CARDIOVASCULAR SYSTEMS, INC. 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 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 these 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.
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.
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.
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
International
We serve a growing patient population globally through an expanding distribution
and sales network. Sales of our approved products in
International sales during the fiscal year ended
Impact of COVID-19 Refer to Part I, Item 1 of this Form 10-K for a discussion of the impact of the COVID-19 pandemic on our business.
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FINANCIAL OVERVIEW
Net Revenues. We derive substantially all of our revenues from the sale of the
Peripheral OAS, the Coronary OAS and other products in
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
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, guidewires, embolic protection devices and certain catheters 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 insurance, information technology, 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, consulting expenses, patent expenses, write-offs of capitalized patent costs, 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. Research and development expenses are expensed as incurred. Costs of in process research and development ("IPR&D") projects acquired as part of an asset acquisition that have no alternative future use are expensed when incurred.
Other (Income) and Expense, Net. Other (income) and expense, net primarily includes interest expense from amounts owed under the lease of our headquarters facility, interest income from money market funds and other investments in marketable securities, and unrealized gains on strategic investments.
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
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
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the actions taken to contain or treat COVID-19, as well as the economic impact on our customers and markets. We have made estimates of the impact of COVID-19 within our consolidated financial statements and there may be changes to those estimates in future periods. 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 our peripheral and coronary products to customers
through a direct sales force in
Performance Obligations
The majority of our revenues are from customer arrangements containing a single performance obligation to transfer control of peripheral and coronary products, and thus revenue is recognized at a point in time when control is transferred to customers. This generally occurs upon shipment or upon delivery to the customer site, based on the contract terms. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer and we do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Significant Judgments
We have an exclusive distribution agreement with Medikit to sell our Coronary
and Peripheral OAS in
Revenue is recognized at the transaction price to which we expect to be entitled. We offer customers certain volume-based rebates, discounts, and incentives. Estimates of variable consideration from these items are taken into account using the most-likely amount method based on contractual provisions, our historical experience, and forecasted customer buying patterns. These items are recognized as a reduction to revenue in the period the revenue is recognized and recorded as a liability.
Return and warranty obligations vary by the specific terms of agreements with customers. We generally do not provide customers with a right of return. We have a limited warranty provision for goods that are nonconforming or defective at the time of shipment, which is estimated based on historical experience.
Contract Costs
Commissions are earned by our direct sales force based on booked orders. We apply the practical expedient and recognize commissions as an expense when incurred because the amortization period of the asset that we would have otherwise recognized is one year or less.
Stock-Based Compensation. We have stock-based compensation plans that include
nonvested share awards and stock options 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 is 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 specialists. During
the years ended
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Legal Proceedings. In accordance with
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 EndedJune 30, 2022 with Fiscal Year EndedJune 30, 2021 Year Ended June 30, Percent 2022 2021 Change Change Net revenues$ 236,222 $ 258,973 $ (22,751) (8.8) % Cost of goods sold 63,440 61,131 2,309 3.8 Gross profit 172,782 197,842 (25,060) (12.7) Gross margin 73.1 % 76.4 % (3.3) % (4.3) Expenses: Selling, general and administrative 170,526 167,498 3,028 1.8 Research and development 36,720 41,061 (4,341) (10.6) Amortization of intangible assets 1,342 1,216 126 10.4 Total expenses 208,588 209,775 (1,187) (0.6) Loss from operations (35,806) (11,933) (23,873) 200.1 Other (income) and expense, net 817 1,236 (419) (33.9) Loss before income taxes (36,623) (13,169) (23,454) 178.1 Provision for income taxes 310 252 58 23.0 Net loss$ (36,933) $ (13,421) $ (23,512) 175.2
Net Revenues. Net revenues decreased by
Subject to the potential impact that the continuing COVID-19 pandemic may have, we expect to resume growing revenue, driven by increasing the number of physicians using the devices we sell; increasing the usage per physician; the use of new and improved products, such as the Scoreflex NC scoring balloon, JADE balloons and the ViperCross Microcatheters; generating additional clinical data; and continuing expansion into new geographies, partially offset by potential decreases in average selling prices. However, ongoing factors such as staffing and supply shortages and competitive and reimbursement pressures may continue to have an adverse impact.
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Cost of Goods Sold. Cost of goods sold increased 3.8%, from
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased by
Research and Development Expenses. Research and development expenses decreased
by
Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal
year ended
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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." Reconciliations of this non-GAAP measure to the most comparable
Year Ended June 30,
2022 2021
Net loss $ (36,933) $ (13,421) Less: Other (income) and expense, net 817 1,236 Less: Provision for income taxes
310 252
Loss from operations (35,806) (11,933)
Add: Stock-based compensation 17,841 16,230
Add: Depreciation and amortization 5,029 4,312
Adjusted EBITDA $ (12,936) $ 8,609 Adjusted EBITDA decreased as compared to the prior year 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 and 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
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.
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.
Beginning with the quarter ended
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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.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of
A summary of our cash flow activities is as follows:
Year Ended June 30,
2022 2021 2020
Net cash used in operating activities $ (24,272) $ (884) $ (12,765) Net cash provided by (used in) investing activities 22,161 (112,709) (8,669) Net cash (used in) provided by financing activities (2,535)
(800) 132,660
Net change in cash and cash equivalents $ (4,646) $ (114,393) $ 111,226
As of June 30,
2022 2021 2020
Cash and marketable securities $ 159,833 $ 207,038 $ 122,672
Changes in Liquidity
Operating Activities
Net cash used in operating activities was
Net cash used in operating activities was
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Investing Activities
Net cash provided by investing activities was
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities was
Net cash used in financing activities was
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 Part I, Item 1 of this Form 10-K, 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 our
Revolving Credit Facility
In
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 the
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
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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
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 of
INFLATION
We do not believe that inflation has had a material impact on our business and operating results during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
No recently issued accounting standards are expected to have a material impact on our consolidated results of operations or financial position.
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
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 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 of
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agreements with third parties to sell their products; the ability of us and our
distribution partners to successfully launch our products outside of
These and additional risks and uncertainties are described more fully in Part I, Item 1A of this Form 10-K under "Risk Factors."
You should read these risk factors and the other cautionary statements made in this Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. We cannot assure you that the forward looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this Form 10-K completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.
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