CARDIOVASCULAR SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 1 of Part I of this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" discussed in our Annual Report on Form 10-K for the year endedJune 30, 2021 and subsequent Quarterly Reports on Form 10-Q, including in Item 1A of Part II of this Quarterly Report on Form 10-Q, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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 patented orbital atherectomy systems
("OAS") for both peripheral and coronary clinical 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, which address many of
the limitations associated with other treatment alternatives.
In the past, 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
representing the highest volume of cases and, therefore, the highest amount of
revenue generated by us during the course of the fiscal year. While we did not
experience this same pattern of seasonality in the three months ended September
30, 2020 due to the significant decrease in procedure volumes in the quarter
ended June 30, 2020 due to the COVID-19 pandemic, we did experience this pattern
of seasonality in the three months ended September 30, 2021 , compared to the
three months ended June 30, 2021 . The three months ended June 30, 2021 benefited
from a recovery from the COVID-19 pandemic, and the volume of procedures
involving our products in the three months ended September 30, 2021 was
adversely impacted primarily by hospital capacity constraints due to increased
hospitalizations caused by the COVID-19 Delta variant, as well as disruption of
referral patterns, deferral of elective procedures, staffing shortages and
heightened summer seasonality in the quarter. Although we began to experience a
recovery from the lower first quarter procedure volumes during the three months
ended December 31, 2021 , these disruptions continued during the quarter and were
heightened as a result of the Omicron variant outbreak in December, and they
continued to adversely affect our business.
Peripheral
Our peripheral artery 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, 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 our Annual Report on Form 10-K for the year
ended June 30, 2021 . We refer to these products in this Quarterly Report on Form
10-Q as the "Peripheral OAS." In addition to our Peripheral OAS, we also offer
support products within the peripheral space. Peripheral sales in the United
States during the six months ended December 31, 2021 represented 66% of revenue.
Coronary
Our coronary artery 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
addition to the Coronary OAS, we also offer support products within the coronary
space as we expand treatment to a broader patient population with complex
coronary artery disease.
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We have received premarket approval ("PMA") from the FDA to market the Coronary
OAS as a treatment for severely calcified coronary arteries. Coronary sales in
the United States during the six months ended December 31, 2021 represented
approximately 28% of revenue.
International
We serve a growing patient population globally through an expanding distribution and sales network. Sales of our approved products inJapan are made through our exclusiveJapan distributor, Medikit Co., Ltd. ("Medikit"). Sales of our products in the rest of the world, which primarily includes certain countries inSoutheast Asia ,Europe and theMiddle East , are made through a network of distributors and sales agents. International sales during the six months endedDecember 31, 2021 represented approximately 6% of revenue.
Impact of COVID-19
The COVID-19 pandemic inthe United States and internationally has caused us to experience ongoing disruptions in the procedures using our products. Procedures have been postponed, and may continue to be postponed, as a result of reduced availability of physicians or lab space to treat patients, the lack of personal protective equipment and active virus test kits, different treatment prioritizations, increased cost pressures and burdens on the overall healthcare infrastructure that result in reallocation of resources, customer staffing shortages, and governmental guidelines and restrictions. In addition, patients have elected to defer or avoid treatment for procedures that use our products due to anxiety about the potential spread of COVID-19 in facilities. Finally, our personnel and the personnel of our distribution partners experienced restrictions on their ability to access many customers, hospitals, labs and other medical facilities for sales activities, training and case support as they may have been deemed to be "non-essential" personnel by those facilities, and there has been a reduction in procedure activity in these accounts. In addition to the impact on procedure volumes, we experienced other disruptions as a result of the COVID-19 pandemic. For example, enrollment in our ECLIPSE clinical trial was paused for several months. Other disruptions included restrictions on the ability of our personnel and personnel of our distribution partners to travel; delays in approvals by regulatory bodies; delays in product development efforts, which has also disrupted or delayed our ability to launch affected products; reallocation of company resources from our strategic priorities; supply chain disruptions that limited, delayed or prevented us from acquiring the components used to develop and manufacture our products or ship those products once manufactured; disruptions in our relationships with our distributors due to the impact of the COVID-19 pandemic on their operations; temporary closures of our facilities; loss of employee productivity; additional government requirements to "shelter at home" or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our products; and we have experienced an increase in employee turnover, which we believe has been consistent with broader market conditions. To address the continuing uncertainties associated with the pandemic and utilize our resources more effectively, we have reduced our field clinical support and realigned a small number of our sales representatives in territories or regions where procedural volumes no longer warrant incremental case support. Throughout the pandemic, we have operated our manufacturing facilities and continued to ship product. Most of our office-based employees have telecommuted, and our field employees have continued to support cases in clinical settings where they are able to have access. We took and continue to take several actions intended to protect the health and well-being of our workforce and our customers. We will continue to monitor developments at the local, state and national levels in order to ensure that we and our employees have current information for purposes of making decisions in the dynamic and unpredictable environment and that we comply with applicable requirements. We are monitoring the spread of variants, including the Delta and Omicron variants, and continue to track hospitalizations resulting from these variants. Many factors may increase or decrease procedure volumes, which would have an impact on our revenue and financial results, including vaccination levels and mandates, the spread of new, more viral or deadly variants of the SARS-CoV-2 virus, easing of social restrictions and government restrictions on elective and semi-elective cases, level of patient anxiety, medical facility and workforce capacity, and sales representative access to facilities to support cases. 19 -------------------------------------------------------------------------------- Table of Contents 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 inthe 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, 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.
Our critical accounting policies are identified in Item 7 of Part II of our
Annual Report on Form 10-K for the fiscal year ended
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as dollar
amounts (in thousands) and the changes between the specified periods expressed
as percent increases or decreases:
Three Months Ended December 31, Six Months Ended December 31,
Percent Percent
2021 2020 Change 2021 2020 Change
Net revenues $ 59,135 $ 64,169 (7.8) % $ 117,505 $ 124,713 (5.8) %
Cost of goods sold 18,073 13,920 29.8 32,381 26,484 22.3
Gross profit 41,062 50,249 (18.3) 85,124 98,229 (13.3)
Expenses:
Selling, general and administrative 40,402 40,061 0.9 82,253 80,343 2.4
Research and development 8,873 9,601 (7.6) 18,895 18,653 1.3
Amortization of intangible assets 346 304 13.8 650 608 6.9
Total expenses 49,621 49,966 (0.7) 101,798 99,604 2.2
Loss from operations (8,559) 283 (3,124.4) (16,674) (1,375) (1,112.7)
Other (income) expense, net 345 276 25.0 712 631 12.8
Loss before income taxes (8,904) 7 (127,300.0) (17,386) (2,006) (766.7)
Provision for income taxes 63 63 - 199 126 57.9
Net loss $ (8,967) $ (56) 15,912.5 $ (17,585) $ (2,132) (724.8)
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Comparison of Three Months Ended
Net revenues. Net revenues decreased by$5.0 million , or 7.8%, from$64.2 million for the three months endedDecember 31, 2020 to$59.1 million for the three months endedDecember 31, 2021 .U.S. peripheral revenues decreased$5.1 million , or 11.6%, whileU.S. coronary revenues decreased$1.3 million , or 7.4%. Both therapies were adversely affected by the impact of the Delta and Omicron variants of the SARS-CoV-2 virus, especially within the hospital setting. Contributing factors to the decreased case volumes from the Delta and Omicron variants were disruptions of referral patterns, deferrals of elective procedures, and staffing shortages. We have also been adversely affected by an increasingly competitive environment. Increased revenue from increased customer adoption of interventional support products partially offset the revenue declines from decreased case volumes in the peripheral and coronary franchise. International revenue was$3.7 million for the three months endedDecember 31, 2021 , compared with international revenue of$2.3 million for the three months endedDecember 31, 2020 . Although international sales were also impacted by the ongoing COVID-19 pandemic, increases in international sales were driven by a stronger recovery inJapan and theAsia Pacific region, and the commencement of sales intoCanada and other territories. In the third quarter of fiscal 2022, we expect our revenue will continue to be impacted by the COVID-19 pandemic's effect on case volumes. Longer-term we expect revenue growth to return to recently observed normal levels when the pandemic subsides, driven by increasing the number of physicians using the devices; increasing the usage per physician; introducing new and improved products; generating additional clinical data; and continuing expansion into new geographies, partially offset by potential decreases in average selling prices. Cost of Goods Sold. Cost of goods sold was$18.1 million for the three months endedDecember 31, 2021 , an increase of 29.8% from$13.9 million for the three months endedDecember 31, 2020 . These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. Gross margin decreased to 69.4% for the three months endedDecember 31, 2021 from 78.3% for the three months endedDecember 31, 2020 . The increase in cost of goods sold and decrease in gross margin were primarily due to a$2.8 million reserve related to the voluntary recall of the WIRION device, as well as lower unit volumes. We expect that gross margin in the third quarter of fiscal 2022 will be higher than in the three months endedDecember 31, 2021 due to the reserve in the second quarter of fiscal 2022, which is not a recurring item. However, there will be a continued shift of sales mix into interventional support products and international markets in addition to declining average selling prices which will also impact gross margins. Quarterly margin fluctuations could also occur based on production volumes, timing of new product introductions, sales mix, pricing changes, or other unanticipated circumstances. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were$40.4 million for the three months endedDecember 31, 2021 , an increase of 0.9% from$40.1 million for the three months endedDecember 31, 2020 . SG&A expense increases were led by costs associated with new product introductions and the resumption of travel-related expenditures due to increased live meetings and tradeshows. These increases were partially offset by reduced commission expenses due to lower sales in the current year period and a decrease in incentive compensation expense due to lower performance. Selling, general and administrative expenses for the three months endedDecember 31, 2021 and 2020 include$3.6 million and$3.2 million , respectively, for stock-based compensation. We expect our selling, general and administrative expenses for the third quarter of fiscal 2022 to be greater than amounts incurred for the three months endedDecember 31, 2021 . Research and Development Expenses. Research and development expenses decreased by 7.6%, from$9.6 million for the three months endedDecember 31, 2020 to$8.9 million for the three months endedDecember 31, 2021 . Research and development expenses relate to specific projects to develop new products or expand into new markets, such as the development of new versions of the Peripheral and CoronaryOAS , shaft designs and crown designs, and expanded product offerings, including our percutaneous ventricular assist device, and to clinical trials. The decrease was due to timing of project activities, partially offset by increased costs on the ECLIPSE clinical trial resulting from an increase in enrollments. We expect an increase in research and development expense in the third quarter of fiscal 2022 to what we incurred during the three months endedDecember 31, 2021 . Quarterly fluctuations could occur based on the number of projects and studies, the progress of such projects and studies, the rate of study enrollment, acquisitions of IPR&D and possible charges in connection with those acquisitions, and the timing of expenditures. 21 -------------------------------------------------------------------------------- Table of Contents Comparison of Six Months EndedDecember 31, 2021 with Six Months EndedDecember 31, 2020 Net revenues. Net revenues decreased by$7.2 million , or 5.8%, from$124.7 million for the six months endedDecember 31, 2020 to$117.5 million for the six months endedDecember 31, 2021 .U.S. peripheral revenues decreased$9.2 million , or 10.6% andU.S. coronary revenues decreased$1.1 million , or 3.1%. Both therapies were adversely affected by the impact of the Delta and Omicron variants of the SARS-CoV-2 virus, especially within the hospital setting. Contributing factors to the decreased case volumes from the Delta and Omicron variants were disruptions of referral patterns, deferrals of elective procedures, staffing shortages and heightened summer seasonality in the quarter endedSeptember 30, 2021 . We have also been adversely affected by an increasingly competitive environment. Increased revenue from new product launches and increased customer adoption of interventional support products partially offset the revenue declines from decreased case volumes in the peripheral and coronary franchise. International revenue was$7.0 million for the six months endedDecember 31, 2021 , compared with international revenue of$4.0 million for the six months endedDecember 31, 2020 . Although international sales were also impacted by the ongoing COVID-19 pandemic, increases in international sales were driven by Coronary OAS sales inEurope , a stronger recovery inJapan and theAsia Pacific region, and the commencement of sales intoCanada and other territories. Cost of Goods Sold. Cost of goods sold was$32.4 million for the six months endedDecember 31, 2021 , an increase of 22.3% from$26.5 million for the six months endedDecember 31, 2020 . These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. Gross margin decreased to 72.4% for the six months endedDecember 31, 2021 from 78.8% for the six months endedDecember 31, 2020 . The increase in cost of goods sold and decrease in gross margin were primarily due to the$2.8 million reserve related to the voluntary recall of the WIRION device, as well as increased sales of lower margin products. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were$82.3 million for the six months endedDecember 31, 2021 , an increase of 2.4% from$80.3 million for the six months endedDecember 31, 2020 . SG&A expense increases were led by costs associated with new product introductions and the resumption of travel-related expenditures due to increased live meetings and tradeshows, in addition to annual salary increases for our employees. These increases were partially offset by reduced commission expenses due to lower sales in the current year period and a decrease in incentive compensation expense due to lower performance. Selling, general and administrative expenses for the six months endedDecember 31, 2021 and 2020 include$8.1 million and$7.1 million , respectively, for stock-based compensation. Research and Development Expenses. Research and development expenses increased by 1.3%, from$18.7 million for the six months endedDecember 31, 2020 to$19.0 million for the six months endedDecember 31, 2021 . Research and development expenses relate to specific projects to develop new products or expand into new markets, such as the development of new versions of the Peripheral and CoronaryOAS , shaft designs and crown designs, and expanded product offerings, including our percutaneous ventricular assist device, and to clinical trials. The increase was due to increased costs on the ECLIPSE clinical trial resulting from an increase in enrollments compared to the paused enrollment status in the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and highly liquid marketable securities of$176.5 million and$207.0 million atDecember 31, 2021 andJune 30, 2021 , respectively. As ofDecember 31, 2021 , we had an accumulated deficit of$404.1 million . We have historically funded our operating losses primarily from the issuance of common and preferred stock, convertible promissory notes, and debt.
A summary of our cash flow activities (in thousands) is as follows:
Six Months Ended
December 31,
2021 2020
Net cash used in operating activities$ (12,315) $
(467)
Net cash provided by (used in) investing activities 11,109 (109,425) Net cash used in financing activities
(3,999) (1,788)
Net change in cash and cash equivalents$ (5,205) $ (111,680) 22
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Table of Contents Changes in Liquidity Operating Activities
Net cash used in operating activities was
Net cash used in operating activities was$467,000 for the six months endedDecember 31, 2020 , primarily due to the net loss of$2.1 million , and$10.0 million relating to recovery from the initial wave of the COVID-19 pandemic in our business, partially offset by non-cash expenditures for the six months endedDecember 31, 2020 . Investing Activities Net cash provided by investing activities was$11.1 million for the six months endedDecember 31, 2021 , as maturities and sales of marketable securities exceeded marketable security purchases in the three months endedSeptember 30, 2021 . These amounts were partially offset by a product acquisition of peripheral microcatheters, additional payments relating to strategic investments and capital expenditures as we continue to grow our business. Net cash provided by investing activities was$109.4 million for the six months endedDecember 31, 2020 , primarily due to investing cash from ourJune 2020 equity offering into marketable securities. We also deployed cash into strategic investments and capital expenditures as we continue to grow our business. These uses of cash were partially offset by maturities and sales of marketable securities.
Financing Activities
Net cash used in financing activities was$4.0 million and$1.8 million for the six months endedDecember 31, 2021 and 2020, respectively, primarily due to the payment of payroll taxes on the employee vesting of stock awards, partially offset by proceeds from employee stock purchases. 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, the existence, defense and resolution of legal proceedings, and the severity and duration of the COVID-19 pandemic. As discussed in the "Overview" above, the total impact of disruptions from COVID-19 has had a material impact on our financial condition and results of operations, but once the pandemic subsides, we expect ourU.S. business to return to a more normalized pre-pandemic level of operations and activity. We will continue to closely monitor our liquidity and capital resources through the disruption caused by COVID-19 and will continue to evaluate our financial position to assess additional spending reductions and our liquidity needs. As ofDecember 31, 2021 , we believe our current cash, cash equivalents and marketable securities will be sufficient to fund working capital requirements, including open purchase commitments, capital expenditures and operations for the foreseeable future, including at least the next twelve months, as well as to fund payments under our lease agreements, payments under development agreements and future payments relating to our asset acquisition of the WIRION embolic protection system. If needed, we have the ability to borrow under our senior, secured revolving credit facility. 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. 23
-------------------------------------------------------------------------------- Table of Contents Facility Sale and Lease OnDecember 29, 2016 , we entered into a Purchase and Sale Agreement, as subsequently amended (collectively, the "Sale Agreement"), withKrishna Holdings, LLC ("Krishna"), providing for the sale to Krishna of our headquarters facility inSt. Paul, Minnesota (the "Facility") for a cash purchase price of$21.5 million . OnMarch 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). In connection with the closing of the facility sale, we entered into a Lease Agreement (the "Lease Agreement") withKrishna Holdings, LLC ,Apex Holdings, LLC ,Kashi Associates, LLC ,Keva Holdings, LLC ,S&V Ventures, LLC ,Polo Group LLC ,SPAV Holdings LLC ,Star Associates LLC , andThe 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 Note 6 to our Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion.
Revolving Credit Facility
InMarch 2017 , we entered into a Loan and Security Agreement (the "Loan Agreement") withSilicon Valley Bank ("SVB"). InMarch 2020 , we entered into the First Amendment to the Loan Agreement (the "Amendment"). The Amendment extended the maturity date of the Loan Agreement by two years, toMarch 31, 2022 , and increased the maximum amount available under the senior, secured revolving credit facility (the "Revolver") to$50.0 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 bears interest at a floating per annum rate equal to theWall Street Journal prime rate, less 0.75%. Interest on borrowings is due monthly and the principal balance is due at maturity. 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 3% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the Amendment (the "Amended Loan Agreement"), or the Revolver for any reason prior to the date that is fifteen days prior to the maturity date, unless refinanced with SVB. Our obligations under the Amended 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 Amended 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 our business. In addition, the Amended 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 (as defined in the Amended Loan Agreement) of$1.0 million . If we do not comply with the various covenants under the Amended Loan Agreement or an event of default under the Amended Loan Agreement occurs, such as a material adverse change, the interest rate on outstanding amounts will increase by 5% and SVB may, subject to various customary cure rights and the other terms and conditions of the Amended Loan Agreement, decline to provide additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Revolver, and foreclose on all collateral. We are required to pay a fee equal to 0.15% per annum on the unused portion of the Revolver, payable quarterly in arrears. We are not obligated to draw any funds under the Revolver and have not done so under the Revolver since entering into the Loan Agreement. No amounts were outstanding as ofDecember 31, 2021 and we currently do not have plans to borrow under the Amended Loan Agreement.
NON-GAAP FINANCIAL INFORMATION
To supplement our condensed consolidated financial statements prepared in accordance with GAAP, our management uses a non-GAAP financial measure referred to as "Adjusted EBITDA." Reconciliations of this non-GAAP measure to the most comparableU.S. GAAP measure for the respective periods can be found in the following table. In addition, an explanation of the manner in which our management uses this measure to conduct and evaluate our business, the economic substance behind our management's decision to use this measure, the substantive reasons why our management believes that this measure provides useful information to investors, the material limitations associated with the use of this measure and the manner in which our management compensates for those limitations is included following the reconciliation table. 24
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Three Months Ended Six Months Ended
December 31, December 31,
2021 2020 2021 2020
Net loss $ (8,967) $ (56) $ (17,585) $ (2,132)
Less: Other (income) expense, net 345 276 712 631
Less: Provision for income taxes 63 63 199 126
Loss from operations (8,559) 283 (16,674) (1,375)
Add: Stock-based compensation 4,240 3,877 9,912 8,784
Add: Depreciation and amortization 1,287 1,058 2,545 2,087
Adjusted EBITDA $ (3,032) $ 5,218 $ (4,217) $ 9,496
Adjusted EBITDA decreased for the three and six months ended December 31, 2021
as compared to the three and six months ended December 31, 2020 primarily due to
a greater loss from operations in the current year.
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, stock-based compensation and IPR&D charges. 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 withSilicon 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. We exclude stock-based compensation expense from our non-GAAP financial measures primarily because such expense, while constituting an ongoing and recurring expense, is not an expense that requires cash settlement. •Depreciation and amortization expense. We exclude depreciation and amortization expense from our non-GAAP financial measures primarily because such expenses, while constituting ongoing and recurring expenses, are not expenses that require cash settlement and are not used by our management to assess the core profitability of our business operations. •IPR&D charges incurred in connection with asset acquisitions. We exclude charges incurred in connection with acquired IPR&D in asset acquisitions from our non-GAAP financial measures given the one-time nature of such expense, which is not used by our management to assess the core profitability of our business operations. There may be fiscal periods where we do not incur these charges and therefore they may not be included within the table above.
Our management also believes that excluding these above items from our non-GAAP results is useful to investors to understand our operational performance, liquidity and ability to make additional investments in our company.
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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.
We provide detailed reconciliations of each non-GAAP measure to its most directly comparable GAAP measure. We encourage investors to review these reconciliations. We qualify our use of non-GAAP financial measures with cautionary statements as set forth above.
INFLATION
We do not believe that inflation had a material impact on our business and operating results during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements, see Note 1 to the
Consolidated Financial Statements included in Item 8 of Part II of our Annual
Report on Form 10-K for the year ended
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 Quarterly Report on Form 10-Q and in other materials filed or to be filed by us with theSEC (as well as information included in oral statements or other written statements made or to be made by us). Forward-looking statements include all statements based on future expectations. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, (i) our expectations regarding the impact of the COVID-19 pandemic on our operations; (ii) our expectation of continued sales of our products internationally, including the specific products to be sold, the territories in which such products will be sold, the timing of such sales, and whether such sales will be through distributors or directly by us; (iii) seasonality in our business; (iv) our expectation that our revenue will continue to be impacted by the COVID-19 pandemic during our third quarter, and that our revenue growth will return to recently observed normal levels longer-term; (v) our expectation that we will incur selling, general and administrative expenses in the third quarter of fiscal 2022 that are higher than the amounts incurred in the three months endedDecember 31, 2021 ; (vi) our expectation that gross margin in the third quarter of fiscal 2022 will be higher than the gross margin in the three months endedDecember 31, 2021 ; (vii) our expectation that we will incur research and development expenses in the third quarter of fiscal 2022 that are higher than the amounts incurred in the three months endedDecember 31, 2021 ; (viii) 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; (ix) our intention to retain any future earnings to support operations and to finance the growth and development of our business; (x) our dividend expectations; (xi) our plan not to borrow under our loan and security agreement; and (xii) 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. 26
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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 the ongoing COVID-19 pandemic and the impact and scope thereof on us, our distribution partners, the supply chain and physicians and facilities, including government actions related to the COVID-19 outbreak, material delays and cancellations of procedures, delayed spending by healthcare providers, and distributor and supply chain disruptions; regulatory developments, clearances and approvals; approval of our products for distribution outside ofthe United States ; approval of products for reimbursement and the level of reimbursement in theU.S. ,Japan and other foreign countries; dependence on market growth; agreements with third parties to sell their products; the ability of us and our distribution partners to successfully launch our products outside ofthe United States ; our ability to maintain third-party supplier relationships and renew existing purchase agreements; our ability to maintain our relationships with distribution partners; the experience of physicians regarding the effectiveness and reliability of the products we sell; 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, including the timing of product development programs; 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; the effects of hurricanes, flooding, and other natural disasters on our business; the impact of federal corporate tax reform on our business, operations and financial statements; shutdowns of theU.S. federal government; the potential impact of any future strategic transactions; and general economic conditions. These and additional risks and uncertainties are described more fully in our Annual Report on Form 10-K for the year endedJune 30, 2021 and subsequent Quarterly Reports on Form 10-Q, including in Item 1A of Part II of this Quarterly Report on Form 10-Q. Copies of filings made with theSEC are available through theSEC's electronic data gathering analysis and retrieval system (EDGAR) at www.sec.gov. You should read these risk factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this Quarterly Report on Form 10-Q 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.
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