
of
operations.
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017. The Tax Act made numerous changes to U.S. federal corporate tax
law and is expected to reduce our effective tax rate for the year ended June 30, 2018 and future periods. Effective January 1, 2018, the Tax Act lowers the U.S.
corporate tax rate from 35% to 21% and prompts various other changes to U.S. federal corporate tax law. We have assessed the impact the Tax Act with our
professional advisors which resulted in the remeasurement of our deferred tax assets and valuation allowance. The impact the Tax Act will have on us in future
periods is uncertain and may adversely affect our financial condition and results of operations.
The
effects
of
hurricanes,
flooding
and
other
natural
disasters
may
impact
our
sales,
inventories
and
supply
availability,
which
could
adversely
affect
our
financial
condition
and
results
of
operations.
In August and September 2017, Hurricanes Harvey and Irma made landfall along the Texas Gulf Coast and in the State of Florida, respectively, bringing high
winds, unprecedented rain and extreme flooding to those areas. A significant portion of our sales is generated from these areas. Procedure volumes in the Houston
area and in Florida decreased during the pendency and immediate aftermath of the hurricanes and flooding, which decreased the number of our products used
during this time. Any sustained decrease in procedure volumes from hurricanes and other natural disasters that affect any areas in which our customers are located
will result in decreased sales in these areas and could have a material adverse effect on our financial condition and results of operations.
In addition, we maintain a 46,000-square foot production facility in Pearland, Texas, which is just outside of Houston in southeast Texas. The storm and its
aftermath did not cause damage to our Pearland facility. However, any future loss of operations at the Pearland facility as a result of natural disasters eliminates an
alternate production source in the event that our manufacturing capacity at the Minnesota facility is disrupted for any reason.
Any disruptions in our ability to timely manufacture and supply our products to our customers could cause us to experience delays in recognizing revenue or even
to lose sales altogether, and any additional hurricanes, flooding or other natural disasters affecting areas in which our products are sold could result in decreased
numbers of cases using our products. Any of these events could have a material adverse effect on our financial condition and results of operations.
Risks Related to Government Regulation
Our
ability
to
market
the
Peripheral
OAS
in
the
United
States
is
limited
to
use
as
a
therapy
in
patients
with
PAD
and
our
ability
to
market
the
Coronary
OAS
in
the
United
States
is
limited
to
use
as
a
therapy
in
patients
with
severely
calcified
CAD,
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.
We received FDA 510(k) clearances in the United States for use of the Peripheral OAS as a therapy in patients with PAD, and we received PMA to use the
Coronary OAS as a therapy in patients with severely calcified CAD. These general clearances and approvals restrict our ability to market or advertise the
Peripheral OAS and the Coronary OAS beyond these uses and could affect our growth.
If we determine to market our orbital technology in the United States for other uses, we would need to conduct further clinical trials and obtain premarket approval
from the FDA. Clinical trials are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. There is no assurance that we
will be able to obtain FDA approval to use our orbital atherectomy technology for applications other than the treatment of PAD and CAD.
We are or will be subject to an extensive set of post-market controls that apply to us as we commercialize our products, including annual PMA reports, Medical
Device Reports on serious adverse events, complaint handling and analysis under the FDA’s QSR, export controls, advertising and promotion requirements, and
potential post-market studies required by the FDA.
We and our suppliers are also subject to regulation by various state authorities, which may inspect our or our suppliers’ facilities and manufacturing processes and
enforce state regulations. Failure to comply with applicable state regulations may result in seizures, injunctions or other types of enforcement actions.
Our promotion of the Peripheral OAS and the Coronary OAS is closely controlled by the FDA and enforcement activities could limit our ability to inform potential
customers of the features of the products.
24
Our
products
may
in
the
future
be
subject
to
product
recalls
that
could
harm
our
reputation
and
product
liability
claims
that
could
exceed
the
limits
of
available
insurance
coverage.
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. For example, since commercialization of the Peripheral OAS, we have had instances of recalls,
including, in the year ended June 30, 2017 minor recalls involving guidewires and the OAS saline infusion pump recall discussed below. Any 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.
Also, if any of our products is 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 use, misuse or off-label use of our products may result in injuries that lead to product liability suits, which could
be costly to our business. We cannot prevent a physician from using any of our products for off-label applications. 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 claims
that are brought against us.
The
recall
of
our
saline
infusion
pumps
could
adversely
affect
our
business
and
financial
results,
harm
our
reputation
and
result
in
legal
claims
against
us.
In April 2017, we initiated a voluntary recall of one type of our saline infusion pumps. While we have made design changes to this pump and have launched a next
generation pump to address the issues that led to the recall, it is possible that we did not adequately assess the cause and effect of these issues and we may not have
adequately modified the pump design in order to prevent these issues from happening in the future. Any additional problems with our pumps could cause delays in
the ability of our customers to perform procedures using our devices and prevent us from adding new customers who may not have access to other pumps that can
be used in procedures, which could harm our reputation with customers, adversely affect our ability to generate revenue, and have an adverse effect on our
financial condition and results of operations. Any future pump recall would harm our reputation and divert managerial and sales force attention and financial
resources from other aspects of our business and would require us to incur substantial expense.
We
are
subject
to
many
laws
and
governmental
regulations
and
any
adverse
regulatory
action
may
materially
adversely
affect
our
financial
condition
and
business
operations.
Our products and related manufacturing processes, clinical data, adverse events, recalls and 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 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:
•
•
•
•
•
•
•
•
•
warning or other letters from the FDA;
fines, injunctions and civil penalties;
product recall or seizure;
unanticipated expenditures;
delays in clearing or approving or refusal to clear or approve products;
withdrawal or suspension of approval or clearance by the FDA or other regulatory bodies;
orders for physician notification or device repair, replacement or refund;
operating restrictions, partial suspension or total shutdown of production or clinical trials; and
criminal prosecution.
If any of these actions were to occur, it would harm our reputation and cause our product sales to suffer.
Our operations are also 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. Environmental laws and regulations
could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations.
25
In addition, 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, as further described below.
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, which could materially
adversely affect our financial condition and business operations.
In addition, we have agreements with federal, state and local government agencies, such as the Veterans Administration, and third-party healthcare providers that
receive government funding to sell our products. We are subject to extensive regulatory compliance obligations in the award, performance and administration of
our government contracts, including regulations relating to procurement integrity, pricing protection, export control, government security, employment practices,
accuracy of records and the recording of costs. The other parties to these agreements have the right to audit us to determine whether we are in compliance with
these agreements. Failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or
termination, repayment of amounts, the assessment of penalties and fines, and/or suspension or debarment from government contracting or subcontracting in the
future, any of which could negatively affect our financial condition and results of operations.
We
are
subject
to
federal
and
state
laws
prohibiting
“kickbacks”
and
false
and
fraudulent
claims
which,
if
violated,
could
subject
us
to
substantial
penalties.
Additionally,
any
challenges
to
or
investigations
into
our
practices
under
these
laws
could
cause
adverse
publicity
and
be
costly
to
respond
to,
and
thus
could
harm
our
business.
The federal healthcare program Anti-Kickback Statute, and similar state laws, prohibit payments that are intended to induce health care professionals or others
either to refer patients or to purchase, lease, order or arrange for or recommend the purchase, lease or order of healthcare products or services. A number of states
have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and
other health care professionals and health care organizations. In addition, some state statutes, most notably laws in Massachusetts and Vermont, impose outright
bans on certain gifts to physicians as well as requiring reporting of payments to physicians. Some of these laws, referred to as “aggregate spend” or “gift” laws,
carry substantial fines if they are violated. The federal Physician Payments Sunshine Act, or the Sunshine Act, requires us to collect and report certain data on
payments and other transfers of value to physicians and teaching hospitals.
It is widely anticipated that public reporting under the Sunshine Act and implementing Open Payments regulations will result in increased scrutiny of the financial
relationships between industry, physicians and teaching hospitals. These anti-kickback, public reporting and aggregate spend laws affect our sales, marketing,
promotional and clinical activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other
potential purchasers or users of medical devices. They also impose additional administrative and compliance burdens on us. In particular, these laws influence,
among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs, physician consulting
and other service arrangements, and clinical trials. If we were to offer or pay inappropriate inducements to purchase our products, we could be subject to a claim
under the federal healthcare program Anti-Kickback Statute or similar state laws. If we fail to comply with particular reporting requirements, we could be subject
to penalties under applicable federal or state laws. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to
be presented, claims for payments to Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as
claimed. Although we do not submit claims directly to government healthcare programs or other payors, manufacturers can be held liable under these laws if they
are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper
financial inducements, or through certain other activities.
26
In providing billing and coding information to customers, we make every effort to ensure that the billing and coding information furnished is accurate and that
treating physicians understand that they are responsible for all treatment decisions. Nevertheless, we cannot provide assurance that the government will regard any
billing errors that may be made as inadvertent or that the government will not examine our role in providing information to our customers and physicians
concerning the benefits of therapy with our devices. Likewise, our financial relationships with customers, physicians, or others in a position to influence the
purchase or use of our products may be subject to government scrutiny or be alleged or found to violate applicable fraud and abuse laws. False claims laws
prescribe civil, criminal and administrative penalties for noncompliance, which can be substantial. Moreover, an unsuccessful challenge or investigation into our
practices could cause adverse publicity, and be costly to respond to, and thus could harm our business and results of operations.
On May 8, 2014, we received a letter from the DOJ stating that it was investigating us to determine whether we had violated the False Claims Act, and on June 28,
2016, we entered into a Settlement Agreement with the United States of America, acting through the DOJ and on behalf of the OIG, and Travis Thams, who filed
the qui tam complaint underlying the DOJ’s investigation (the “Civil Action”), to resolve the investigation by the DOJ and the Civil Action. The existence of the
investigation and subsequent settlement could negatively affect our reputation and harm our business and results of operations. In addition, the release we received
from the government in the Settlement Agreement related to particular conduct alleged in the complaint underlying the investigation. If the government determines
that other conduct alleged in the complaint for which the government did not grant us a release merits additional investigation or if the government pursues any
action against us relating to this other alleged conduct, then we may need to expend additional amounts to defend ourselves, our management would undergo the
distraction of additional investigation and potential litigation, our reputation could be harmed, and our business and results of operations could be materially
adversely affected.
Compliance
with
the
terms
and
conditions
of
our
Corporate
Integrity
Agreement
requires
significant
resources
and
management
time
and,
if
we
fail
to
comply,
we
could
be
subject
to
penalties
or,
under
certain
circumstances,
excluded
from
government
healthcare
programs,
which
would
materially
adversely
affect
our
business.
On June 28, 2016, we entered into a five-year Corporate Integrity Agreement with the OIG. The Corporate Integrity Agreement requires that we maintain our
existing compliance programs and imposes certain expanded compliance-related requirements during the term of the Corporate Integrity Agreement, including
establishment of specific procedures and requirements regarding consulting activities, co-marketing activities and other interactions with healthcare professionals
and healthcare institutions and the sale and marketing of our products; ongoing monitoring, reporting, certification and training obligations; and the engagement of
an independent review organization to perform certain auditing and reviews and prepare certain reports regarding our compliance with federal health care
programs. Maintaining the broad array of processes, policies and procedures necessary to comply with the Corporate Integrity Agreement will require a significant
portion of management’s attention and the application of significant resources. The costs associated with implementation of and compliance with the Corporate
Integrity Agreement could be substantial and may be greater than we currently anticipate. In addition, while we have developed and instituted a corporate
compliance program, we cannot guarantee that we, our employees, our consultants or our contractors are or will be in compliance with all potentially applicable
U.S. federal and state regulations and/or laws, all potentially applicable foreign regulations and/or laws and/or all requirements of the Corporate Integrity
Agreement. In the event of a breach of the Corporate Integrity Agreement, we could become liable for payment of certain stipulated penalties or could be excluded
from participation in federal health care programs. The costs associated with compliance with the Corporate Integrity Agreement, or any liability or consequences
associated with its breach, could have an adverse effect on our business, revenues, earnings and cash flows.
Regulations
related
to
“conflict
minerals”
may
force
us
to
incur
additional
expenses,
may
result
in
damage
to
our
business
reputation
and
may
adversely
impact
our
ability
to
conduct
our
business.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of certain minerals,
known as conflict minerals, that are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer’s
efforts to prevent the sourcing of such minerals and metals produced from those minerals. These disclosure requirements require ongoing due diligence efforts and
disclosure obligations. There are costs associated with complying with these disclosure requirements, including for diligence in regards to the sources of any
conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of
such verification activities. In addition, our ongoing implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our
products.
27
Our
anticipated
international
expansion
will
subject
us
to
increased
legal
and
regulatory
requirements,
which
could
have
a
material
effect
on
our
business.
In February 2018, Medikit, our exclusive distributor in Japan, commenced sales of our Coronary OAS Micro Crown, and, in July 2018, we entered into an
exclusive Distribution Agreement with OrbusNeich to sell our Peripheral and Coronary OAS outside of the United States and Japan. We expect sales by
OrbusNeich to commence in Southeast Asia, Europe and the Middle East in the year ending June 30, 2019. Movement into international markets will subject us
and our products to different and increased laws and regulations, including foreign medical device regulations; tax laws; increased financial accounting and
reporting burdens and complexities; export laws; and the Foreign Corrupt Practices Act and similar anti-corruption laws. Although we have and will continue to
implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors, distributors and
agents, as well as those companies to which we will outsource certain aspects of our business operations, including those based in foreign countries where practices
that violate such U.S. laws may be customary, will comply with our internal policies. Medikit and OrbusNeich may appoint sub-distributors of our products and we
will have limited ability to control the actions of these sub-distributors, but we may be held responsible by governmental authorities for the actions of these sub-
distributors. We will incur additional compliance costs associated with global operations, and any alleged or actual violations of these laws and regulations could
subject us to government scrutiny, severe criminal or civil fines, sanctions and other liabilities, and prohibitions on business conduct, and could negatively affect
our business, reputation, operating results, and financial condition.
New
regulatory
requirements
will
impose
additional
burdens
on
us,
and
our
business
could
be
adversely
affected
if
we
are
unable
to
satisfy
all
applicable
new
requirements
in
a
timely
fashion.
New regulations impacting our products are periodically adopted. These regulations may require us to change our existing product designs in order to continue
marketing our products, which could result in increased expenditures and in risks that we may be unable to successfully change our designs to satisfy the new
requirements. For example, IEC 60601-1-2 (4th Edition) was published in July 2014 and updates the performance requirements with respect to electromagnetic
interference for medical devices. In the United States, the 4th Edition requirements go into effect on December 31, 2018 for new devices and devices that have
undergone substantial changes. We have taken steps to ensure that our products sold in the United States will be compliant with the 4th Edition requirements, but
we could experience technical and regulatory delays. If our products do not meet the 4th Edition standards, we may be delayed in launching new products or
selling existing products that require material changes, including, for example, as a result of a change of supplier or quality issues. Any delays in selling our
products resulting from non-compliance with 4th Edition and other new regulatory requirements could have a material adverse effect on our business.
The
impact
of
restrictive
trade
policies
in
the
United
States
and
the
potential
corresponding
actions
by
other
countries
could
adversely
affect
our
financial
performance.
The U.S. federal government has recently implemented tariffs on certain products imported into the United States from China, and the Chinese government has
responded with retaliatory tariffs on certain products, including medical devices, exported from the United States to China. We cannot predict whether the United
States will implement additional trade restrictions with respect to China or other countries and how such countries would respond to such trade restrictions. If these
tariffs continue or are expanded, they would make it more difficult to sell our products in China or other markets outside of the United States, if we seek to expand
into the Chinese or other markets in the future, and they may increase the costs of procuring component parts for our products from China or other countries.
Restrictive trade policies may also harm the United States and global economies generally, which would adversely affect our business in a variety of ways,
including reducing the market for our products, causing a downturn in the trading price of our common stock, and restricting access to credit if we seek it for future
growth.
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. Our issued patents and related intellectual
property may not be adequate to protect us or permit us to gain or maintain a competitive advantage. Also, we cannot be assured that any of our pending patent
applications will result in the issuance of patents to us. 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 and achieve competitive advantages.
28
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. In
addition, 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.
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.
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 having a policy that our employees, consultants, contractors, outside scientific collaborators and
other advisors execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement. 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 in securing
necessary assignments from these third parties.
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. We are aware of numerous patents issued to third parties that relate to the manufacture and use of medical devices for the treatment of vascular
disease. 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. There
could also be existing patents of which we are unaware that one or more aspects of our 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 management’s
attention from our business and harm our reputation. 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.
Item 1B. Unresolved
Staff
Comments.
None.
Item 2. Properties.
Our principal executive offices are located in our headquarters, a 125,000 square foot facility in St. Paul, Minnesota, which contains dedicated research and
development, training and education, and manufacturing facilities, and our central administrative offices. In March 2017, we sold the Minnesota facility and
entered into an agreement to lease the facility through March 2032.
In September 2009, we entered into an agreement to lease a 46,000 square foot production facility in Pearland, Texas beginning in April 2010 and continuing
through April 2020. This facility primarily accommodates additional manufacturing activities.
We believe that our current facilities are substantially adequate for our current and anticipated future needs for the foreseeable future.
Item 3. Legal
Proceedings
.
None.
Item 4. Mine
Safety
Disclosures.
None.
29
PART II
Item 5.
Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities.
Price Range of Common Stock and Dividend Policy
We trade 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:
Fiscal Year Ended June 30, 2018
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal Year Ended June 30, 2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Common Stock
High
Low
33.11 $
29.47
27.80
34.51
25.22 $
27.38
29.70
33.11
26.62
23.00
20.58
20.89
18.00
21.29
23.28
27.73
The number of record holders of our common stock on August 17, 2018 was approximately 139. No cash dividends have been previously paid on our common
stock and none are anticipated during the year ending June 30, 2019 .
Recent Sales of Unregistered Securities
None.
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.”
30
Performance Graph
The following graph compares the cumulative total stockholder return of our common stock (“CSII”) with the return of the Standard & Poor’s 500 Stock Index
(“S&P”) and the S&P Health Care Index (“S&P HC”) from June 30, 2013, through June 30, 2018. The comparisons assume $100 was invested on June 30, 2013 in
our common stock, the S&P 500 Stock Index and the S&P Health Care Index and also assumes that any dividends are reinvested. The returns set forth on the
following graph are based on historical results and are not intended to suggest future performance.
Item 6. Selected
Financial
Data.
Five-Year Selected Financial Data
(in thousands, except per share amounts)
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:
Net revenues
Income (loss) from operations
Net income (loss)
Basic and diluted earnings per share
Cash dividends declared per share
FINANCIAL POSITION AT YEAR END:
Total assets
Total long-term liabilities
Stockholders’ equity
$
$
$
$
$
$
$
$
2018
2017
2016
2015
2014
217,043 $
204,906 $
2,234 $
1,712 $
0.05 $
— $
(1,542) $
(1,792) $
(0.06) $
— $
178,184 $
(56,077) $
(56,024) $
(1.72) $
— $
181,544 $
(32,637) $
(32,822) $
(1.04) $
— $
136,612
(33,489)
(35,290)
(1.25)
—
203,352 $
31,422 $
134,470 $
193,940 $
34,579 $
118,389 $
142,406 $
171,328 $
181,901
6,010 $
2,005 $
117
100,897 $
139,435 $
152,055
31
Item 7. Management’s
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 technology company leading the way in the effort to successfully treat patients suffering from peripheral and coronary artery diseases, including
those with arterial calcium, the most difficult arterial disease to treat. We are committed to clinical rigor, constant innovation and a defining drive to set the
industry standard to deliver safe and effective medical devices that improve lives of patients facing these difficult disease states.
Peripheral
Our Peripheral OAS products are catheter-based platforms capable of treating a broad range of plaque types in leg arteries both above and below the knee,
including calcified plaque, and address many of the limitations associated with other existing surgical, catheter and pharmacological treatment alternatives. The
micro-invasive devices use small access sheaths that can provide procedural benefits and allow physicians to treat PAD patients in even the small and tortuous
vessels located below the knee and facilitate access through alternative sites in the ankle, foot and wrist, as well as in the groin.
The United States Food and Drug Administration (“FDA”) has granted us 510(k) clearances for our Peripheral OAS as a therapy in patients with PAD, as
discussed in Item 1 of Part I of this Form 10-K.
Coronary
Our coronary arterial disease (“CAD”) product, the Diamondback 360 Coronary OAS (“Coronary OAS”), is marketed as a treatment for severely calcified
coronary arteries. The Coronary OAS is a catheter-based platform designed to facilitate stent delivery in patients with CAD who are acceptable candidates for
percutaneous transluminal coronary angioplasty or stenting due to de novo, severely calcified coronary artery lesions. The Coronary OAS design is similar to
technology used in our Peripheral OAS, customized specifically for the coronary application.
In January 2018, we announced our relationship with OrbusNeich ® to be the exclusive U.S. distributor of OrbusNeich balloon products. In March 2018, the FDA
granted 510(k) clearance for the OrbusNeich 1.0mm Sapphire ® 11 Pro coronary balloon (“1.0mm balloon”). The 1.0mm balloon, the first and only 1.0mm
coronary balloon available in the U.S., offers industry-leading entry and crossing profiles and is precision engineered for crossing and treating extremely tight and
complex lesions. We anticipate OrbusNeich’s full balloon product portfolio will become available in the United States in fiscal 2019 and fiscal 2020.
International
In November 2016, we signed an exclusive distribution agreement with Medikit Co., Ltd. (“Medikit”) to sell our Coronary and Peripheral OAS in Japan. In March
2017, we received approval from Japan’s Ministry of Health, Labor and Welfare for our Coronary OAS Micro Crown. On February 1, 2018, the Coronary OAS
Micro Crown received reimbursement approval in Japan, followed by the first commercial sales, making Japan the first international market for any of our
products. The Coronary OAS Micro Crown is the only atherectomy device designed to both pilot tight, calcific lesions and treat 2.5 to 4mm vessels with a single
device.
In October 2014, we received CE Mark for our Stealth 360 Peripheral OAS device. In July 2018, we entered into an exclusive Distribution Agreement with
OrbusNeich to sell our Peripheral and Coronary OAS outside of the United States and Japan. We expect that OrbusNeich will commence sales of our products in
certain countries in Southeast Asia, Europe and the Middle East during our fiscal year ending June 30, 2019.
FINANCIAL OVERVIEW
32
Net Revenues. We derive substantially all of our revenues from the sale of Peripheral OAS, the Coronary OAS and ancillary products in the United States. The
Peripheral OAS and Coronary OAS each use a disposable, single-use, low-profile catheter that travels over our proprietary ViperWire guide wire. The systems use
a saline infusion pump as a power supply for the operation of the catheter. Additional ancillary products include the ViperSlide Lubricant, ViperTrack Radiopaque
Tape, OrbusNeich balloons, and ZILIENT guidewires.
We have observed some degree of seasonality in our business, as there tends to be a lower number of procedures that use our products during the three months
ending September 30. Interventional procedure volume usually grows throughout the course of the fiscal year, with the quarter ending June 30 usually representing
the highest volume of cases and, therefore, the highest amount of revenue generated by us during the course of the fiscal year.
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. Balloons and guide wires are purchased from third-party suppliers. Our cost of goods sold consists primarily of raw materials, direct labor, manufacturing
overhead, and purchased finished goods.
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 and facilities overhead. Other significant expenses
include bad debt expense, travel, marketing costs, professional fees and professional education.
Research and Development Expenses. 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. Approved
patent applications are capitalized and amortized using the straight-line method over their remaining estimated lives. Patent amortization begins at the time of
patent application approval, and does not exceed 20 years.
Other (Income) and Expense, Net. Other (income) and expense, net primarily includes interest expense from amounts owed under the lease of our headquarters
facility and DOJ settlement, and interest income from money market funds.
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, 2018 , we had net operating loss carryforwards for federal and
state income tax reporting purposes of approximately $275.0 million , which will expire at various dates through fiscal 2037.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations is 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, deferred revenue and stock-based compensation, are updated as appropriate at least quarterly. We use authoritative pronouncements, our
technical accounting knowledge, cumulative business experience, valuation specialists, 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.
Revenue Recognition. We sell the majority of our products via direct shipment to hospitals or clinics, and in fiscal 2018 we began shipping to our distributor in
Japan. 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. Revenue recognition may occur upon shipment or upon delivery to the customer site, based on the
contract terms. We record estimated sales returns, discounts and rebates as a reduction of net sales.
Deferred revenue associated with the upfront payment received under our distribution agreement with Medikit is recognized in relation to the estimated future sales
under the agreement. The short term portion represents the expected amount of deferred revenue that will be recognized over the next year. The estimate of future
sales under contract will continue to be assessed and adjusted accordingly.
33
Costs related to products delivered are recognized in the period the revenue is recognized. Cost of goods sold consists primarily of raw materials, direct labor, and
manufacturing overhead.
Stock-Based Compensation. We have stock-based compensation plans that include nonvested share awards and an employee stock purchase plan. We determine
the fair value of nonvested share awards with market conditions using the Monte Carlo simulation. Fair value of nonvested share awards that vest based upon
performance or time conditions is determined by the closing market price of our stock on the date of grant. Stock-based compensation expense is recognized
ratably over the requisite service period for the awards expected to vest. Fair value of shares purchased under the employee stock purchase plan are estimated on
the grant date, which is the first date in the six-month purchase period. Stock-compensation expense is recognized over the purchase period based on the
anticipated amount of shares to be purchased. Management’s key assumptions are developed with input from independent third-party valuation advisors. During
the years ended June 30, 2018, 2017 and 2016, we recorded stock-based compensation expense of $10.3 million , $10.4 million , and $13.0 million , respectively.
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 reasonably 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.
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:
Comparison
of
Fiscal
Year
Ended
June
30,
2018
with
Fiscal
Year
Ended
June
30,
2017
Net revenues
Cost of goods sold
Gross profit
Gross margin
Expenses:
Selling, general and administrative
Research and development
Total expenses
Income (loss) from operations
Other (income) and expense, net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Year Ended June 30,
2018
2017
Change
Percent
Change
$
217,043
$
204,906
$
12,137
5.9 %
39,484
177,559
39,441
165,465
43
12,094
81.8%
80.8%
1.0%
148,569
26,756
175,325
2,234
390
1,844
132
144,096
22,911
167,007
(1,542)
164
(1,706)
86
$
1,712
$
(1,792)
$
4,473
3,845
8,318
3,776
226
3,550
46
3,504
0.1
7.3
1.2
3.1
16.8
5.0
(244.9)
137.8
(208.1)
53.5
(195.5)
Net Revenues. Net revenues increased by $12.1 million , or 5.9% , from $204.9 million for the year ended June 30, 2017 , to $217.0 million for the year ended
June 30, 2018 . Revenues from our Peripheral OAS increased $6.9 million, or 4.9%, due to an increase in the number of devices sold, partially offset by decreases
to average selling price, the adverse effect of Hurricanes Harvey and Irma, and a recall of a version of our saline infusion pump during fiscal 2018. Sales of our
Coronary OAS increased by approximately $2.2 million, or 4.7%, reflecting an increase in devices sold. The increase in Peripheral and Coronary OAS sales is
primarily due to the expansion of our customer base. We also had $1.8 million of revenue from sales in Japan as commercialization commenced in February 2018,
which includes $383,000 related to the deferred up-front payment from Medikit. Other product revenue increased $2.1 million, or 7.4%, during the year ended
June 30, 2018 , driven by increased sales of our Peripheral and Coronary OAS, which the other products support.
34
Prior to February 2018, all of our revenues have been in the United States; however, sales in Japan commenced in February 2018. In November 2016, we signed an
exclusive distribution agreement with Medikit to sell our Peripheral and Coronary OAS in Japan, and in March 2017, we received approval from Japan’s Ministry
of Health, Labor and Welfare for our Coronary OAS Micro Crown. On February 1, 2018, the Coronary OAS Micro Crown received reimbursement approval in
Japan, followed by the first commercial sales, making Japan the first international market for any of our products. In July 2018, we entered into an exclusive
Distribution Agreement with OrbusNeich to sell our Peripheral and Coronary OAS outside of the United States and Japan. We expect that sales under this
agreement will commence in fiscal 2019. We expect our revenue to increase as we continue to increase the number of physicians using the devices, increase the
usage per physician, introduce new and improved products such as the OrbusNeich balloons and ZILIENT guidewires, generate additional clinical data, and
expand into new geographies, partially offset by potential decreases in average selling prices.
Cost of Goods Sold. Cost of goods sold increased 0.1% , from $39.4 million for the year ended June 30, 2017 to $39.5 million for the year ended June 30, 2018 .
These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. The small increase in
cost of goods sold was due to greater unit volumes offset by the $1.5 million one-time charge in the year ended June 30, 2017 related to the voluntary recall of one
type of our saline infusion pumps, as well as lower costs per unit driven by manufacturing efficiencies and cost reductions in the current year ended June 30, 2018 .
Gross margin increased to 81.8% for the year ended June 30, 2018 from 80.8% for the year ended June 30, 2017 due to lower costs per unit, as discussed above.
Cost of goods sold for the years ended June 30, 2018 and 2017 includes $275,000 and $689,000 , respectively, for stock-based compensation. We expect that gross
margin for the year ending June 30, 2019 will decrease slightly compared to the year ended June 30, 2018, as an increasing amount of revenue will be derived from
lower margin products and international markets. Quarterly margin 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 . Selling, general, and administrative expenses increased by $4.5 million , or 3.1% , from $144.1 million for the
year ended June 30, 2017 to $148.6 million for the year ended June 30, 2018 . The increase was primarily due to increased payroll related expenses due to the
expansion of clinical specialists in our sales organization, severance benefits, as well as litigation and other legal expenses. These amounts were partially offset by
lower incentive compensation expense. Selling, general, and administrative expenses for the years ended June 30, 2018 and 2017 include $9.1 million and $8.7
million , respectively, for stock-based compensation. We expect our selling, general and administrative expenses to increase as revenue grows in fiscal 2019, but at
a rate slightly less than the rate of revenue growth.
Research and Development Expenses. Research and development expenses increased by $3.8 million , or 16.8% , from $22.9 million for the year ended June 30,
2017 to $26.8 million for the year ended June 30, 2018 . Research and development expenses relate to the specific projects to develop new products or expand into
new markets, such as the development of new versions of our Peripheral OAS and Coronary OAS, and ancillary products, and PAD and CAD clinical studies. The
increase was primarily due to the ramp-up of our ECLIPSE clinical study and new development projects. Research and development expenses for the years ended
June 30, 2018 and 2017 include $1.0 million for stock-based compensation. We generally expect to incur higher research and development expenses in fiscal 2019
than amounts incurred for the year ended June 30, 2018 as we continue enrollment in the ECLIPSE clinical study and invest in expanding our product portfolio.
Fluctuations could occur based on the number of projects and studies and the timing of expenditures.
35
Comparison
of
Fiscal
Year
Ended
June
30,
2017
with
Fiscal
Year
Ended
June
30,
2016
Net revenues
Cost of goods sold
Gross profit
Gross margin
Expenses:
Selling, general and administrative
Research and development
Restructuring
Legal Settlement
Total expenses
Loss from operations
Other (income) and expense, net
Loss before income taxes
Provision for income taxes
Net loss
Year Ended June 30,
2017
2016
Change
$
204,906
$
178,184
$
39,441
165,465
35,421
142,763
26,722
4,020
22,702
80.8%
80.1%
0.7%
144,096
22,911
—
—
167,007
(1,542)
164
(1,706)
86
162,542
25,934
2,364
8,000
198,840
(56,077)
(145)
(55,932)
92
(18,446)
(3,023)
(2,364)
(8,000)
(31,833)
54,535
309
54,226
(6)
$
(1,792)
$
(56,024)
$
54,232
Percent
Change
15.0 %
11.3
15.9
0.9
(11.3)
(11.7)
100.0
100.0
(16.0)
(97.3)
(213.1)
(96.9)
(6.5)
(96.8)
Net Revenues. Net revenues increased by $26.7 million, or 15.0%, from $178.2 million for the year ended June 30, 2016, to $204.9 million for the year
ended June 30, 2017. Revenues from our Peripheral OAS increased $13.5 million, or 10.5%, primarily reflecting an 11.5% increase in the number of devices sold.
Sales of our Coronary OAS increased by approximately $11.2 million, or 31.2%, reflecting 32.2% more devices sold. The increase in Peripheral and Coronary
OAS sales are primarily due to the expansion of our customer base. Other product revenue increased $2.0 million, or 14.1%, during the year ended June 30, 2017,
driven by increased sales of our Peripheral and Coronary OAS, which the other products support.
Cost of Goods Sold. Cost of goods sold increased by $4.0 million, or 11.3%, from $35.4 million for the year ended June 30, 2016 to $39.4 million for the year
ended June 30, 2017. These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products.
The increase was primarily due to increased sales levels and a one-time charge of $1.5 million related to the initiation of a voluntary recall of one type of our saline
infusion pumps, partially offset by lower costs per unit driven by manufacturing efficiencies and cost reductions. Gross margin increased to 80.8% for the year
ended June 30, 2017 from 80.1% for the year ended June 30, 2016 due to lower costs per unit, as discussed above. Cost of goods sold for the years ended June 30,
2017 and 2016 includes $689,000 and $794,000, respectively, for stock-based compensation.
Selling, General and Administrative Expenses. Selling, general, and administrative expenses decreased by $18.4 million, or 11.3%, from $162.5 million for the
year ended June 30, 2016 to $144.1 million for the year ended June 30, 2017 primarily due to lower payroll-related and travel expenses from a decrease in
headcount from the year ended June 30, 2016, commission plan changes, $1.5 million of fiscal 2016 costs associated with the departure of our former CEO, and a
reduction in medical device excise tax expense due to the suspension of the tax effective January 1, 2016. Partially offsetting the decreases was a charge of $1.3
million for employment litigation costs and an increase in incentive compensation expense due to performance. Selling, general, and administrative expenses for
the years ended June 30, 2017 and 2016 include $8.7 million and $10.4 million, respectively, for stock-based compensation, which decreased due to the reduction
in headcount and a change in vesting terms for our performance-based restricted stock awards granted in fiscal 2017 from those granted in fiscal 2016.
Research and Development Expenses. Research and development expenses decreased by $3.0 million, or 11.7%, from $25.9 million for the year ended June 30,
2016 to $22.9 million for the year ended June 30, 2017. Research and development expenses relate to the specific projects to develop new products or expand into
new markets, such as the development of new versions of our Peripheral and Coronary OAS, and ancillary products, and PAD and CAD clinical studies. The
decrease primarily related to the completion of enrollment in several of our clinical studies and lower payroll-related expenses from a decrease in headcount from
the year ended June 30, 2016. Partially offsetting these were higher patent expense and incentive compensation expense due to performance. Research and
development expenses for the years ended June 30,
36
2017 and 2016 include $1.0 million and $1.8 million, respectively, for stock-based compensation, which decreased due to the reduction in headcount.
Restructuring Charges. In March 2016, we announced a broad-based restructuring to reduce costs as a key part of our plan to balance revenue growth with a
pathway to profitability and positive cash flow. As a result, we recorded a restructuring expense of $2.4 million during the year ended June 30, 2016, which was
comprised of severance and other employee related costs. There were no additional charges related to restructuring activities.
Legal Settlement. On June 28, 2016, we entered into a Settlement Agreement with the United States of America, acting through the U.S. Attorney for the Western
District of North Carolina (the “DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services, and Travis Thams (the
“Relator”), to resolve the previously disclosed investigation by the DOJ and the qui tam complaint filed by the Relator pursuant to the False Claims Act in the
United States District Court for the Western District of North Carolina, Charlotte Division. We recorded an $8.0 million legal settlement expense during the year
ended June 30, 2016.
NON-GAAP FINANCIAL INFORMATION
To supplement our consolidated 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 GAAP measure
expressed as dollar amounts (in thousands):
Net income (loss)
Less: Other (income) and expense, net
Less: Provision for income taxes
Income (loss) from operations
Add: Stock-based compensation
Add: Depreciation and amortization
Adjusted EBITDA
Year Ended June 30,
2018
2017
1,712 $
(1,792)
390
132
2,234
10,302
3,934
16,470 $
164
86
(1,542)
10,354
4,135
12,947
$
$
Adjusted EBITDA improved as compared to the prior year due to the increased earnings from operations.
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. Management does not use this Adjusted EBITDA measure as a liquidity measure or in the calculation of our financial covenants under the
revolving credit facility with Silicon Valley Bank.
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 understand our operating performance and evaluate the methodology used by our management to evaluate and measure such performance.
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 . Our management believes that excluding this item from our non-GAAP results is useful to investors to understand the
application of stock-based compensation guidance and its impact on our operational performance and ability to make additional investments in our
company, and it allows for greater transparency to certain line items in our financial statements.
37
•
Depreciation and amortization expense . Our management believes that excluding these items from our non-GAAP results is useful to investors to
understand our operational performance and ability to make additional investments in our 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 $116.3 million and $107.9 million at June 30, 2018 and 2017 , respectively. As of June 30, 2018 , we had an accumulated
deficit of $327.6 million . The increase in cash and cash equivalents was primarily attributable to net cash provided by our operating and financing activities during
the year ended June 30, 2018 .
A summary of our cash flow activities is as follows:
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net change in cash and cash equivalents
Changes
in
Liquidity
Operating Activities
Year Ended June 30,
2018
2017
2016
$
$
9,674 $
19,588 $
(5,095)
3,769
(1,779)
29,465
8,348 $
47,274 $
(23,583)
(3,769)
4,148
(23,204)
Net cash provided by (used in) operating activities was $9.7 million , $19.6 million , and $(23.6) million for the years ended June 30, 2018 , 2017 , and 2016 ,
respectively. For the years ended June 30, 2018 , 2017 , and 2016 , we had a net income (loss) of $1.7 million , $(1.8) million , and $(56.0) million , respectively,
and stock based compensation expense of $10.3 million , $10.4 million , and $13.0 million , respectively. Significant changes in working capital during these
periods included:
•
Cash (used in) provided by accounts receivable of $(2.9) million , $(5.8) million , and $7.3 million during the years ended June 30, 2018 , 2017 , and
2016 , respectively, was primarily due to the amount and timing of revenue during the periods.
38
•
•
•
•
•
Cash provided by (used in) inventories was $292,000 , $543,000 , and $(3.5) million during the years ended June 30, 2018 , 2017 , and 2016 ,
respectively. Cash provided by inventory during the years ended June 30, 2018 and 2017 was primarily due to lower inventory levels from improved
inventory management. Cash used by inventory during fiscal 2016 was due to higher levels of inventory for future sales growth and new product
launches, as well as timing of inventory purchases and sales.
Cash provided by (used in) prepaid expenses and other current assets was $2.3 million , $(1.8) million , and $728,000 during the years ended June 30,
2018 , 2017 , and 2016 , respectively, primarily due to payment timing of vendor deposits and other expenditures. During the year ended June 30, 2018,
we also received proceeds from an insurance receivable related to a litigation settlement payment.
Cash provided by (used in) accounts payable of $104,000 , $1.8 million , and $(970,000) during the years ended June 30, 2018 , 2017 , and 2016 ,
respectively, was primarily due to the amount and timing of purchases and vendor payments.
Cash (used in) provided by accrued expenses and other liabilities was $(6.6) million , $725,000 , and $10.9 million during the years ended June 30, 2018
, 2017 , and 2016 , respectively. Cash used during the year ended June 30, 2018 was primarily due to the amount and timing of compensation payments,
as well as a litigation settlement payment. Cash provided during the year ended June 30, 2017, was primarily due to the amount and timing of
compensation payments. Cash provided during the year ended June 30, 2016 was primarily due to the restructuring accrual, benefits related to our
former CEO’s departure, and the DOJ legal settlement expense.
Cash provided by deferred revenue was $189,000 and $10.0 million during the years ended June 30, 2018 and 2017. During the year ended June 30,
2017, Medikit made an upfront payment of $10.0 million to us in connection with the exclusive distribution agreement with Medikit to sell our Coronary
and Peripheral OAS in Japan. Medikit also provides advance payments for orders under the terms of the agreement, and, therefore, deferred revenue is
recorded until products are accepted by Medikit.
Investing Activities
Net cash used in investing activities was $5.1 million for the year ended June 30, 2018, compared with $1.8 million for the year ended June 30, 2017. The increase
was due to a $2.5 million cost method investment made in June 2018, partially offset by the collection of a note receivable.
Net cash used in investing activities was $1.8 million for the year ended June 30, 2017, compared with $3.8 million for the year ended June 30, 2016. The decrease
was primarily due to property and equipment purchases and sales of available-for-sale marketable securities under the deferred compensation plan.
Financing Activities
Net cash provided by financing activities was $3.8 million for the year ended June 30, 2018, compared with $29.5 million for the year ended June 30, 2017. The
decrease was primarily driven by $20.9 million of cash proceeds received from the sale of the Facility in March 2017, described below and a lesser amount of cash
proceeds from stock options received in the year ended June 30, 2018, as there were fewer stock options outstanding.
Net cash provided by financing activities was $29.5 million for the year ended June 30, 2017, compared with $4.1 million for the year ended June 30, 2016. The
increase was primarily driven by $20.9 million of cash proceeds received from the sale of the Facility in March 2017, as described below, and a greater amount of
cash proceeds from stock option exercises during the year ended June 30, 2017.
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
business operations, 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, market and regulatory developments, ongoing facility requirements, potential strategic transactions
(including the potential acquisition of, or investments in, businesses, technologies and products), international expansion, and the existence, defense and resolution
of legal proceedings. As of June 30, 2018, we believe our current cash and cash equivalents will be sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future, including at least the next twelve months, as well as to fund payments related to the DOJ settlement,
expenses relating
39
to compliance with our Corporate Integrity Agreement (as defined below), payments under our lease agreements, payments under severance agreements, and
anticipated costs relating to litigation. We intend to retain any future earnings to support operations and to finance the growth and development of our business. We
do not anticipate paying any dividends in the foreseeable future.
Legal Settlement
On June 28, 2016, we entered into a Settlement Agreement with the United States of America, acting through the U.S. Attorney’s Office for the Western District of
North Carolina (the “DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services (the “OIG”), and Travis Thams,
pursuant to which we will pay $8.0 million as follows: an initial payment of $3.0 million, which we paid on July 1, 2016, with the remaining $5.0 million, which
bears interest at 1.8% per annum, payable in 11 equal quarterly installments, beginning January 1, 2017. Under the settlement agreement, if we make a single
payment in excess of $2.0 million, which payment is not covered by an insurance policy, in settlement of any claims before paying the full settlement amount, the
remaining unpaid balance of the settlement amount will become immediately due and payable, with interest accruing on the unpaid principal portion at an interest
rate of 1.8% per annum.
In connection with the resolution of this matter, we entered into a five-year corporate integrity agreement (the “Corporate Integrity Agreement”) with the OIG. The
Corporate Integrity Agreement requires that we maintain our existing compliance programs and imposes certain expanded compliance-related requirements during
the term of the Corporate Integrity Agreement, including establishment of specific procedures and requirements regarding consulting activities, co-marketing
activities and other interactions with healthcare professionals and healthcare institutions and the sale and marketing of our products; ongoing monitoring, reporting,
certification and training obligations; and the engagement of an independent review organization to perform certain auditing and reviews and prepare certain
reports regarding our compliance with federal health care programs. In the event of a breach of the Corporate Integrity Agreement, we could become liable for
payment of certain stipulated penalties or could be excluded from participation in federal health care programs. The Corporate Integrity Agreement requires us to
invest additional amounts in our compliance program and pay fees and expenses of the independent review organization.
Facility
Sale
and
Lease
On December 29, 2016, we entered into a Purchase and Sale Agreement, as subsequently amended (collectively, the “Sale Agreement”), with Krishna Holdings,
LLC (the “Buyer”), providing for the sale to Buyer of our headquarters facility in St. Paul, Minnesota (the “Facility”), for a cash purchase price of $21.5 million.
On March 30, 2017, the sale of the Facility under the Sale Agreement closed. We received proceeds of approximately $20.9 million ($21.5 million
less $556,000 of transaction expenses).
We intend to use the net proceeds from the sale for working capital and general corporate purposes, which may include, but are not limited to:
•
•
•
•
the funding of clinical trials and studies;
sales and marketing programs;
expansion into international markets; and
development of new products.
We may also use a portion of the net proceeds for the potential acquisition of, or investments in, businesses, technologies and products, although we have no
current understandings, commitments or arrangements to do so. We cannot specify with certainty all of the particular uses for the net proceeds. Accordingly, we
will retain broad discretion over the use of these net proceeds.
In connection with the closing of the Facility sale, we entered into a Lease Agreement (the “Lease Agreement”) with Krishna Holdings, LLC, Apex Holdings,
LLC, Kashi Associates, LLC, Keva Holdings, LLC, S&V Ventures, LLC, Polo Group LLC, SPAV Holdings LLC, Star Associates LLC, and The Global Villa,
LLC. The Lease Agreement has an initial term of fifteen years, with four consecutive renewal options of five years each, with a base annual rent in the first year
of $1.6 million and annual escalations of 3%. See Notes 2 and 3 to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K
for additional discussion.
40
Revolving
Credit
Facility
On March 31, 2017, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement provides
for a senior, secured revolving credit facility (the “Revolver”) of $40.0 million (the “Maximum Dollar Amount”).
Advances under the Revolver may be made from time to time up to the Maximum Dollar Amount, subject to certain borrowing limitations. The Revolver has a
maturity date of March 31, 2020 and bears interest at a floating per annum rate equal to the Wall Street Journal prime rate, less 0.25%. Interest on borrowings is
due monthly and the principal balance is due at maturity. Borrowings up to $10.0 million are available on a non-formula basis. Borrowings above $10.0 million are
based on (i) 85% of eligible domestic accounts receivable, and (ii) the lesser of 50% of eligible inventory or $5.0 million, subject to adjustment as defined in Loan
Agreement. Upon the Revolver’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolver will be due and
payable. We will incur a fee equal to 1% of the Maximum Dollar Amount upon termination of the Loan Agreement or the Revolver for any reason prior to the
maturity date, unless refinanced with SVB.
Our obligations under the Loan Agreement are secured by certain of our assets, including, among other things, accounts receivable, deposit accounts, inventory,
equipment, general intangibles and records pertaining to the foregoing. The collateral does not include our intellectual property, but we agreed not to encumber our
intellectual property without the consent of SVB. The Loan Agreement contains customary covenants limiting our ability to, among other things, incur debt or
liens, make certain investments and loans, enter into transactions with affiliates, undergo certain fundamental changes, dispose of assets, or change the nature of its
business. In addition, the Loan Agreement contains financial covenants requiring us to maintain, at all times when any amounts are outstanding under the
Revolver, either (i) minimum unrestricted cash at SVB and unused availability on the Revolver of at least $10.0 million or (ii) minimum trailing three-month
Adjusted EBITDA of $1.0 million. If we do not comply with the various covenants under the Loan Agreement, the interest rate on outstanding amounts will
increase by 5% and SVB may, subject to various customary cure rights, decline to provide additional advances under the Revolver, require the immediate payment
of all amounts outstanding under the Revolver, and foreclose on all collateral.
Under the Loan Agreement, we paid SVB a non-refundable commitment fee of $80,000, which will be amortized to interest expense over the term of the Loan
Agreement. We are required to pay a fee equal to 0.35% per annum on the unused portion of the Revolver, payable quarterly in arrears. SVB’s obligations to
advance funds under the Revolver are subject to an initial collateral examination to be completed within 90 days of the effective date of the Loan Agreement. We
are not obligated to draw any funds under the Revolver and no amounts are outstanding as of June 30, 2018 . We currently do not have plans of borrowing under
the Loan Agreement.
Contractual Cash Obligations. Our contractual obligations and commercial commitments as of June 30, 2018 are summarized below:
Contractual Obligations
Operating leases (1)
Financing obligation (2)
Purchase commitments (3)
Legal settlement (4)
Severance payments (5)
Other (6)
Payments Due by Period (in thousands)
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
$
906 $
510 $
28,397
18,323
2,314
975
66
1,699
18,323
1,847
934
66
396 $
3,553
— $
3,770
—
19,375
—
467
41
—
—
—
—
—
—
—
—
—
19,375
Total
3,770 $
(1) The amounts represent future minimum payments under a non-cancellable operating lease for our Texas production facility along with equipment leases.
(2) The amounts represent future minimum payments due under the capital lease related to the sale leaseback of our Facility.
(3) The amount represents open purchase orders as of June 30, 2018.
(4) Consists of payments and related interest associated with the DOJ settlement discussed above.
(5)
(6) Other includes service agreements.
Includes severance related to various severance agreements.
50,981 $
23,379 $
4,457 $
$
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at June 30, 2018, we are unable to make
reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $597,000 of unrecognized tax benefits have been
excluded from the contractual obligations table above.
41
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 arrangements as defined in Item 303(a)(4) of Regulation S-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended revenue recognition guidance to clarify the principles for recognizing revenue
from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be
entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts,
significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
We have completed an adoption plan, which included a review of customer contracts, applying the five-step model of the new standard to the customer contracts
and comparing the results to our current accounting. We have elected the modified retrospective method of adoption, which we anticipate will not result in a
material adjustment to retained earnings. Our revenue recognition will remain largely unchanged given the majority of our revenue arrangements consist of a single
performance obligation that will be recognized at a point in time when control passes to the customer. As a result, we do not anticipate a material impact on the
amount and timing of revenue recognized in our consolidated financial statements.
We are also implementing new internal controls around the judgments needed to address risks associated with applying the five-step model, which includes
identifying performance obligations and judgments made related to variable consideration. Effective July 1, 2018, we will be revising our revenue recognition
accounting policy and disclosures to reflect the requirements of the amended revenue recognition guidance. We will continue to monitor any modifications or
interpretations communicated by the FASB that may impact any of its final assessments related to the guidance.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises the accounting
requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial
liabilities measured at fair value. The update also changes certain disclosure requirements associated with the fair value of financial instruments. These changes
will require an entity to measure, at fair value, investments in equity securities and recognize the changes in fair value within net income. ASU 2016-01 will be
applied on a modified retrospective basis to all outstanding instruments, with an adjustment recorded to opening retained earnings as of the beginning of the first
period in which the guidance becomes effective. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. The guidance is effective for us on July 1, 2018. We do not anticipate a material impact on our financial
statements upon adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The guidance requires lessees to recognize the assets and liabilities that arise from leases on the
balance sheet. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and should
be applied using a modified retrospective approach. Early adoption is permitted. The guidance is effective for us on July 1, 2019. We are currently evaluating the
timing, method of adoption and impact of the new lease guidance on our financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which revises guidance for the accounting for credit
losses on financial instruments within its scope. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of
financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the
current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other
receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. ASU 2016-13 is effective for annual periods
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and should be applied as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The guidance is effective for us on July 1, 2020.
We do not anticipate a material impact on our financial statements upon adoption.
42
In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting” which clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award
being accounted for as modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for
annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. We do not anticipate a material
impact on our financial statements upon adoption.
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 the Company). Forward-looking statements include all statements based on future expectations. This Form 10-K
contains forward-looking statements that involve risks and uncertainties, including, but not limited to, (i) the expectation of selling our products, including recently
approved products, future products and products we distribute, domestically and internationally in the future, the timing and structure of our plans to do so, and the
specific countries and products to be sold, either by us or through distributors; (ii) our strategy; (iii) the competitive benefits of our products; (iv) potential strategic
acquisitions and partnerships; (v) our products in development; (vi) seasonality in our business; (vii) reimbursement of our products; (viii) our intention to expand
our product portfolio through internal development and external relationships; (ix) our plan to balance revenue growth with a pathway to profitability and positive
cash flow; (x) our current and anticipated clinical studies, including the results and timing of such studies; (xi) our expectation that our revenue will increase; (xii)
our expectation of increased selling, general and administrative expenses and the rate of such growth; (xiii) our expectation that gross margin in fiscal 2019 will
decrease slightly compared to fiscal 2018; (xiv) our expectation that our current facilities will be adequate for the foreseeable future; (xv) our plans to continue to
expand our sales and marketing efforts as well as our product portfolio and clinical studies; (xvi) our intention to file additional patents and our efforts to protect
our intellectual property; (xvii) our expectation that we will incur research and development expenses in fiscal 2019 higher than the amounts incurred for fiscal
2018; (xviii) our belief that our current cash and cash equivalents will be sufficient to fund working capital requirements, capital expenditures and operations for
the foreseeable future, as well as to fund certain other anticipated expenses; (xix) our intention to retain any future earnings to support operations and to finance the
growth and development of our business; (xx) our dividend expectations; (xxi) our plans to use the net proceeds from the sale of our headquarters facility; (xxii)
our ability to obtain regulatory approvals to market our products; (xxiii) our plan not to borrow under our loan and security agreement; and (xxiv) the anticipated
impact of adoption of recent accounting pronouncements on our financial statements.
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 management’s 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 industry’s actual results, levels of activity,
performance or achievements to be materially different from the information expressed or implied by these forward-looking statements.
These factors include regulatory developments, clearances and approvals; approval of our products for distribution in foreign countries; approval of products for
reimbursement and the level of reimbursement in the U.S., Japan and other foreign countries; dependence on market growth; agreements with third parties to sell
their products; the ability of OrbusNeich to successfully launch CSI products outside of the United States and Japan; our ability to maintain third-party supplier
relationships and renew existing purchase agreements; our ability to maintain our relationships with Medikit and OrbusNeich; the experience of physicians
regarding the effectiveness and reliability of our products; the reluctance of physicians, hospitals and other organizations to accept new products; the potential for
unanticipated delays in enrolling medical centers and patients for clinical trials; actual clinical trial and study results; the impact of competitive products and
pricing; our ability to comply with the financial covenants in our loan and security agreement and to make payments under and comply with the lease agreement
for our corporate headquarters; unanticipated developments affecting our estimates regarding expenses, future revenues and capital requirements; the difficulty of
successfully managing operating costs; our ability to manage our sales force strategy; actual research and development efforts and needs; our ability to obtain and
maintain intellectual property protection for product candidates; fluctuations in results and expenses based on new product introductions, sales mix, unanticipated
warranty claims, and the timing of project expenditures; our ability to manage costs; our actual financial resources and our ability to obtain additional financing;
investigations or litigation threatened or initiated against us; court rulings and future actions by the FDA and other regulatory bodies; international trade
developments; and general economic conditions.
These and additional risks and uncertainties are described more fully 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
43
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, United States government securities, and certain
bank obligations. Our cash and cash equivalents as of June 30, 2018 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.
Additionally, we have certain available-for-sale marketable securities under our deferred compensation plan. See Note 1 to our Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K for additional information on these available-for-sale marketable securities.
Item 8. Financial
Statements
and
Supplementary
Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
44
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cardiovascular Systems, Inc.
Opinions
on
the
Financial
Statements
and
Internal
Control
over
Financial
Reporting
We have audited the accompanying consolidated balance sheets of Cardiovascular Systems, Inc. and its subsidiaries as of June 30, 2018 and 2017 and the related
consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended
June 30, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30,
2018 and 2017 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2018 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis
for
Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
Over Financial Reporting under item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition
and
Limitations
of
Internal
Control
over
Financial
Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-1
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 23, 2018
We have served as the Company’s auditor since at least 2003, which includes periods before the Company became subject to SEC reporting requirements.
F-2
Cardiovascular Systems, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share and share amounts)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Marketable securities
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Patents, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities
Long-term liabilities
Financing obligation
Deferred revenue
Other liabilities
Total liabilities
Commitments and contingencies
Common stock, $0.001 par value; authorized 100,000,000 common shares; issued and outstanding 33,360,032 at
June 30, 2018 and 32,849,563 at June 30, 2017
Additional paid in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
June 30,
2018
June 30,
2017
$
116,260 $
107,912
31,225
16,605
544
2,977
167,611
27,744
5,231
2,766
$
203,352 $
10,441
25,776
1,243
37,460
21,064
8,946
1,412
68,882
33
461,927
101
(327,591)
134,470
$
203,352 $
28,472
16,897
704
5,074
159,059
29,696
5,056
129
193,940
10,736
30,236
—
40,972
21,100
10,000
3,479
75,551
33
447,559
100
(329,303)
118,389
193,940
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Cardiovascular Systems, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share and share amounts)
Year Ended June 30,
2018
2017
2016
$
217,043 $
204,906 $
39,484
177,559
148,569
26,756
—
—
175,325
2,234
1,717
(1,327)
390
1,844
132
1,712 $
0.05 $
0.05 $
39,441
165,465
144,096
22,911
—
—
167,007
(1,542)
500
(336)
164
(1,706)
86
(1,792) $
(0.06) $
(0.06) $
$
$
$
178,184
35,421
142,763
162,542
25,934
2,364
8,000
198,840
(56,077)
—
(145)
(145)
(55,932)
92
(56,024)
(1.72)
(1.72)
Net revenues
Cost of goods sold
Gross profit
Expenses:
Selling, general and administrative
Research and development
Restructuring
Legal settlement
Total expenses
Income (loss) from operations
Other (income) expense, net:
Interest expense
Interest income and other, net
Total other (income) expense, net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Basic earnings per share
Diluted earnings per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
33,145,140
33,614,260
32,373,709
32,373,709
32,537,621
32,537,621
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Cardiovascular Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands, except per share and share amounts)
Net income (loss)
Other comprehensive income (loss):
Unrealized gain on available for sale securities
Adjustment for net gain realized and included in interest income and other, net
Total change in unrealized gain (loss) on available for sale securities
Comprehensive income (loss)
Year Ended June 30,
2018
2017
2016
1,712 $
(1,792) $
(56,024)
35
(34)
1
66
(6)
60
20
(70)
(50)
1,713 $
(1,732) $
(56,074)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Cardiovascular Systems, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except per share and share amounts)
Common Stock
Shares
31,898,124 $
Amount
Additional
Paid In
Capital
Accumulated Other
Comprehensive Income
Accumulated
Deficit
Total
32 $
410,700 $
90
$
(271,387) $
139,435
557,756
87,817
248,800
—
—
—
1
—
—
—
—
—
11,985
1,006
4,544
—
—
—
32,792,497 $
33 $
428,235 $
(635,018)
515,164
176,920
—
—
—
—
—
—
—
—
—
9,412
5,362
4,550
—
—
—
—
—
—
20
(70)
—
40
$
—
—
—
66
(6)
—
—
—
—
—
11,986
1,006
4,544
20
(70)
(56,024)
(56,024)
(327,411) $
100,897
—
(100)
—
—
—
9,412
5,262
4,550
66
(6)
—
(1,792)
(1,792)
32,849,563 $
33 $
447,559 $
100
$
(329,303) $
118,389
295,650
55,880
158,939
—
—
—
—
—
—
—
—
—
9,546
514
4,308
—
—
—
—
—
—
35
(34)
—
—
—
—
—
—
1,712
9,546
514
4,308
35
(34)
1,712
33,360,032 $
33 $
461,927 $
101
$
(327,591) $
134,470
Balances at June 30, 2015
Stock-based compensation related to restricted stock
awards, net
Exercise of stock options at $7.90-$12.37 per share
Employee stock purchase plan activity
Unrealized gain on marketable securities
Net gain reclassified from accumulated other
comprehensive income
Net loss
Balances at June 30, 2016
Stock-based compensation related to restricted stock
awards, net
Exercise of stock options at $7.90-$12.15 per share
Employee stock purchase plan activity
Unrealized gain on marketable securities
Net gain reclassified from accumulated other
comprehensive income
Net loss
Balances at June 30, 2017
Stock-based compensation related to restricted stock
awards, net
Exercise of stock options at $7.90-$12.15 per share
Employee stock purchase plan activity
Unrealized gain on marketable securities
Net gain reclassified from accumulated other
comprehensive income
Net income
Balances at June 30, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Cardiovascular Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operations
Depreciation of property and equipment
Provision for (recovery of) doubtful accounts (including note receivable)
Amortization of patents
Write-off of patent costs
Loss on disposal of property and equipment
Stock-based compensation
Other
Changes in assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities
Expenditures for property and equipment
Purchase of investment
Proceeds from (issuance of) convertible note receivable
Purchases of marketable securities
Sales of marketable securities
Costs incurred in connection with patents
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the employee stock purchase plan
Exercise of stock options
Proceeds from financing
Other
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Noncash investing and financing activities
Change in equipment included in accounts payable
Change in patent costs included in accounts payable
Supplemental cash flow information
Interest paid
Year Ended June 30,
2018
2017
2016
$
1,712 $
(1,792) $
(56,024)
3,917
3,686
3,730
(225)
204
497
16
10,302
—
(2,878)
292
2,308
104
(6,577)
189
9,674
(1,956)
(2,538)
318
—
194
(1,113)
(5,095)
3,242
513
14
3,769
8,348
465
218
733
158
10,354
138
(5,809)
543
(1,823)
1,761
725
10,000
19,588
(981)
—
—
—
46
(844)
(1,779)
3,254
5,263
20,944
4
29,465
47,274
107,912
60,638
116,260 $
107,912 $
162 $
237 $
(319) $
(150) $
1,717 $
500 $
$
$
$
$
725
231
168
170
12,977
—
7,327
(3,474)
728
(970)
10,873
—
(23,583)
(3,818)
—
(350)
(37)
1,249
(813)
(3,769)
3,142
1,006
—
—
4,148
(23,204)
83,842
60,638
(374)
87
—
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and share amounts)
1. Summary of Significant Accounting Policies
Company
Description
Cardiovascular Systems, Inc. (the “Company”), based in St. Paul, Minn., is a medical device company focused on developing and commercializing innovative
solutions for treating vascular and coronary disease. The Company’s Orbital Atherectomy Systems (“OAS”) treat calcified and fibrotic plaque in arterial vessels
throughout the leg and heart in a few minutes of treatment time, and address many of the limitations associated with existing surgical, catheter and
pharmacological treatment alternatives.
Principles
of
Consolidation
The consolidated balance sheets and statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows include the accounts of the
Company and its wholly-owned subsidiary, after elimination of all intercompany transactions and accounts.
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 an
allowance for doubtful accounts, which is an estimate 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 customer’s ability to pay. Provisions for the allowance for doubtful accounts attributed to bad debt are recorded in general and administrative expenses.
The following table shows the allowance for doubtful accounts activity:
Balances at June 30, 2015
Provision for doubtful accounts
Write-offs
Balance at June 30, 2016
Provision for doubtful accounts
Write-offs
Balance at June 30, 2017
Provision for doubtful accounts
Write-offs
Balance at June 30, 2018
Inventories
Amount
1,437
375
(1,100)
712
465
(313)
864
125
(189)
800
$
$
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out method of valuation. The establishment of inventory
allowances for excess and obsolete inventories is based on estimated exposure on specific inventory items. The Company writes down its inventories as it becomes
aware of any situation where the carrying amount exceeds the estimated realizable value based on assumptions about future demands and market conditions.
F-8
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 40 years for the building; five to seven 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 that do not extend or improve the life of the respective assets are expensed as incurred. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gains or losses included in the
consolidated statement of operations.
Patents
The capitalized costs incurred to obtain patents are amortized using the straight-line method over their remaining estimated lives. Patent amortization begins at the
time of patent application approval, and does not exceed 20 years. The recoverability of capitalized patent costs is dependent upon the Company’s ability to derive
revenue-producing products from such patents or the ultimate sale or licensing of such patent rights. Patent recoverability is regularly reviewed and any patents that
are abandoned are written off at the time of abandonment.
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 asset’s carrying value over its fair value.
Operating
Leases
The Company leases its Texas manufacturing facilities under an operating lease agreement. The lease contains rent escalation clauses for which the lease expense
is recognized on a straight-line basis over the lease term. Rent expense that is recognized but not yet paid is included in other liabilities on the consolidated balance
sheets.
Financing
Obligation
In March 2017, the Company entered into an agreement to lease its Minnesota facility. The lease agreement has an initial term of fifteen years, with four
consecutive renewal options of five years each at the Company's option. As the lease terms resulted in a capital lease classification, the Company accounted for the
sale and leaseback of its Minnesota facility as a financing transaction where the assets remain on the Company's balance sheet and a financing obligation was
recorded for $20,944. As lease payments are made, they will be allocated between interest expense and a reduction of the financing obligation, resulting in a value
of the financing obligation that is equivalent to the net book value of the assets at the end of the lease term. At the end of the lease (including any renewal option
terms), the Company will remove the assets and financing obligation from its balance sheet.
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. Revenue
recognition may occur upon shipment or upon delivery to the customer site, based on the contract terms. The Company records estimated sales returns, discounts
and rebates as a reduction of net sales.
Deferred revenue associated with the upfront payment received under the Company’s distribution agreement with Medikit is recognized in relation to the estimated
future sales under the agreement. The short term portion represents the expected amount of deferred revenue that will be recognized over the next year. The
estimate of future sales under contract will continue to be assessed and adjusted accordingly.
Costs related to products delivered are recognized in the period the revenue is recognized. Cost of goods sold consists primarily of raw materials, direct labor, and
manufacturing overhead.
F-9
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred
Revenue
In November 2016, the Company signed an exclusive distribution agreement with Medikit Co., Ltd. (“Medikit”) to sell its Coronary and Peripheral OAS in Japan.
To secure exclusive distribution rights, Medikit made an upfront payment of $10,000 to the Company, which is refundable based on the occurrence of certain
events during the term of the agreement. The Company has classified the payment as current or long-term based on its expectation of when revenue will be
recognized and is re-evaluated on a quarterly basis. Medikit also provides advance payments for orders under the terms of the agreement, and, therefore, deferred
revenue is recorded until products are accepted by Medikit.
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 were as follows:
Balances at June 30, 2015
Provision
Claims
Balance at June 30, 2016
Provision
Claims
Balance at June 30, 2017
Provision
Claims
Balance at June 30, 2018
Pump Recall
Amount
126
490
(471)
145
1,733
(1,361)
517
328
(713)
132
$
$
In April 2017, the Company initiated a voluntary recall of one type of its saline infusion pumps that resulted in a reserve of approximately $1,535 incurred in fiscal
2017, relating to estimated costs of the recall.
Litigation
and
Contingent
Liabilities
The Company and its operations from time to time are, and in the future may be, parties to or targets of lawsuits, claims, investigations, and proceedings, which are
handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and
the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues
an amount based on management’s best estimate considering all facts and circumstances. The Company expenses legal costs, including those expected to be
incurred in connection with a loss contingency, as incurred.
Medical
Device
Excise
Tax
The Patient Protection and Affordable Care Act of 2010 imposed a medical device excise tax on medical device manufacturers on their sales in the United States of
certain devices, which was effective January 1, 2013. The excise tax is 2.3% of the taxable base and applied to a substantial majority of the Company’s sales.
Effective January 1, 2016, the excise tax was suspended until the end of 2017, and in January 2018, another temporary two year suspension of the tax was passed,
extending the suspension to December 31, 2019. The Company incurred $1,273 of expense related to the tax during the year ended June 30, 2016.
F-10
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company’s judgment and tax
strategies are subject to audit by various taxing authorities.
Accounting guidance requires that accounting for uncertainty in income taxes is recognized in the financial statements. The guidance provides that a tax benefit
from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. The guidance also provides rules on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition.
Research
and
Development
Expenses
Research and development expenses include costs associated with the design, development, testing, enhancement and regulatory approval of the Company’s
products. Research and development expenses include employee compensation (including stock-based compensation), supplies and materials, consulting expenses,
patent amortization, 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. Expenses associated with patent
applications are capitalized and amortized using the straight-line method over their remaining estimated lives. Patent amortization begins at the time of patent
application approval, and does not exceed 20 years .
Concentration
of
Credit
Risk
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities and
accounts receivable.
The Company maintains its cash balances primarily with one financial institution. 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.
The Company believes that the credit risk related to marketable securities is limited due to the adherence to an investment policy and that credit risk related to
accounts receivable is limited due to a large customer base.
Marketable
Securities
The Company’s marketable securities consist solely of available-for-sale securities and were valued in accordance with the fair value measurement guidance
discussed below. Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a component of stockholders’ equity as
accumulated other comprehensive income (loss), net of tax. Realized gains and losses, if any, are calculated on the specific identification method and are included
in interest and other, net in the consolidated statements of operations.
Available-for-sale securities are reviewed for possible impairment at least quarterly, or more frequently if circumstances arise that may indicate impairment. When
the fair value of the securities declines below the amortized cost basis, impairment is indicated and it must be determined whether it is other than temporary.
Impairment is considered to be other than temporary if the Company: (i) intends to sell the security, (ii) will more likely than not be forced to sell the security
before recovering its cost, or (iii) does not expect to recover the security’s amortized cost basis. If the decline in fair value is considered other than temporary, the
cost basis of the security is adjusted to its fair market value and the realized loss is reported in earnings. Subsequent increases or decreases in fair value are reported
in equity as accumulated other comprehensive income (loss).
F-11
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost
Method
Investments
When the Company controls less than 20% of the decision-making ability over the operations of the investee, the investment is accounted for at cost. Cost method
investments are reviewed quarterly for any events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. When
the fair value declines below the cost, an impairment loss is recognized unless it is considered temporary. Impairment is considered to be other than temporary if
the length of time it will take for the investment’s value to exceed its cost is greater than the Company’s intent and ability to hold the investment.
Fair
Value
Measurements
Under the authoritative guidance for fair value measurements, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use
in valuing the asset or liability developed based upon the best information available in the circumstances. The categorization of financial assets and financial
liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The hierarchy is broken down into three levels defined as follows:
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
As of June 30, 2018 , 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. See Note 4 for additional information.
Use
of
Estimates
The preparation of the Company’s 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 and these differences could be material.
Stock-Based
Compensation
The Company has stock-based compensation plans, which include stock options, nonvested share awards, and an employee stock purchase plan. Fair value of
option awards is determined using option-pricing models, fair value of nonvested share awards with market conditions is determined using the Monte Carlo
simulation, and fair value of nonvested share awards that vest based upon performance or service conditions is determined by the closing market price of the
Company’s stock on the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for the awards expected to vest.
Recent
Accounting
Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended revenue recognition guidance to clarify the principles for recognizing revenue
from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be
entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts,
significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The Company has completed an adoption plan, which included a review of customer contracts, applying the five-step model of the new standard to the customer
contracts and comparing the results to the Company’s current accounting. The Company has elected the modified retrospective method of adoption, which the
Company anticipates will not result in a material adjustment
F-12
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to retained earnings. The Company’s revenue recognition will remain largely unchanged given the majority of the Company’s revenue arrangements consist of a
single performance obligation that will be recognized at a point in time when control passes to the customer. As a result, the Company does not anticipate a
material impact on the amount and timing of revenue recognized in the Company’s consolidated financial statements.
The Company is also implementing new internal controls around the judgments needed to address risks associated with applying the five-step model, which
includes identifying performance obligations and judgments made related to variable consideration. Effective July 1, 2018, the Company will be revising its
revenue recognition accounting policy and disclosures to reflect the requirements of the amended revenue recognition guidance. The Company will continue to
monitor any modifications or interpretations communicated by the FASB that may impact any of its final assessments related to the guidance.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises the accounting
requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial
liabilities measured at fair value. The update also changes certain disclosure requirements associated with the fair value of financial instruments. These changes
will require an entity to measure, at fair value, investments in equity securities and recognize the changes in fair value within net income. ASU 2016-01 will be
applied on a modified retrospective basis to all outstanding instruments, with an adjustment recorded to opening retained earnings as of the beginning of the first
period in which the guidance becomes effective. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. The guidance is effective for the Company on July 1, 2018. The Company does not anticipate a material impact
on its financial statements upon adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The guidance requires lessees to recognize the assets and liabilities that arise from leases on the
balance sheet. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and should
be applied using a modified retrospective approach. Early adoption is permitted. The guidance is effective for the Company on July 1, 2019. The Company is
currently evaluating the timing, method of adoption and impact of the new lease guidance on its financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which revises guidance for the accounting for credit
losses on financial instruments within its scope. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of
financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the
current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other
receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. ASU 2016-13 is effective for annual periods
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and should be applied as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The guidance is effective for the Company on
July 1, 2020. The Company does not anticipate a material impact on its financial statements upon adoption.
In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting” which clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award
being accounted for as modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for
annual periods, and interim periods within those annual periods beginning after December 15, 2017, with early adoption permitted. The Company does not
anticipate a material impact on its financial statements upon adoption.
F-13
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Selected Consolidated Financial Statement Information
Accounts
Receivable,
Net
Accounts receivable consists of the following:
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
Inventories
Inventories consist of the following:
Raw materials
Work in process
Finished goods
Inventories
Property
and
Equipment,
Net
Property and equipment consists of the following:
Land
Building
Equipment
Furniture
Leasehold improvements
Construction in progress
Less: Accumulated depreciation
Total Property and equipment, net
June 30,
2018
2017
32,025 $
(800)
31,225 $
29,336
(864)
28,472
June 30,
2018
2017
6,820 $
1,315
8,470
16,605 $
7,898
1,221
7,778
16,897
June 30,
2018
2017
$
$
$
$
$
500 $
22,420
16,510
2,709
438
1,110
43,687
(15,943)
$
27,744 $
500
22,420
16,502
2,709
86
421
42,638
(12,942)
29,696
On December 29, 2016, the Company entered into a Purchase and Sale Agreement, as subsequently amended (collectively, the “Sale Agreement”), with Krishna
Holdings, LLC (the “Buyer”), providing for the sale to Buyer of the Company’s headquarters facility in St. Paul, Minnesota (the “Facility”), for a cash purchase
price of $21,500 . On March 30, 2017, the sale of the Facility under the Sale Agreement closed. The Company received proceeds of approximately $20,944 (
$21,500 , less $556 of transaction expenses). The net proceeds are to be used for working capital and general corporate purposes. In connection with the sale, the
Company recorded an impairment charge of $158 .
Under the Sale Agreement, the Company entered into a Lease Agreement (the “Lease Agreement”) with Krishna Holdings, LLC, Apex Holdings, LLC, Kashi
Associates, LLC, Keva Holdings, LLC, S&V Ventures, LLC, Polo Group LLC, SPAV Holdings LLC, Star Associates LLC, and The Global Villa, LLC. As the
lease terms resulted in a capital lease classification, the Company accounted for the sale and leaseback of the Facility as a financing transaction where the assets
remain on the Company’s balance sheet. See Note 3 for further discussion on future payment obligations under the Lease Agreement.
F-14
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patents,
net
Patents, net consist of the following:
Patents
Less: Accumulated amortization
Total Patents, net
As of June 30, 2018 , future estimated amortization of patents is as follows:
2019
2020
2021
2022
2023
Thereafter
June 30,
2018
2017
$
$
6,435 $
(1,204)
5,231 $
$
$
6,056
(1,000)
5,056
199
193
191
181
174
4,293
5,231
This future amortization expense is an estimate. Actual amounts may vary from these estimated amounts due to additional intangible asset acquisitions, approval of
patents-in-process, potential impairment, change in useful life or other events.
Accrued
Expenses
Accrued expenses consist of the following:
Commissions
Salaries and bonus
Accrued vacation
Accrued excise, sales and other taxes
Legal settlement
Clinical studies
Accrued litigation
Other accrued expenses
Total Accrued expenses
Legal Settlement
June 30,
2018
2017
$
7,234 $
6,624
3,557
3,522
1,847
1,422
—
1,570
8,217
8,247
3,436
3,497
1,814
657
2,600
1,768
$
25,776 $
30,236
On June 28, 2016, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the United States of America, acting through the
Department of Justice (the “DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services, and Travis Thams, to
resolve the investigation by the DOJ and the civil action underlying such investigation. Under the Settlement Agreement, the Company agreed to pay $8,000 (the
“Settlement Amount”), as follows: an initial payment of $3,000 , paid on July 1, 2016, with the remaining $5,000 , which bears interest at 1.8% per annum,
payable in 11 equal quarterly installments, beginning January 1, 2017. The amount payable within the next twelve months is included in accrued expenses (as
noted in the table above) with the long-term portion included in other liabilities (as noted in the table below). Under the Settlement Agreement, if the Company
makes a single payment in excess of $2,000 , which payment is not covered by an insurance policy, in settlement of any claims before paying the full Settlement
Amount, the remaining unpaid balance of the Settlement Amount will become immediately due and payable, with interest accruing on the unpaid principal portion
at an interest rate of 1.8% per annum.
F-15
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring
On March 31, 2016, the Company announced a restructuring to reduce costs as part of its plan to progress towards profitability and positive cash flow. As a result,
the Company recorded a restructuring expense of $2,364 during the year ended June 30, 2016, which was comprised of severance and other employee related costs.
There was $22 and $169 of accrued restructuring costs recorded as accrued expenses on the consolidated balance sheet as of June 30, 2018 and June 30, 2017,
respectively.
Other
Liabilities
The Company’s non-current other liabilities consist of the following:
Legal settlement
Deferred compensation
Deferred grant incentive
Other liabilities
Total Other liabilities
3. Debt
Revolving
Credit
Facility
June 30,
2018
2017
467 $
395
460
90
1,412 $
2,314
519
473
173
3,479
$
$
On March 31, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement
provides for a senior, secured revolving credit facility (the “Revolver”) of $40,000 (the “Maximum Dollar Amount”).
Advances under the Revolver may be made from time to time up to the Maximum Dollar Amount, subject to certain borrowing limitations. The Revolver has a
maturity date of March 31, 2020 and bears interest at a floating per annum rate equal to the Wall Street Journal prime rate, less 0.25% . Interest on borrowings is
due monthly and the principal balance is due at maturity. Borrowings up to $10,000 are available on a non-formula basis. Borrowings above $10,000 are based on
(i) 85% of eligible domestic accounts receivable, and (ii) the lesser of 50% of eligible inventory or $5,000 , subject to adjustment as defined in Loan Agreement.
Upon the Revolver’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolver will be due and payable.
The Company will incur a fee equal to 1% of the Maximum Dollar Amount upon termination of the Loan Agreement or the Revolver for any reason prior to the
maturity date, unless refinanced with SVB.
The Company’s obligations under the Loan Agreement are secured by certain of the Company’s assets, including, among other things, accounts receivable, deposit
accounts, inventory, equipment, general intangibles and records pertaining to the foregoing. The collateral does not include the Company’s intellectual property,
but the Company has agreed not to encumber its intellectual property without the consent of SVB. The Loan Agreement contains customary covenants limiting the
Company’s ability to, among other things, incur debt or liens, make certain investments and loans, enter into transactions with affiliates, undergo certain
fundamental changes, dispose of assets, or change the nature of its business. In addition, the Loan Agreement contains financial covenants requiring the Company
to maintain, at all times when any amounts are outstanding under the Revolver, either (i) minimum unrestricted cash at SVB and unused availability on the
Revolver of at least $10,000 or (ii) minimum trailing three-month Adjusted EBITDA of $1,000 . If the Company does not comply with the various covenants under
the Loan Agreement, the interest rate on outstanding amounts will increase by 5% and SVB may, subject to various customary cure rights, decline to provide
additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Revolver, and foreclose on all collateral.
Under the Loan Agreement, the Company paid SVB a non-refundable commitment fee of $80 , which is being amortized to interest expense over the term of the
Loan Agreement. The Company is required to pay a fee equal to 0.35% per annum on the unused portion of the Revolver, payable quarterly in arrears. SVB’s
obligations to advance funds under the Revolver are subject to an initial collateral examination to be completed within 90 days of the effective date of the Loan
Agreement. The Company is not obligated to draw any funds under the Revolver and no amounts were outstanding as of June 30, 2018 and 2017.
F-16
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing
Obligation
In connection with the sale of the Facility, the Company entered into a Lease Agreement to lease the Facility. The Lease Agreement has an initial term of 15 years ,
with four consecutive renewal options of 5 years each at the Company’s option, with a base annual rent in the first year of $1,638 and annual escalations of 3%
thereafter. Rent during subsequent renewal terms will be at the then fair market rental rate. The effective interest rate is 7.89% .
Future payments under the initial term of the Lease Agreement as of June 30, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
4. Fair Value
$
$
1,699
1,750
1,803
1,857
1,913
19,375
28,397
The available-for-sale marketable securities are primarily comprised of investments with a fixed income and equity investments and consist of the following,
measured at fair value on a recurring basis:
Mutual funds
Total marketable securities
Mutual funds
Total marketable securities
Fair Value Measurements as of June 30, 2018 Using Inputs Considered
as
Fair Value
Level 1
Level 2
Level 3
544
544
199
199
345 $
345 $
—
—
Fair Value Measurements as of June 30, 2017 Using Inputs Considered
as
Fair Value
Level 1
Level 2
Level 3
704
704
281
281
423 $
423 $
—
—
$
$
$
$
During the years ended June 30, 2018 and 2017 , there were no purchases of available-for-sale securities and $194 and $40 , respectively, of available-for-sale
securities that were sold. There were no other-than-temporary impairments during the years ended June 30, 2018 and 2017 . During the years ended June 30, 2018
and 2017 , there was a realized gain of $34 and $6 that was recorded within interest income and other, net on the consolidated statement of operations.
There were no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the year ended June 30, 2018 . Any transfers
between levels are recognized on the date of the event or when a change in circumstances causes a transfer.
Cost Method Investment
The Company holds a cost method investment measured at fair value on a nonrecurring basis and is classified as a Level 3 investment. As of June 30, 2018, the
cost of the investment was $2,538 . There were no identified events or changes that had a significant adverse effect on the fair value of the investment. The
investment is recorded within other long term assets on the consolidated balance sheet.
F-17
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Stock Options and Restricted Stock Awards
On November 15, 2017, the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”) for the purpose of granting equity awards to
employees, directors, and consultants. The 2017 Plan replaced the 2014 Equity Incentive Plan (the “2014 Plan”), and no further equity awards may be granted
under the 2014 Plan or the 2007 Equity Incentive Plan (the “2007 Plan”) (the 2017 Plan, 2014 Plan and the 2007 Plan are collectively referred to as the “Plans”).
The 2017 Plan allows for the granting of up to 3,607,523 shares of common stock as approved by the Board of Directors or committees thereof 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.
Stock Options
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 Company’s common stock at the date of grant, as determined by the Company’s management and Board of Directors. In
addition, the Company has granted nonqualified stock options to a director outside of the Plans.
Stock option activity is as follows:
Options outstanding at June 30, 2015
Exercised
Forfeited or expired
Options outstanding at June 30, 2016
Exercised
Expired
Options outstanding at June 30, 2017
Exercised
Options outstanding at June 30, 2018
Number of
Options
Weighted Average
Exercise Price
699,872 $
(87,817) $
(5,176) $
606,879 $
(519,297) $
(9,381) $
78,201 $
(55,880) $
22,321 $
10.32
11.46
12.37
10.14
10.33
8.83
9.07
9.20
8.75
As of June 30, 2018 , all options were fully vested. An employee’s vested options must be exercised at or within 90 days of termination to avoid forfeiture. The
Company determined the fair value of options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated
forfeitures, was recognized as expense on a straight-line basis over the options’ vesting periods. There were no options granted during the years ended June 30,
2018 , 2017 or 2016 .
The aggregate intrinsic value of a stock option 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 vested and outstanding options at June 30, 2018 , 2017 and 2016 , was $527 , $1,811 and $4,025 , respectively. The total aggregate
intrinsic value of options exercised during the years ended June 30, 2018 , 2017 and 2016 , was $1,095 , $7,955 , and $417 , respectively. Cash received from
option exercises was $514 , $5,363 and $1,006 for the years ended June 30, 2018 , 2017 and 2016 , respectively. The weighted average remaining contractual life
of options outstanding at June 30, 2018 was 0.67 years . Shares supporting option exercises are sourced from new share issuances.
Restricted Stock
The fair value of each restricted stock award was equal to the fair market value of the Company’s common stock at the date of grant. Vesting of time based
restricted stock awards ranges 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 stock’s vesting period.
F-18
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock award activity is as follows:
Outstanding at June 30, 2015
Granted
Forfeited
Vested
Outstanding at June 30, 2016
Granted
Forfeited
Vested
Outstanding at June 30, 2017
Granted
Forfeited
Vested
Outstanding at June 30, 2018
Number of
Shares
Weighted Average
Grant Date
Fair Value
843,094 $
522,415 $
(230,710) $
(487,226) $
647,573 $
258,346 $
(103,140) $
(316,195) $
486,584 $
290,856 $
(68,499) $
(253,725) $
455,216 $
25.16
19.30
24.83
22.27
23.24
21.80
22.11
24.21
21.26
27.93
22.76
22.87
24.77
Total fair value of time-based restricted stock that vested during fiscal 2018 , 2017 and 2016 was $5,803 , $7,655 , and $10,851 , respectively. Estimated pre-
vesting forfeitures are considered in determining stock-based compensation expense. As of June 30, 2018 , 2017 and 2016 , the Company estimated its weighted
average forfeiture rate at 15.2% , 17.1% and 17.0% , respectively. As of June 30, 2018 , there was approximately $8,171 of total unrecognized compensation
expense, net of the effect of estimated forfeitures, related to nonvested restricted stock awards, which is expected to be recognized over a weighted-average period
of 1.6 years .
Performance-Based Restricted Stock
The Company also grants performance-based restricted stock awards to certain executives and other management. Fiscal 2018 awards vest based on the
Company’s total shareholder return relative to total shareholder return of the peer group (a market condition), as measured by the closing prices of the stock of the
Company and its peer group for the 90 trading days preceding July 1, 2017 compared to the closing prices for the 90 trading days preceding July 1, 2020. Fiscal
2017 awards vest based on the Company’s total shareholder return relative to total shareholder return of the peer group (a market condition), as measured by the
closing prices of the stock of the Company and its peer group for the 90 trading days preceding July 1, 2016 compared to the closing prices for the 90 trading days
preceding July 1, 2019. Fiscal 2016 awards included grants that vested based upon the achievement of certain thresholds measuring total shareholder return during
periods within the fiscal year as compared to a pre-determined peer group of companies, and grants that vested based upon achievement of certain thresholds
measuring annual revenue growth during the fiscal year as compared to a pre-determined peer group of companies. The aggregate maximum shares granted were
as follows:
Performance Measurement
Total shareholder return
Annual revenue growth
2018
2017
2016
278,889
N/A
336,826
N/A
156,509
156,509
The results of the Company’s performance based restricted stock awards for fiscal 2016 was a 0% achievement and zero shares vesting for both performance
measurements.
F-19
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance-based restricted stock award activity is as follows:
Outstanding at June 30, 2015
Granted
Forfeited
Vested
Outstanding at June 30, 2016
Granted
Forfeited
Outstanding at June 30, 2017
Granted
Forfeited
Outstanding at June 30, 2018
Number of
Shares
Weighted Average
Grant Date
Fair Value
152,224 $
313,018 $
(52,680) $
(102,451) $
310,111 $
336,826 $
(328,353) $
318,584 $
278,889 $
(66,295) $
531,178 $
22.03
16.67
28.64
25.58
16.67
11.97
16.41
11.97
13.63
13.17
12.69
Total fair value of performance-based restricted stock that vested during fiscal 2018 , 2017 and 2016 was $0 , $0 , and $2,621 , respectively. Estimated pre-vesting
forfeitures are considered in determining stock-based compensation expense. As of June 30, 2018 , there was approximately $2,791 of total unrecognized
compensation expense related to nonvested performance-based restricted stock awards, which is expected to be recognized over a weighted-average period of 1.6
years .
Restricted Stock Units
The Company grants restricted stock units to members of its Board of Directors. Restricted stock units represent the right to receive payment in the form of shares
of the Company’s common stock or in cash at the Company’s option. Restricted stock unit payments would occur within 30 days following the six month
anniversary of the date that the director ceases to serve on the Board of Directors or, if the restricted stock units are granted in lieu of an annual cash retainer, on
the payment date selected by the director that is at least two years after the grant date. 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:
Restricted stock units outstanding at June 30, 2015
Granted
Converted to common stock
Restricted stock units outstanding at June 30, 2016
Granted
Forfeited
Converted to common stock
Restricted stock units outstanding at June 30, 2017
Granted
Converted to common stock
Restricted stock units outstanding at June 30, 2018
F-20
Number of
Shares
Weighted Average
Grant Date
Fair Value
262,943 $
47,586 $
(5,713) $
304,816 $
54,064 $
(2,974) $
(6,476) $
349,430 $
28,364 $
(41,925) $
335,869 $
12.62
22.27
22.18
13.95
21.21
21.01
29.34
14.73
31.02
16.07
15.94
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation Expense
The following amounts were recognized as stock-based compensation expense in the consolidated statements of operations:
Year Ended June 30, 2018
Cost of goods sold
Selling, general and administrative
Research and development
Total stock-based compensation expense
Year Ended June 30, 2017
Cost of goods sold
Selling, general and administrative
Research and development
Total stock-based compensation expense
Year Ended June 30, 2016
Cost of goods sold
Selling, general and administrative
Research and development
Total stock-based compensation expense
Shares Available for Grant
The following summarizes shares available for grant under the 2017 Plan:
Reserved
Transferred from 2014 Plan
Granted
Forfeited or cancelled
Shares available for grant at June 30, 2018
6. Employee Stock Purchase Plan
Restricted
Stock
Awards
Employee Stock
Purchase Plan
Restricted
Stock
Units
207 $
7,462
817
8,486 $
68 $
848
150
1,066 $
— $
750
—
750 $
Restricted
Stock
Awards
Employee Stock
Purchase Plan
Restricted
Stock
Units
588 $
6,568
879
8,035 $
101 $
1,065
129
1,295 $
— $
1,024
—
1,024 $
Restricted Stock
Awards
Employee Stock
Purchase Plan
Restricted
Stock
Units
679 $
8,215
1,681
10,575 $
115 $
1,167
120
1,402 $
— $
1,000
—
1,000 $
$
$
$
$
$
$
Total
275
9,060
967
10,302
Total
689
8,657
1,008
10,354
Total
794
10,382
1,801
12,977
3,607,523
(1,057,523)
(81,060)
95,525
2,564,465
The Company maintains an employee stock purchase plan that was approved by the Company’s stockholders in November 2015 (“2015 ESPP”) and replaced the
previous employee stock purchase plan that expired on May 31, 2016. The 2015 ESPP provides eligible employees the opportunity to acquire common stock in
accordance with Section 423 of the Internal Revenue Code of 1986. Stock can be purchased each six -month period per year (twice per year). The purchase price is
equal to 85% of the lower of the price at the beginning or the end of the respective period. Employees purchased 158,939 shares at an average price of $20.40 per
share during the year ended June 30, 2018 . Shares reserved under the 2015 ESPP at June 30, 2018 totaled 1,685,431 .
F-21
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
The components of the Company’s overall deferred tax assets and liabilities are as follows:
Deferred tax assets
Stock-based compensation
Deferred revenue
Accrued expenses
Inventories
Compensation accruals
Depreciation and amortization
Other
Research and development credit carryforwards
Net operating loss carryforwards
Total deferred tax assets
Valuation allowance
Net deferred tax assets
June 30,
2018
2017
$
2,505 $
2,351
970
305
133
320
397
5,048
64,101
76,130
(76,130)
$
— $
5,107
—
1,650
433
261
409
1,019
4,650
87,502
101,031
(101,031)
—
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”), resulting in significant
modifications to existing law. Accounting for the income tax effects of the Act which impact our tax provision has been completed as of the current year and
included in the Company’s financial statements as of June 30, 2018. As a result of the Act, the Company remeasured deferred tax assets and liabilities from 34% to
21%, but given the Company is in a full valuation allowance position, there was no tax expense impact.
The Company has established valuation allowances to fully offset its deferred tax assets due to the uncertainty about the Company’s ability to generate the future
taxable income necessary to realize these deferred assets, particularly in light of the Company’s 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 Company’s equity financings. A summary of the valuation allowances are as follows:
Balances at June 30, 2015
Additions
Balance at June 30, 2016
Reductions
Balance at June 30, 2017
Reductions
Balance at June 30, 2018
$
$
84,319
16,898
101,217
(186)
101,031
(24,901)
76,130
As of June 30, 2018 and 2017 , the Company had federal tax NOL carryforwards of approximately $275,030 and $287,598 , respectively. These NOL
carryforwards are available to offset taxable income through 2037. The Company also had various state NOL carryforwards available to offset future state taxable
income. These state NOL carryforwards typically have the same expirations as the Company’s federal tax NOL carryforwards.
As of June 30, 2018 and 2017 , the Company had approximately $4,244 and $4,137 of federal research and development credit carryforwards, respectively. As of
June 30, 2018 and 2017 , the Company had approximately $1,560 and $ 1,729 of state research and development credit carryforwards. The federal and state
research and development credit carryforwards will expire through fiscal 2037 and 2032, respectively.
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
F-22
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $597 and $570 at June 30, 2018 and 2017 , respectively. Due to the Company having a full valuation allowance, this liability has been netted against the
deferred tax asset. 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 (in thousands):
Balances at June 30, 2015
Increases related to prior year tax positions
Increases related to current year tax positions
Balances at June 30, 2016
Decreases related to prior year tax positions
Increases related to current year tax positions
Balance at June 30, 2017
Decreases related to prior year tax positions
Increases related to current year tax positions
Balance at June 30, 2018
$
$
494
10
41
545
(8)
33
570
(3)
30
597
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, 2018, 2017, 2016, and 2015. The Company is not currently under examination by any taxing jurisdiction.
8. Commitments and Contingencies
Operating
Leases
The Company leases manufacturing space, equipment and apartments under lease agreements that expire at various dates through March 2020 . Rental expenses
were $652 , $656 , and $1,049 , for the years ended June 30, 2018 , 2017 , and 2016 , respectively. In March 2017, the Company sold the Facility and began leasing
the Facility.
Future minimum lease payments under the agreements as of June 30, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Other
Matters
$
$
510
376
20
—
—
—
906
In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters including, but not limited to,
employment claims and commercial disputes. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of
June 30, 2018 that are probable or estimable, for which the outcome is reasonably possible of having a material adverse impact on its consolidated balance sheets
or statements of operations.
F-23
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Employee Benefits
The Company offers a 401(k) plan to its employees. Eligible employees may authorize up to $19 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, 2018 , 2017 , and 2016 .
The Company offers certain members of management and highly compensated employees the opportunity to defer up to 100% of their base salary (after 401(k),
payroll tax and other deductions), performance bonus and discretionary bonus and elect to receive the deferred compensation at a fixed future date of participant’s
choosing. Each participant may, at the time of his or her deferral election, choose to allocate the deferred compensation into investment alternatives set by the
Human Resources and Compensation Committee. The amount payable to each participant under the plan will change in value based upon the investment selected
by that participant and is classified as current or long-term on the Company’s balance sheet based on the disbursement elections made by the participants. As of
June 30, 2018 , $149 of the amount is included in accrued expenses and $395 is included in other liabilities on the consolidated balance sheet.
10. Earnings Per Share
The following table presents a reconciliation of the numerators and denominators used in the basic and diluted earnings per common share computations (in
thousands except share and per share amounts):
Numerator
Net income (loss)
Income allocated to participating securities
Net income (loss) available to common stockholders
Denominator
Weighted average common shares outstanding — basic
Effect of dilutive stock options (1)
Effect of dilutive restricted stock units (2)
Effect of performance-based restricted stock awards (3)
Weighted average common shares outstanding — diluted
Earnings per common share — basic
Earnings per common share — diluted
Year Ended June 30,
2018
2017
2016
1,712 $
(19)
1,693 $
(1,792) $
(56,024)
—
(1,792) $
—
(56,024)
33,145,140
32,373,709
32,537,621
15,039
335,869
118,212
—
—
—
—
—
—
33,614,260
32,373,709
32,537,621
0.05 $
0.05 $
(0.06) $
(0.06) $
(1.72)
(1.72)
$
$
$
$
(1)
(2)
(3)
At June 30, 2018 , 2017 , and 2016 ; 22,321 , 78,201 , and 606,879 stock options, respectively, were outstanding. The effect of the shares that would be issued upon
exercise of these options has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
At June 30, 2018 , 2017 , and 2016 ; 335,869 , 349,430 and 304,816 additional shares of common stock, respectively, were issuable upon the settlement of outstanding
restricted stock units. The effect of the shares that would be issued upon settlement of these restricted stock units has been excluded from the calculation of diluted loss
per share because those shares are anti-dilutive.
At June 30, 2018 and 2017 , 531,178 and 318,584 , respectively, of performance-based restricted stock awards were outstanding. The effect of the shares that would be
issued upon vesting of these awards has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
Unvested time-based restricted stock awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings
per share pursuant to the two-class method. Under this method, earnings attributable to the Company are allocated between common stockholders and the
participating awards, as if the awards were a second class of stock. During periods of net income, the calculation of earnings per share excludes the income
attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss, undistributed
earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these
F-24
CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securities as they do not share in the losses of the Company. During the year ended June 30, 2018 , undistributed earnings allocated to participating securities were
based on 382,476 unvested time-based restricted stock awards.
11. Quarterly Data (Unaudited)
The following table sets forth the Company’s unaudited quarterly summary consolidated statements of operations in each of the quarters for the years ended
June 30, 2018 and 2017 . The information for each of these quarters is unaudited and has been prepared on the same basis as the consolidated financial statements.
This data should be read in conjunction with the consolidated financial statements and related notes. These operating results may not be indicative of results to be
expected for any future period (amounts in thousands, except per share data).
Net revenue
Gross profit
Net income (loss)
Earnings per common share - basic (1)
Earnings per common share - diluted (1)
Net revenue
Gross profit
$
$
$
$
$
$
$
Q1
Q2
2018
Q3
49,676 $
40,474 $
(1,977) $
(0.06) $
(0.06) $
52,628 $
43,129 $
(413) $
(0.01) $
(0.01) $
55,587 $
45,618 $
365 $
0.01 $
0.01 $
Q4
59,152 $
48,338 $
3,737 $
0.11 $
0.11 $
Total
217,043
177,559
1,712
0.05
0.05
Q1
Q2
2017
Q3
Q4
49,800 $
40,334 $
50,043 $
40,880 $
52,144 $
41,005 $
52,919 $
43,246 $
Total
204,906
165,465
(1,792)
(0.06)
(0.06)
Net income (loss)
Earnings per common share - basic (1)
Earnings per common share - diluted (1)
0.02 $
(1) The summation of quarterly per share data may not equate to the calculation for the full fiscal year as quarterly calculations are performed on a discrete basis.
(1,858) $
(1,749) $
1,043 $
(0.06) $
(0.06) $
(0.05) $
(0.05) $
0.03 $
0.03 $
0.02 $
772 $
$
$
$
F-25
Item 9. Changes
in
and
Disagreements
With
Accountants
on
Accounting
and
Financial
Disclosure.
None.
Item 9A. Controls
and
Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, referred to collectively herein as the Certifying Officers, are responsible for establishing and
maintaining our disclosure controls and procedures. The Certifying Officers have reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
June 30, 2018 . Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the Certifying Officers have
concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures, as designed and implemented, are
effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) for us. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of June 30, 2018 .
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report
on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of June 30, 2018 , as stated in their attestation report included in
Part IV, Item 15 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three
months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other
Information.
Base Salaries
On August 21, 2018, the Human Resources and Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) approved base salaries for
Jeffrey S. Points, our Chief Financial Officer, and Laura J. Gillund, our Chief Talent Officer, of $302,500 and $315,655, respectively, for the year ending June 30,
2019.
On August 22, 2018, the Board approved a base salary for Scott R. Ward, our Chairman, President and Chief Executive Officer, of $670,000 for the year ending
June 30, 2019.
Fiscal 2019 Incentive Plan
On August 21, 2018 and August 22, 2018, the Board and the Committee approved the incentive compensation plans for our executive officers for the year ending
June 30, 2019, as described below.
Cash Bonus Plan
For the 12-month period ending June 30, 2019, each executive officer is eligible to receive cash incentive compensation pursuant to the Fiscal 2019 Executive
Officer Bonus Plan (the “Bonus Plan”), based on our achievement of revenue and Adjusted EBITDA financial goals for such period. Adjusted EBITDA is defined
as EBITDA with stock compensation added back into the calculation. Target bonus amounts are weighted 75% for the revenue goal and 25% for the Adjusted
EBITDA goal. Target bonus levels as a percentage of base salary are 115% for the Chief Executive Officer, 90% for the Chief Operating
47
Officer, 75% for the Chief Financial Officer, 65% for the Chief Talent Officer and General Counsel, and 50% for the other executive officers. Depending upon our
performance against the goals, participants are eligible to earn up to 200% of each of the Adjusted EBITDA and revenue portions of their target bonus amount. The
Bonus Plan criteria are the same for all of the executive officers.
Long-term Incentive Plan
Each executive officer will receive grants of restricted stock under the fiscal 2019 long-term incentive plan, effective three business days following the filing of
this Form 10-K. The restricted stock grants will be based on a target equity percentage of each executive officer’s base salary, with 40% of such target amount
allocated to time-vesting restricted stock and 60% of such target amount allocated to performance-vesting restricted stock; provided, that the performance-vesting
restricted stock will be granted to each executive officer at 200% of the target number of shares allocated to performance-vesting restricted stock, and any shares
not earned will be forfeited upon confirmation of performance achievement. Target equity grants as a percentage of base salary are 400% for the Chief Executive
Officer, 200% for the Chief Operating Officer, 150% for the Chief Financial Officer, and 125% for the other executive officers.
The time-vesting restricted stock grants will vest in equal installments of 1/3 in August 2019, 2020 and 2021. The performance-vesting restricted stock grants will
vest based on our total shareholder return relative to total shareholder return of our peer group (as determined by the Committee), as measured by the closing prices
of our stock and the peer group members for the 90 trading days preceding July 1, 2018 compared to the closing prices of our stock and the stock of the peer group
members for the 90 trading days preceding July 1, 2021. Vesting of the performance-vesting shares will be determined on the date that our Form 10-K for the fiscal
year ending June 30, 2021 is filed.
48
Item 10. Directors,
Executive
Officers
and
Corporate
Governance.
PART III
Other than the information included in this Form 10-K under the heading “Employees—Executive Officers of the Registrant,” which is set forth at the end of Item
1 and incorporated herein by reference, the information required by Item 10 is incorporated by reference to the sections labeled “Election of Directors,”
“Information Regarding the Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” all of which will
appear in our definitive proxy statement for our 2018 Annual Meeting.
Item 11. Executive
Compensation.
The information required by Item 11 is incorporated herein by reference to the sections entitled “Executive Compensation,” “Director Compensation,” “Human
Resources and Compensation Committee” and “Compensation Committee Interlocks and Insider Participation,” all of which will appear in our definitive proxy
statement for our 2018 Annual Meeting.
Item 12. Security
Ownership
of
Certain
Beneficial
Owners
and
Management
and
Related
Stockholder
Matters.
The information required by Item 12 is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information,” which will appear in our definitive proxy statement for our 2018 Annual Meeting.
Item 13. Certain
Relationships
and
Related
Transactions,
and
Director
Independence.
The information required by Item 13 is incorporated herein by reference to the sections entitled “Independence of the Board of Directors” and “Transactions With
Related Persons,” which will appear in our definitive proxy statement for our 2018 Annual Meeting.
Item 14. Principal
Accounting
Fees
and
Services.
The information required by Item 14 is incorporated herein by reference to the section entitled “Principal Accountant Fees and Services,” which will appear in our
definitive proxy statement for our 2018 Annual Meeting.
49
Item 15. Exhibits,
Financial
Statement
Schedules.
(a) Documents filed as part of this report.
PART IV
(1)
Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
•
•
•
•
•
•
•
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2018 and 2017
Consolidated Statements of Operations for the years ended June 30, 2018 , 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended June 30, 2018 , 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018 , 2017 and 2016
Consolidated Statements of Cash Flows for the years ended June 30, 2018 , 2017 and 2016
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
•
All financial statement schedules have been omitted, because they are not applicable, are not required, or the information is included in the
Financial Statements or Notes thereto
(3) Exhibits.
Exhibit
No.
Description
3.1
3.2
4.1
4.2
10.1†
10.2†
10.3†
10.4†*
10.5†*
10.6†*
10.7†
10.8†
10.9†
Restated Certificate of Incorporation, as amended (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the
Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Amended and Restated Bylaws (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current
Report on Form 8-K filed on May 21, 2015).
Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s
Current Report on Form 8-K filed on March 3, 2009).
Registration Rights Agreement by and among Cardiovascular Systems, Inc. and certain of its stockholders, dated as of March 16, 2009 (previously
filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current Report on Form 8-K filed on March 18, 2009).
Employment Agreement, dated April 7, 2008, by and between Cardiovascular Systems, Inc., a Minnesota corporation, and Laurence L. Betterley
(previously filed with the SEC as an Exhibit to and incorporated herein by reference from CSI Minnesota, Inc.’s Registration Statement on Form S-
1/A, File No. 333-148798, filed April 18, 2008).
Employment Agreement, dated May 9, 2011, by and between Cardiovascular Systems, Inc. and Kevin J. Kenny (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed September 12, 2011).
Form of Standard Employment Agreement (previously filed with the SEC as an Exhibit to and incorporated herein by reference from CSI Minnesota,
Inc.’s Registration Statement on Form S-1, File No. 333-148798, filed January 22, 2008).
Fiscal Year 2019 Executive Officer Base Salaries.
Fiscal 2019 Executive Officer Bonus Plan and Equity Compensation.
Fiscal Year 2019 Director Compensation Arrangements.
Form of Director and Officer Indemnification Agreement (previously filed with the SEC as an Exhibit to and incorporated herein by reference from
the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Cardiovascular Systems, Inc. Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Registration Statement on Form S-8, File No. 333-158755, filed April 24, 2009).
Form of Incentive Stock Option Agreement under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
50
Exhibit
No.
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16
10.17
10.18+
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†
10.25†
Description
Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Form of Restricted Stock Agreement under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an Exhibit to
and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed on September 12, 2011).
Form of Restricted Stock Unit Agreement under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an Exhibit
to and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed on September 12, 2011).
Form of Performance Share Award under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Form of Performance Unit Award under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Form of Stock Appreciation Rights Agreement under the Amended and Restated 2007 Equity Incentive Plan (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 14, 2009).
Build-To-Suit Lease Agreement between Pearland Economic Development Corporation and Cardiovascular Systems, Inc., dated September 9, 2009
(previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed on
September 28, 2009).
First Amendment of Lease, between Pearland Economic Development Corporation and Cardiovascular Systems, Inc., dated November 10, 2017
(previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on
February 9, 2018).
Supply Agreement, between Cardiovascular Systems, Inc. and Fresenius Kabi AB, effective April 4, 2011 (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 13, 2011).
Amendment to Employment Agreement, dated December 31, 2012, by and between the Company and Laurence L. Betterley (previously filed with
the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed February 8, 2013).
Amendment to Employment Agreement, dated December 31, 2012, by and between the Company and Kevin J. Kenny (previously filed with the SEC
as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed February 8, 2013).
Cardiovascular Systems, Inc. Deferred Compensation Plan (previously filed with the SEC as an Exhibit to and incorporated herein by reference from
the Company’s Current Report on Form 8-K filed December 17, 2013).
Cardiovascular Systems, Inc. 2014 Equity Incentive Plan, as amended (previously filed with the SEC as an Exhibit to and incorporated herein by
reference from the Company’s Annual Report on Form 10-K filed August 27, 2015).
Form of Restricted Stock Agreement for Time-Based Awards under the 2014 Equity Incentive Plan (previously filed with the SEC as an Exhibit to
and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed February 6, 2015).
Form of Restricted Stock Agreement for Performance-Based Awards under the 2014 Equity Incentive Plan (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed February 6, 2015).
Amendment No. 2 to Employment Agreement, dated February 4, 2015, by and between Cardiovascular Systems Inc. and Kevin J. Kenny (previously
filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 8, 2015).
10.26†*
Cardiovascular Systems, Inc. Executive Officer Severance Plan (restated August 22, 2018).
10.27†
10.28†
Form of Restricted Stock Unit Agreement under the 2014 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 8, 2015).
Form of Restricted Stock Agreement under the 2014 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and incorporated herein by
reference from the Company’s Quarterly Report on Form 10-Q filed May 8, 2015).
51
Exhibit
No.
10.29†
10.30
10.31+
10.32
10.33
10.34†
10.35†
10.36†
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44†
10.45†
10.46†
Description
Cardiovascular Systems, Inc. 2015 Employee Stock Purchase Plan (previously filed with the SEC as an Exhibit to and incorporated herein by
reference from the Company’s Current Report on Form 8-K filed November 19, 2015).
Amendment No. 1 to Supply Agreement, between Cardiovascular Systems, Inc. and Fresenius Kabi AB, effective March 17, 2016 (previously filed
with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 6, 2016).
Amendment No. 1 to Product Schedule, between Cardiovascular Systems, Inc. and Fresenius Kabi AB, effective March 27, 2016 (previously filed
with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 6, 2016).
Settlement Agreement, among Cardiovascular Systems, Inc., the United States of America acting through the United States Attorney for the Western
District of North Carolina and on behalf of the Office of Inspector General of the Department of Health and Human Services, and Travis Thams,
dated June 28, 2016 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current Report on
Form 8-K filed June 28, 2016).
Corporate Integrity Agreement, between Cardiovascular Systems, Inc. and the Office of Inspector General of the Department of Health and Human
Services, dated June 28, 2016 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Current
Report on Form 8-K filed June 28, 2016).
Form of Performance Unit Award (Cash Settled) under the 2014 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Annual Report on Form 10-K filed August 24, 2017).
Form of Restricted Stock Agreement for Performance-Based Awards (3-year cliff vesting) under the 2014 Equity Incentive Plan (previously filed
with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed August 25, 2016).
Employment Agreement, dated August 15, 2016, by and between Cardiovascular Systems Inc. and Scott R. Ward (previously filed with the SEC as
an Exhibit to and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed August 25, 2016).
Purchase and Sale Agreement by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC dated December 29, 2016 (previously filed
with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed February 3, 2017).
First Amendment to Purchase and Sale Agreement, by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC, dated February 2,
2017 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed
February 3, 2017).
Second Amendment to Purchase and Sale Agreement, by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC, dated February 15,
2017 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed
May 5, 2017).
Third Amendment to Purchase and Sale Agreement, by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC, dated February 23,
2017 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed
May 5, 2017).
Fourth Amendment to Purchase and Sale Agreement, by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC, dated March 1,
2017 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed
May 5, 2017).
Lease Agreement, by and between Cardiovascular Systems, Inc. and Krishna Holdings, LLC, Apex Holdings, LLC, Kashi Associates, LLC, Keva
Holdings, LLC, S&V Ventures, LLC, Polo Group LLC, SPAV Holdings LLC, Star Associates LLC, and The Global Villa, LLC, dated March 30,
2017 (previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed
May 5, 2017).
Loan and Security Agreement, by and between Cardiovascular Systems, Inc. and Silicon Valley Bank, dated March 31, 2017 (previously filed with
the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed May 5, 2017).
Separation Agreement, between Cardiovascular Systems, Inc. and Paul Koehn, dated June 30, 2017 (previously filed with the SEC as an Exhibit to
and incorporated herein by reference from the Company’s Annual Report on Form 10-K filed August 24, 2017).
Cardiovascular Systems, Inc. 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and incorporated herein by reference from
the Company’s Current Report on Form 8-K filed on November 17, 2017).
Form of Board Restricted Stock Award Agreement (in lieu of cash retainer) under 2017 Equity Incentive Plan (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
52
Exhibit
No.
10.47†
10.48†
10.49†
10.50†
10.51†
10.52†
10.53†
10.54†
10.55†
10.56+
Description
Form of Board RSU Agreement (annual) under 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and incorporated herein
by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
Form of Board RSU Agreement (in lieu of cash retainer) under 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
Form of Performance Unit Agreement (cash settled) under 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
Form of Performance-Vest Restricted Stock Award Agreement under 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
Form of Time-Vest Restricted Stock Award Agreement under 2017 Equity Incentive Plan (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Current Report on Form 8-K filed on November 17, 2017).
Separation Agreement, dated January 31, 2018, by and between the Company and Kevin Kenny (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 4, 2018).
Offer Letter and Employment Agreement, dated January 12, 2018, by and between the Company and Rhonda Robb (previously filed with the SEC as
an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 4, 2018).
Offer Letter and Employment Agreement, dated February 7, 2018, by and between the Company and Jeff Points (previously filed with the SEC as an
Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 4, 2018).
Transition Letter, dated February 6, 2018, by and between the Company and Larry Betterley (previously filed with the SEC as an Exhibit to and
incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 4, 2018).
Purchasing Agreement, effective May 1, 2018, between Cardiovascular Systems, Inc. and Healthtrust Purchasing Group, L.P. (previously filed with
the SEC as an Exhibit to and incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q filed on May 4, 2018).
10.57*
Second Amendment of Lease, between Pearland Economic Development Corporation and Cardiovascular Systems, Inc., dated April 9, 2018
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
101**
Consent of PricewaterhouseCoopers LLP.
Power of Attorney (included on the signature page).
Certification of principal executive officer required by Rule 13a-14(a).
Certification of principal financial officer required by Rule 13a-14(a).
Section 1350 Certification of principal executive officer.
Section 1350 Certification of principal financial officer.
Financial statements from the Annual Report on Form 10-K of the Company for the year ended June 30, 2018, formatted, in Extensible Business
Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements
of Comprehensive Loss, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and
(vi) the Notes to Consolidated Financial Statements.
* Filed herewith.
** Furnished herewith.
† Compensatory plan or agreement.
+
Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 23, 2018
CARDIOVASCULAR SYSTEMS, INC.
By:
/s/ Scott R. Ward
Scott R. Ward
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Scott R. Ward and Jeffrey S. Points as the undersigned’s true and lawful attorneys-in fact and
agents, each acting alone, with full power of substitution and resubstitution, for the undersigned and in the undersigned’s name, place and stead, in any and all
amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granted unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Signature
/s/ Scott R. Ward
Scott R. Ward
/s/ Jeffrey S. Points
Jeffrey S. Points
/s/ Martha Goldberg Aronson
Martha Goldberg Aronson
/s/ Scott Bartos
Scott Bartos
/s/ Brent G. Blackey
Brent G. Blackey
/s/ Edward Brown
Edward Brown
/s/ William E. Cohn
William E. Cohn
/s/ Augustine Lawlor
Augustine Lawlor
Title
Date
Chairman, President and Chief Executive Officer
(principal executive officer)
August 23, 2018
Chief Financial Officer (principal financial and
accounting officer)
August 23, 2018
Director
Director
Director
Director
Director
Director
54
August 23, 2018
August 23, 2018
August 23, 2018
August 23, 2018
August 23, 2018
August 23, 2018
The Company’s executive officers are scheduled to receive the following annual base salaries for the fiscal year ending June 30, 2019 in their current positions:
FISCAL YEAR 2019 EXECUTIVE OFFICER BASE SALARIES
Exhibit 10.4
Name/Title
Scott R. Ward
Chairman, President and Chief Executive Officer
Jeffrey S. Points
Chief Financial Officer
Rhonda J. Robb
Chief Operating Officer
Laura J. Gillund
Chief Talent Officer
Alexander Rosenstein
General Counsel and Corporate Secretary
Sandra M. Sedo
Chief Compliance Officer
FY2019 Salary
$
$
$
$
$
$
670,000
302,500
463,500
315,655
317,623
283,608
FISCAL 2019 EXECUTIVE OFFICER BONUS PLAN AND EQUITY COMPENSATION
Exhibit 10.5
Bonus Plan
For the twelve month period ending June 30, 2019, each executive officer of Cardiovascular Systems, Inc. (the “Company”) is eligible to receive cash incentive
compensation pursuant to the Fiscal 2019 Executive Officer Bonus Plan (the “Bonus Plan”) as follows:
Revenue and Adjusted EBITDA Goals
Receipt of cash incentive compensation for fiscal 2019 is based on the Company’s achievement of revenue and adjusted EBITDA financial goals for fiscal 2019.
Adjusted EBITDA is defined as EBITDA with stock compensation added back into the calculation. Target bonus amounts are weighted 75% for the revenue goal
and 25% for the adjusted EBITDA goal. Target bonus levels as a percentage of base salary are 115% for the Chief Executive Officer, 90% for the Chief Operating
Officer, 75% for the Chief Financial Officer, 65% for the Chief Talent Officer, and 50% for the other executive officers. Depending upon the Company’s
performance against the goals, participants are eligible to earn up to 200% of each of the adjusted EBITDA and revenue portions of their target bonus amount. The
Bonus Plan criteria are the same for all of the executive officers. Participation in the Bonus Plan for each executive officer is in the form of a grant of Performance
Units.
Equity Compensation
Each executive officer will receive grants of restricted stock under the fiscal 2019 long-term incentive plan, effective three business days following the filing of
this Form 10-K. The restricted stock grants will be based on a target equity percentage of each executive officer’s base salary, with 40% of such target amount
allocated to time-vesting restricted stock and 60% of such target amount allocated to performance-vesting restricted stock; provided, that the performance-vesting
restricted stock will be granted to each executive officer at 200% of the target number of shares allocated to performance-vesting restricted stock, and any shares
not earned will be forfeited upon confirmation of performance achievement. Target equity grants as a percentage of base salary are 400% for the Chairman,
President and Chief Executive Officer, 200% for the Chief Operating Officer, 150% for the Chief Financial Officer, and 125% for the other executive officers.
The time-vesting restricted stock grants will vest in equal installments of 1/3 in August 2019, 2020 and 2021. The performance-vesting restricted stock grants will
vest based on our total shareholder return relative to total shareholder return of our peer group (as determined by the Human Resources and Compensation
Committee), as measured by the closing prices of our stock and the peer group members for the 90 trading days preceding July 1, 2018 compared to the closing
prices of our stock and the stock of the peer group members for the 90 trading days preceding July 1, 2021. Vesting of the performance-vesting shares will be
determined on the date that our Form 10-K for the fiscal year ending June 30, 2021 is filed.
Exhibit 10.6
For the 12 month period ending June 30, 2019, each non-employee director of Cardiovascular Systems, Inc. will receive the following compensation:
FISCAL 2019 DIRECTOR COMPENSATION ARRANGEMENTS
●
●
Retainers of $45,000 for service as a Board member; $22,000 for service as the chair of the Audit committee; $20,000 for service as a chair
of a Board committee other than the Audit committee; $10,000 for service as a member of a Board committee; and $1,200 per Board or
committee meeting attended in the event that more than 12 of such meetings are held during the period. Directors may irrevocably elect, in
advance of each fiscal year, to receive these fees in cash, in common stock of the Company or a combination thereof, or in restricted stock
units (“RSUs”). Each director electing to receive fees in RSUs shall at the time of such election also irrevocably select the date of settlement
of the RSU. On the settlement date, RSUs may be settled, at the Company’s discretion, in cash or in shares of common stock or a
combination thereof.
An RSU award with a value of $135,000 payable, in the Company’s discretion, in cash or in shares of common stock. The Company will
provide for the RSU payment, whether paid in cash or shares of common stock, to be made (in a lump sum if paid in cash) within 30 days
following the six-month anniversary of the termination of the director’s Board membership.
In addition, the Lead Independent Director of the Board receives an additional annual retainer of $40,000, and may irrevocably elect, in advance of each fiscal
year, to receive this retainer in cash, in common stock of the Company or a combination thereof, or in RSUs. The non-employee members of the Board are also
reimbursed for travel, lodging and other reasonable expenses incurred in attending Board or committee meetings.
Exhibit 10.26
CARDIOVASCULAR SYSTEMS, INC.
EXECUTIVE OFFICER SEVERANCE PLAN
Restatement Date: August 22, 2018
I. Introduction
This document is the Cardiovascular Systems, Inc. Executive Officer Severance Plan (the “Plan”). (Cardiovascular Systems, Inc. is
referred to as “the Company” in this document.) The purpose of severance pay is to help ease the financial burden resulting from the
Executive Officer’s loss of employment under certain circumstances.
II. Eligibility for Severance Pay
An Executive Officer is eligible for severance pay hereunder when the Executive Officer’s loss of employment results from (i) the
involuntary termination by the Company without Cause, (ii) Executive’s resignation for Good Reason, or (iii) termination of
employment due to a Reduction-in-Force, subject to the terms and conditions contained in this Plan. Such termination must also
constitute a Separation from Service. In all cases, the Executive Officer must execute, return and not rescind a release of claims in a
form supplied by and reasonably satisfactory to the Company.
III. Definitions
A. Base
Salary
means the then-current annual base salary payable to the Executive Officer in effect on the date of the
Executive Officer’s termination of employment; provided, however, that if an Eligible Officer is on an approved short-term
disability leave or on designated leave pursuant to the Family and Medical Leave Act or other similar law, “Base Salary” shall mean
such Executive Officer’s then-current annual base salary immediately preceding the inception of the leave. Base Salary shall not be
reduced for any salary reduction contributions (i) to cash or deferred arrangements under Code Section 401(k), (ii) to a cafeteria plan
under Code Section 125, or (iii) to a nonqualified deferred compensation plan. Subject to paragraph (b) in the definition of “Salary
Continuation Benefits,” Base Salary shall not take into account or include any bonuses, reimbursed expenses, credits or benefits
(including benefits under any plan of deferred compensation), or any additional cash compensation or compensation payable in a
form other than cash.
B. Cause
means (i) the Executive Officer’s neglect of any of his material duties or his failure to carry out reasonable
directives from the Board of Directors or its designees; (ii) any willful or deliberate misconduct that is injurious to the Company;
(iii) any statement, representation or warranty made to the Board or its designees by the Executive Officer that the Executive Officer
knows is false or materially misleading; or (iv) the Executive Officer’s commission of a felony, whether or not against the
Company and whether or not committed during the Executive Officer’s employment.
C. Change
of
Control
means any of the following events occurring after the effective date of this Plan:
(a)
(b)
(c)
(d)
(e)
(f)
A merger or consolidation to which the Company is a party if the individuals and entities who were
stockholders of the Company immediately prior to the effective date of such merger or consolidation have,
immediately following the effective date of such merger or consolidation, beneficial ownership (as defined in
Rule 13d‑3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined
voting power of all classes of securities issued by the surviving corporation for the election of directors of the
surviving corporation;
The acquisition of direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of securities of the Company by any person or entity or by a group of associated
persons or entities acting in concert in one or a series of transactions, which causes the aggregate beneficial
ownership of such person, entity or group to equal or exceed twenty percent (20%) or more of the total
combined voting power of all classes of the Company’s then issued and outstanding securities;
The sale of the properties and assets of the Company substantially as an entirety, to any person or entity that is
not a wholly-owned subsidiary of the Company;
The stockholders of the Company approve any plan or proposal for the liquidation of the Company;
A change in the composition of the Board of the Company at any time during any consecutive twenty-four
(24) month period such that the “Continuity Directors” no longer constitute at least a seventy percent (70%)
majority of the Board. For purposes of this event, “Continuity Directors” means those members of the Board
who were directors at the beginning of such consecutive twenty-four (24) month period and any directors
whose election was unanimously approved by the directors serving at the beginning of such 24 month period;
or
The Company enters into a letter of intent, an agreement in principle or a definitive agreement relating to an
event described in Sections (a), (b), (c), (d) or (e) above that ultimately results in such a Change of Control, or
a tender or exchange offer or proxy contest is commenced that ultimately results in an event described in
Sections (b) or (e) above.
D. Code
means the Internal Revenue Code of 1986, as amended.
E. Compensation
Committee
means the Human Resources and Compensation Committee of the Board of Directors, or
any similar successor committee.
F. Executive
Officer
means (i) the Chief Executive Officer; (ii) the Chief Financial Officer; (iii) the Chief Operating
Officer; (iv) the Executive Vice Presidents and Senior Vice Presidents; (v) the Vice Presidents and other corporate officers; (vi) any
other officers of the Company who have been designated by the Board of Directors as “officers” within the meaning of Section 16 of
the Securities Exchange Act of 1934, as amended; and (vii) such other employees designated by the Compensation Committee, in its
sole discretion, to participate in this Plan.
G. Good
Reason
means the occurrence of any of the following without Executive’s consent:
(a)
(b)
(c)
(d)
a material diminution in Executive’s Base Salary as in effect immediately prior to a Change of Control;
a material diminution in the Executive’s authority, duties or responsibilities as in effect immediately prior to a
Change of Control;
a material diminution in the authority, duties, or responsibilities of the supervisor to whom Executive reports
as in effect immediately prior to a Change of Control, including a requirement that Executive report to a
corporate officer or employee instead of the Board of Directors (or similar governing body);
a material diminution in the budget over which Executive retains authority as in effect immediately prior to a
Change of Control;
(e)
requiring Executive to be based at a location that is more than fifty (50) miles from the location of Executive’s
principal office immediately prior to a Change of Control;
(f)
(g)
the Company’s failure to provide Executive with the same target bonus opportunity as in effect immediately
prior to a Change of Control;
the Company’s failure to provide Executive with employee benefit plans (including, but not limited to, a
qualified retirement plan, equity compensation plans or similar arrangements, life insurance, health insurance,
disability insurance and other fringe benefit plans) that provide substantially similar benefits in the aggregate
as the benefits provided to Executive immediately prior to a Change of Control; or
(h)
any other action or inaction that constitutes a material breach by the Company of any agreement under which
Executive provides services.
Notwithstanding the foregoing, Executive’s resignation shall not constitute resignation for Good Reason unless (i) Executive notifies
the Company in writing within ninety (90) days after the initial existence of any condition that constitutes Good Reason, (ii) the
Company fails to cure the condition within thirty (30) days after receiving such notice, and (iii) Executive resigns within ninety (90)
days after the end of such thirty-day cure period.
H. Reduction-in-Force
means a work force reduction, restructuring, or other cost containment or business decision
involving the termination of employment of Company employees that is designated by the Compensation Committee, in its sole and
absolute discretion, from time to time as a “Reduction-in-Force,” which designation shall be binding for purposes of this Plan.
I. Separation
from
Service
means the Executive Officer’s termination of employment with the Company other than death
or disability. The Executive Officer shall not be deemed to have a Separation from Service while the Executive Officer is on military
leave, sick leave or other bona fide leave of absence if the period of the leave does not exceed six (6) months or, if longer, the
Executive Officer’s right to reemployment with the Company is provided either by statute or contract. If the period of leave exceeds
six (6) months and the Executive Officer’s right to reemployment is not provided either by statute or contract, the Executive Officer
shall be deemed to have a Separation from Service on the first day immediately following such six (6) month period. A termination
of employment will be deemed to occur if, based on the facts and circumstances, the Executive Officer and the Company reasonably
anticipate that no further services would be performed by the Executive Officer (whether as an employee or an independent
contractor) after the termination date or that the level of the Executive Officer’s services would permanently decrease to no more
than 20% of the average level of bona fide services performed by the Executive Officer (whether as an employee or an independent
contractor) over the immediately preceding 36-month period (or the period of time that the Executive Officer performed services for
the Company, if less than 36 months). Such determination shall be made in accordance with Code Section 409A and the regulations,
notices and other guidance of general applicability issued thereunder.
J. Severance
Period
means the period of time set forth in Exhibit A.
K . Salary
Continuation
Benefits
means:
(a) In the case of (i) an involuntary termination by the Company without Cause, or (ii) termination of employment due to a
Reduction-in-Force that, in either case, does not occur within 24 months following the effective date of a Change of Control, the
continued payment during the Severance Period of the Executive Officer’s Base Salary.
(b) In the case of (i) an involuntary termination by the Company without Cause, (ii) Executive’s resignation for Good
Reason, or (iii) termination of employment due to a Reduction-in-Force that, in any case, occurs within 24 months following the
effective date of a Change of Control, the payment during the Severance Period of the Executive Officer’s Base Salary, but increased
to an amount equal to the sum of (i) Executive Officer’s Base Salary and (ii) the target bonus amount that Executive Officer was
eligible to earn for the fiscal year in which termination occurs under the Company’s cash bonus plan assuming 100% achievement
against the Company’s budgets.
IV. Amount of Payment.
An Executive Officer who is eligible for severance benefits under this Plan shall receive Salary Continuation Benefits until the
earlier of (i) the end of the Executive Officer’s Severance Period, or (ii) the date the Executive Officer fails to comply with the
provisions of any employment or other written agreement in effect between the Executive Officer and the Company that contains
non-competition, confidentiality and/or non-solicitation provisions. The Executive Officer’s Salary Continuation Benefit shall be
payable in accordance with the Company’s regular payroll practice on the regularly scheduled paydays on which the Executive
Officer would have otherwise been paid during the Severance Period if a termination of employment had not occurred.
V. Time of Payment
Salary Continuation Benefits shall commence on the next regularly scheduled payday coinciding with or immediately following the
60th day after the termination of the Executive Officer’s employment, provided that the Executive Officer has executed and
submitted a release of claims in a form supplied by and reasonably satisfactory to the Company and (i) the statutory rescission
periods during which the Executive Officer is entitled to revoke such release have expired on or before that 60th day, and (ii) the
Executive Officer has not in fact revoked such release of claims by that 60th day.
Notwithstanding the foregoing, if the Executive Officer is a “specified employee” as defined in Code Section 409A and the
regulations, notices and other guidance of general applicability issued thereunder, then to the extent any amount payable pursuant to
this Article V is subject to and not otherwise exempt from the requirements of Code Section 409A, no payment of such amount shall
be made before the first day of the seventh (7 th ) month period immediately following the date on which the Executive Officer
experiences a Separation from Service, or if earlier, on the date of the Executive Officer’s death. Each amount that is paid to an
Executive Officer pursuant to this Article V shall be treated as a separate payment for purposes of Section 409A of the Code.
VI. Effect on Other Benefits .
In addition to Salary Continuation Benefits, an Executive Officer who is eligible for severance benefits under this Plan shall receive
payment for a pro rata portion of any performance bonus for which the performance period has not expired prior to his or her
termination of employment, with such pro rata portion based on that portion of the performance period during which the Executive
Officer was employed. Such pro rata bonus shall be determined after the end of the performance period, and shall be paid at the
same time and in the same manner as provided under the Company’s bonus plan.
The Executive Officer will be paid for any accrued and unused vacation in accordance with the Company’s regular vacation policy,
and this Plan does not affect payments made under that policy.
The Executive Officer will have the right to continue his or her medical, dental and/or life insurance benefits to the extent required
by applicable federal or state law. If the Executive Officer timely elects to continue such coverage, the Company will pay its
ordinary share of the premiums for such coverage during the Severance Period, provided that the Executive Officer timely pays his
or her share of the premiums, if any. If continuation of such coverage remains available after under applicable federal or state law
after the Severance Period, the Executive Officer will be required to timely pay the full cost of the premiums for such coverage.
Upon the Executive Officer’s involuntary termination by the Company without Cause or termination of employment due to a
Reduction-in-Force, the Compensation Committee or Board of Directors (as applicable) shall take any action that may be required
under the terms of the Company’s Equity Incentive Plans to (i) accelerate the vesting of that portion of any outstanding stock
options, restricted stock awards, restricted stock unit awards or other equity awards previously granted to the Executive Officer that
would have vested within the 12-month period immediately following the Executive Officer’s termination of employment, (ii)
permit any outstanding stock options to remain exercisable for 180 days following the Executive Officer’s termination of
employment, and (iii) provide that, if the Executive Officer breaches any noncompetition, nondisparagement or nonsolicitation
provisions of any employment or other written agreement in effect between the Executive Officer and the Company, the Executive
Officer shall immediately forfeit any and all rights in any outstanding equity awards and shall immediately forfeit any shares of the
Company’s Common Stock that the Executive Officer previously received under such equity awards. Notwithstanding the foregoing,
if any such equity awards are intended to be qualified performance-based awards under Code Section 162(m), the vesting of such
awards shall be accelerated only if and to the extent permitted by Code Section 162(m) and the regulations issued thereunder.
All other Company-provided benefits (for example, any other paid leave, disability insurance coverage, etc.) will end on the
Executive Officer’s termination date.
VII. Right to Terminate.
The Company reserves the right to change this Plan at any time to any extent and in any manner that it may deem advisable. While
the Company expects this Plan to continue, the Company further reserves the right to terminate the Plan at any time. Further, the
Company specifically reserves the right to amend this Plan without any Executive Officer’s consent to the extent necessary or
desirable to comply with the requirements of Section 409A of the Code and the regulations, notices and other guidance of general
application issued thereunder, and with any other applicable federal or state law. Notwithstanding the foregoing, the Company shall
not amend or terminate this Plan in any manner that diminishes the benefits paid hereunder: (i) within 24 months after a Change of
Control, (ii) if such amendment or termination was requested by a party (other than the Board of Directors of the Company) that had
previously taken other steps reasonably calculated to result in a Change of Control and that ultimately results in a Change of Control,
or (iii) if such amendment or termination arose in connection with or in anticipation of a Change of Control that ultimately occurs.
VIII. General Plan Provisions
A.
Withholding
. The Company shall be entitled to deduct from all payments or benefits provided for under this Plan any
federal, state or local income and employment taxes required by law to be withheld with respect to such payments or benefits.
B
. No
Employment
Rights
. Participation in the Plan does not give an Executive Officer any rights to continuing
employment with the Company.
C
. Successors
and
Assigns
. An Executive Officer’s rights under this Plan shall inure to the benefit of and shall be
enforceable by the Executive Officer, his or her heirs and the personal representative of his or her estate. Except as otherwise
provided, this Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. The Company shall
not be a party to any Change of Control unless and until its obligations under the Plan are expressly assumed by any successor or
successors or are otherwise continued as required by Section VII.
D. Notices
. Notices and all other communications required under the Plan shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid.
Any such notice or other communication provided to the Company shall be sent to the address of the Agent for Service of Legal
Process set forth below, or to such other address as the Company may have furnished in writing. Any such notice or other
communication provided to an Executive Officer shall be addressed to the last-known address that the Company has on file for such
Executive Officer.
E. No
Assignments
. Benefits under the Plan cannot be assigned, transferred or sold to anyone else. Benefits also cannot
be used as collateral for loans or pledged in payment of debts, contracts or any other liability.
F. Superseding
Effect
. This Plan replaces any and all severance pay plans, policies or practices, written or unwritten, that
the Company may have had in effect for its Executive Officers from time to time prior to the Effective Date, including the Executive
Officer Severance Plan dated June 28, 2010, as amended. Notwithstanding the foregoing, nothing in this Plan shall adversely affect
the rights an Executive Officer may have to severance payments under any employment or other written agreement executed by and
between the Company and the Executive Officer (hereinafter referred to as a “Severance Agreement”); provided, however, that in
the event the Executive Officer is entitled to and is receiving severance benefits under his Severance Agreement, the Executive
Officer shall receive the severance benefits under his Severance Agreement first, and then shall be eligible for benefits under this
Plan, but only to the extent such benefits are not duplicative of the benefits previously paid pursuant to such Severance Agreement,
with the maximum severance benefits payable to such Eligible Officer under both the Plan and the Severance Agreement equal to
the maximum aggregate benefit payable to the Executive Officer under the Severance Agreement or this Plan, whichever is greater.
G. Governing
Law
. To the extent not preempted by ERISA, the validity, interpretation, construction and performance of
the Plan shall in all respects be governed by the laws of Minnesota, without reference to principles of conflict of law.
H. Code
Section
409A
. It is intended that any amounts payable under the Plan will be exempt from or comply with the
applicable requirements, if any, of Code Section 409A and the notices, regulations and other guidance of general applicability issued
thereunder, and the Company will interpret the Plan in a manner that will preclude the imposition of additional taxes and interest
under Code Section 409A. Any payments under the Plan that may be excluded from Code Section 409A either as separation pay due
to an involuntary separation from service or as a short-term deferral will be so excluded to the maximum extent possible.
IX. Additional Information Regarding This Plan
Plan Sponsor/Plan Administrator
Employer Identification Number
Plan Number
Plan Year
Cardiovascular Systems, Inc.
1225 Old Highway 8 NW
St. Paul, MN 55112
(651) 259-1600
41-1698056
502
July 1 through June 30
Type of Plan
Type of Administration
Claims Administrator
Welfare benefit plan providing severance benefits to certain
officers
The Plan is administered by the Plan Administrator
Cardiovascular Systems, Inc.
Agent for Service of Legal Process
Cardiovascular Systems, Inc.
Funding
Administrator Discretion
X.
Claims Procedures
The Plan is funded through the general assets of the Company
The Plan Administrator has discretionary authority to interpret,
apply and enforce all provisions of the Plan, for example:
determining an Executive Officer’s eligibility to participate in the
Plan, an Executive Officer’s base pay, whether an Executive
Officer is entitled to severance pay and the amount of any such
payment.
If an Executive Officer does not agree with the way his or her claim for benefits has been handled, the Executive Officer may object
in writing during the 30-day period after the date payment of benefits is to begin, or would begin if any benefits were payable. The
Executive Officer’s authorized representative may also object on the Executive Officer’s behalf, subject to any documentation
required by the Company to verify that such representative has that authority.
The Company must respond to the Executive Officer’s written objection. That response must be in writing and must be provided to
the Executive Officer during the 90-day period following the Company’s receipt of the written objection. However, if special
circumstances require an extension of the time period for the Company to make a decision, the Company will, within the initial 90-
day period, notify the Executive Officer of those circumstances and the date by which the Company expects to make its decision. In
no event will the Company have longer than 180 days from the receipt of the Executive Officer’s written objection to make its
decision. The Company will issue a written explanation of its decision, which must:
•
•
State the reason(s) why the Executive Officer’s claim for benefits was denied;
Specifically refer to any Plan provisions that formed the basis for the Company’s decision;
• Describe any additional material or information necessary for the Executive Officer to perfect his or her claim and
why that material or information is necessary; and
• Describe the procedures the Executive Officer must follow to have his or her claim reviewed further, including
the Executive Officer’s right to bring a civil action under ERISA in the event of an adverse decision.
If an Executive Officer disagrees with the Company’s decision, the Executive Officer may request an appeal by filing a written
application for review with the Company within the 60-day period following the Executive Officer’s receipt of the notice of denial
of his or her original claim. The Executive Officer will be entitled to review any applicable documents or other records, to request
copies of such documents or other records without charge, and to submit written comments, documents or other materials relating to
his or her claim for benefits. The Company must provide the Executive Officer with a decision on his or her appeal within 60 days
following receipt of the Executive Officer’s written request. However, if special circumstances require an extension of the time
period for the Company to make a decision, the Company will, within the initial 60-day period, notify the Executive Officer of those
circumstances and the date by which the Company expects to make its decision. In no event will the Company have longer than 120
days to make its decision. The Company will issue a written explanation of its decision, which will be considered final. That
explanation must:
•
•
State the reason(s) why the Executive Officer’s claim for benefits was denied;
Specifically refer to any Plan provisions that formed the basis for the Company’s decision;
•
•
Inform the Executive Officer that he or she may have reasonable access to all documents, records and other
materials relevant to his or her claim, and may request copies at no charge; and
Inform the Executive Officer of his or her right to bring a civil action under ERISA.
If an Executive Officer does not give proper notice or otherwise follow the rules for filing and reviewing claims under the Plan, the
Executive Officer and/or the Executive Officer’s beneficiary may not be able to take further legal action, including arbitration, to
contest any decision made under the Plan with respect to the Executive Officer’s benefits.
XI. ERISA Rights
Federal law requires the Company to provide to employees a “Statement of ERISA Rights” set forth in federal regulations. That
statement, which follows, describes some of the Executive Officers’ rights under federal law with respect to the Plan.
As a participant in the Plan, Executive Officers are entitled to certain rights and protections under the Employee Retirement Income
Security Act of 1974 (“ERISA”). ERISA provides that all Plan participants shall be entitled to:
Receive Information About Your Plan and Benefits
(a)
(b)
(c)
Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all
documents governing this Plan, including insurance contracts and collective bargaining agreements, if any, filed by
the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits
Security Administration.
Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of this Plan,
including insurance contracts and collective bargaining agreements, if any, and updated summary plan description.
The Administrator may make a reasonable charge for the copies.
Receive a summary of the Plan’s annual financial report. The Plan Administrator is required by law to furnish each
participant with a copy of this summary annual report.
Prudent Actions by Plan Fiduciaries
In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of
the Plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you
and other plan participants and beneficiaries. No one, including the Company or any other person, may fire you or otherwise
discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA.
Enforce Your Rights
If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of
documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of documents and do not
receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to
provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of
reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part,
you may file suit in a state or federal court. If it should happen that Plan fiduciaries do not administer the Plan in accordance with its
terms, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or
you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court
may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees; for
example, if it finds your claim is frivolous.
Assistance with Your Questions
If you have any questions about this Plan, you should contact the Plan Administrator. If you have any questions about this statement
or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact
the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or
the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200
Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities
under ERISA by calling the publications hotline of the Employee Benefits Security Administration.
EXHIBIT A
Executive
Severance Period
Chief Executive Officer
Section 16 Officers
Senior Vice Presidents/Executive Vice Presidents
Vice Presidents and Other Corporate Officers
24 months
18 months
15 months
12 months
Area Vice Presidents and Other Employees Designated by the Compensation
Committee
6 months or such other period as designated by
the Compensation Committee
SECOND LEASE AMENDMENT
Exhibit 10.57
This Amendment (hereinafter “Amendment”) is made between the Pearland Economic Development Corporation (“ Landlord ”) and Cardiovascular
Systems, Inc., (“ Tenant ”) to amend that certain Lease Amendment (the “Agreement”) attached hereto and incorporated by reference for all purposes, executed on
November 10, 2017 between the Landlord and Tenant.
I.
Amended Terms . The Landlord and the Tenant agree that the following provisions of the Agreement are hereby amended as follows:
7. Contingency – The terms of this Lease Amendment shall be contingent upon Landlord’s closing on the sale of the Adjacent Property on or before
October 1, 2018. Landlord shall provide to Tenant written notice of the closing of such sale within five (5) days of the closing date. If such closing
does not occur on or before October 1, 2018, then this Amendment shall be null and void. Notwithstanding the foregoing, Landlord’s obligations to
make the Building Repairs, as defined in Section 8 herein, shall not be contingent on the sale of the Adjacent Property and shall survive any
termination of this Amendment.
II.
Agreement to Remain in Force. Other than the provisions of the Agreement expressly amended herein, the Agreement shall remain in full force and
its enforceability shall be unaffected by this Amendment.
EXECUTED and EFFECTIVE as of the 9 day of April , 2018.
TENANT: CARDIOVASCULAR SYSTEMS, INC.
By: /s/ John Hastings
JOHN HASTINGS
Vice President Manufacturing & Operations
Date: April 9, 2018
LANDLORD: PEARLAND ECONOMIC DEVELOPMENT CORPORATION
By: /s/ Matt Buchanan
MATT BUCHANAN
President
Date: April 9, 2018
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-158755, 333-160609, 333-168682, 333-175703, 333-
182668, 333-189856, 333-197348, 333-200214, 333-208137, and 333-221651) of Cardiovascular Systems, Inc. of our report dated August 23, 2018 relating to the
financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 23, 2018
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Scott R. Ward, certify that:
1.
I have reviewed this annual report on Form 10-K of Cardiovascular Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: August 23, 2018
/s/ Scott R. Ward
Scott R. Ward
Chairman, President and Chief Executive Officer
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Jeffrey S. Points, certify that:
1.
I have reviewed this annual report on Form 10-K of Cardiovascular Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: August 23, 2018
/s/ Jeffrey S. Points
Jeffrey S. Points
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the filing of the Annual Report on Form 10-K for the year ended June 30, 2018 (the “Report”) by Cardiovascular Systems, Inc. (“Registrant”),
I, Scott R. Ward, the Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to
the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Dated: August 23, 2018
/s/ Scott R. Ward
Scott R. Ward
Chairman, President and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the filing of the Annual Report on Form 10-K for the year ended June 30, 2018 (the “Report”) by Cardiovascular Systems, Inc. (“Registrant”),
I, Jeffrey S. Points, the Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that
to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Dated: August 23, 2018
By: /s/ Jeffrey S. Points
Jeffrey S. Points
Chief Financial Officer