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, 2022 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 these
difficult disease states. 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.
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 three months 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.
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, 2022 . 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, 2022 represented approximately
63% 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.
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, 2022 represented
approximately 29% of revenue.
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International
We serve a growing patient population globally through an expanding distribution
and sales network. Sales of our approved products in Japan have been made
through our exclusive Japan distributor, Medikit Co., Ltd. ("Medikit"). On
December 13, 2022 , we entered into a distribution agreement with Otsuka Medical
Devices Co., Ltd. Effective February 1, 2023 , upon the expiration of our
distribution agreement with Medikit, Otsuka became our exclusive Japan
distributor. Sales of our products in the rest of the world, which primarily
includes certain countries in Southeast Asia , Europe , Latin America , the Middle
East and Canada , are made through a network of distributors and sales agents.
International sales during the six months ended December 31, 2022 represented
approximately 8% 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 and sales agents 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 in fiscal 2022, such as the 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; and decreased employee productivity. Some of these disruptions continued into the first and second quarters of fiscal 2023, although to a lesser extent than we experienced in the first and second quarters of fiscal 2022. 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. Throughout the COVID-19 pandemic, we have observed the impact from the spread of some variants, and the fluctuations in hospitalizations resulting from these variants. For example, there were significant disruptions in procedures that occurred in the first quarter of fiscal 2022 due to the Delta variant outbreak and in the second and third quarters of fiscal 2022 due to the Omicron variant outbreak. 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. We continue to monitor the spread of variants and track hospitalizations resulting from variants of the SARS-CoV-2 virus.
The Abbott Transaction
OnFebruary 8, 2023 , we entered into an Agreement and Plan of Merger (the "Abbott Merger Agreement") with Abbott Laboratories, anIllinois corporation ("Abbott"), andCobra Acquisition Co. , aDelaware corporation and a direct, wholly-owned subsidiary of Abbott ("Merger Sub"). The Abbott Merger Agreement provides that, upon the terms and subject to the conditions set forth in such agreement, Merger Sub will merge with and into us, and we will continue as the surviving corporation and as a wholly-owned subsidiary of Abbott (the "Abbott Transaction"). At the effective time of the Abbott Transaction, each share of our common stock issued and outstanding immediately prior to the effective time, subject to certain exceptions set forth in the Abbott Merger Agreement, will automatically convert into and be exchangeable for the right to receive$20.00 per share in cash, without interest. The boards of directors of both the Company and Abbott have unanimously approved the Abbott Merger Agreement and the Abbott Transaction. Our board of directors unanimously recommended that our stockholders vote to adopt the Abbott Merger Agreement and approve the transactions contemplated thereby, including the Abbott Transaction, and directed that the adoption of the Abbott Merger Agreement be submitted to a vote of our stockholders. 20
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The closing of the Abbott Transaction is subject to the affirmative vote of the holders of a majority of our outstanding shares of common stock to adopt the Abbott Merger Agreement, the expiration or termination of any waiting period (and extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and various other closing conditions. The Abbott Merger Agreement includes certain termination provisions for both us and Abbott and provides that (i) in connection with the termination of the Abbott Merger Agreement under certain specified circumstances related to a change in the recommendation of the Company, the entry into an agreement for a superior proposal or the breach of certain of our covenants under the Abbott Merger Agreement, we may be required to pay Abbott a termination fee of$26,500,000 , and (ii) in connection with the termination of the Abbott Merger Agreement afterNovember 8, 2023 (or as such date might be extended under the Abbott Merger Agreement) under certain specified circumstances related to antitrust laws or due to the consummation of the Abbott Transaction being permanently enjoined under antitrust laws, Abbott may be required to pay us a termination fee of$26,500,000 .
Additional information about the Abbott Merger Agreement and the Abbott
Transaction will be set forth in the Company's preliminary and definitive proxy
statements relating to the transaction that will be filed with the
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
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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
2022 2021 Change 2022 2021 Change
Net revenues $ 61,453 $ 59,135 3.9 % $ 121,126 $ 117,505 3.1 %
Cost of goods sold 18,461 18,073 2.1 35,159 32,381 8.6
Gross profit 42,992 41,062 4.7 85,967 85,124 1.0
Expenses:
Selling, general and administrative 41,642 40,402 3.1 86,117 82,253 4.7
Research and development 9,533 8,873 7.4 18,589 18,895 (1.6)
Amortization of intangible assets 345 346 (0.3) 691 650 6.3
Total expenses 51,520 49,621 3.8 105,397 101,798 3.5
Loss from operations (8,528) (8,559) (0.4) (19,430) (16,674) (16.5)
Other (income) expense, net (689) 345 (299.7) (941) 712 (232.2)
Loss before income taxes (7,839) (8,904) (12.0) (18,489) (17,386) (6.3)
Provision for income taxes 49 63 (22.2) 30 199 (84.9)
Net loss $ (7,888) $ (8,967) (12.0) $ (18,519) $ (17,585) (5.3)
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Comparison of Three Months Ended
Net revenues. Net revenues increased by$2.3 million , or 3.9%, from$59.1 million for the three months endedDecember 31, 2021 to$61.5 million for the three months endedDecember 31, 2022 .U.S. peripheral revenues decreased$0.6 million , or 1.6%, whileU.S. coronary revenues increased$1.5 million , or 8.8%. Both therapies continue to be adversely affected by labor shortages and turnover in the health care workforce. We have also been adversely affected by an increasingly competitive environment and reimbursement pressures in the office-based lab setting. Increased revenue from increased customer adoption of interventional support products offset the revenue declines from decreased case volumes, competitive pressures, and reimbursement pressures in the peripheral and coronary franchises. International revenue was$5.1 million for the three months endedDecember 31, 2022 , compared with international revenue of$3.7 million for the three months endedDecember 31, 2021 . Increases in international sales were driven by increased adoption inEurope andCanada , and the commencement of sales into other territories, as well as an increase in deferred revenue recognized. In the third quarter of fiscal 2023, we expect to continue 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, ViperCross Microcatheters, and the 2.00Max Crown for Peripheral OAS; and continuing expansion into new geographies, partially offset by potential decreases in average selling prices and foreign currency exchange impacts. However, ongoing factors such as staffing and supply shortages and competitive and reimbursement pressures may continue to have an adverse impact. Cost of Goods Sold. Cost of goods sold was$18.5 million for the three months endedDecember 31, 2022 , an increase of 2.1% from$18.1 million for the three months endedDecember 31, 2021 . These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. Gross margin increased to 70.0% for the three months endedDecember 31, 2022 from 69.4% for the three months endedDecember 31, 2021 . The increase in gross margin was primarily due to a$2.8 million reserve in the three months endedDecember 31, 2021 related to the voluntary recall of the WIRION device. Excluding this item, gross margin decreased primarily due to increased sales of lower margin products, as well as increased inflationary costs and freight costs. We expect that gross margin in the third quarter of fiscal 2023 will be similar to the three months endedDecember 31, 2022 due to an expected increase in device sales offset by the 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, the impact of inflation or other unanticipated circumstances. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were$41.6 million for the three months endedDecember 31, 2022 , an increase of 3.1% from$40.4 million for the three months endedDecember 31, 2021 . Selling, general and administrative expense increases were led by costs associated with incentive compensation expense, travel-related expenditures and legal expenditures. Selling, general and administrative expenses for the three months endedDecember 31, 2022 and 2021 include$3.0 million and$3.6 million , respectively, for stock-based compensation. We expect our selling, general and administrative expenses for the third quarter of fiscal 2023 to be higher than amounts incurred for the three months endedDecember 31, 2022 . Quarterly fluctuations could occur based on the level of net revenue, which could be materially impacted by the factors noted above, as well as inflation. Research and Development Expenses. Research and development expenses increased by 7.4%, from$8.9 million for the three months endedDecember 31, 2021 to$9.5 million for the three months endedDecember 31, 2022 . 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 primarily due to increased costs on the ECLIPSE clinical trial, initiation of the Japan Kaizen clinical study and timing of costs associated with the development activities of our percutaneous ventricular assist device. We expect an increase in research and development expense in the third quarter of fiscal 2023 from what we incurred during the three months endedDecember 31, 2022 . Quarterly fluctuations could occur based on the number of projects and studies, the progress of such projects and studies, the rate of study enrollment, the impact of inflation, acquisitions of in process research and development and possible charges in connection with those acquisitions, and the timing of expenditures. 23 -------------------------------------------------------------------------------- Table of Contents Comparison of Six Months EndedDecember 31, 2022 with Six Months EndedDecember 31, 2021 Net revenues. Net revenues increased by$3.6 million , or 3.1%, from$117.5 million for the six months endedDecember 31, 2021 to$121.1 million for the six months endedDecember 31, 2022 .U.S. peripheral revenues decreased$0.8 million , or 1.1% andU.S. coronary revenues increased$1.7 million , or 5.1%. Both therapies continue to be adversely affected by labor shortages and turnover in the health care workforce. We have also been adversely affected by an increasingly competitive environment and reimbursement pressures in the office-based lab setting. Increased revenue from increased customer adoption of interventional support products offset the revenue declines from decreased case volumes, competitive pressures, and reimbursement pressures in the peripheral and coronary franchises. International revenue was$9.8 million for the six months endedDecember 31, 2022 , compared with international revenue of$7.0 million for the six months endedDecember 31, 2021 . Increases in international sales were driven by increased adoption inEurope andCanada , and the commencement of sales into other territories, as well as an increase in deferred revenue recognized. Cost of Goods Sold. Cost of goods sold was$35.2 million for the six months endedDecember 31, 2022 , an increase of 8.6% from$32.4 million for the six months endedDecember 31, 2021 . 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 71.0% for the six months endedDecember 31, 2022 from 72.4% for the six months endedDecember 31, 2021 . Excluding the$2.8 million reserve in the six months endedDecember 31, 2021 related to the voluntary recall of the WIRION device, the increase in cost of goods sold and decrease in gross margin were primarily due to increased sales of lower margin products, as well as increased inflationary costs and freight costs. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were$86.1 million for the six months endedDecember 31, 2022 , an increase of 4.7% from$82.3 million for the six months endedDecember 31, 2021 . Selling, general and administrative expense increases were led by costs associated with incentive compensation expense and travel-related expenditures. These increases were partially offset by lower stock compensation. Selling, general and administrative expenses for the six months endedDecember 31, 2022 and 2021 include$6.8 million and$8.1 million , respectively, for stock-based compensation. Research and Development Expenses. Research and development expenses decreased by 1.6%, from$18.9 million for the six months endedDecember 31, 2021 to$18.6 million for the six months endedDecember 31, 2022 . 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 primarily due to timing of international commercialization expenses and project spend. 24
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LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and highly liquid marketable securities of$132.0 million and$159.8 million atDecember 31, 2022 andJune 30, 2022 , respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$443.4 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,
2022 2021
Net cash used in operating activities $ (17,200) $ (12,315)
Net cash provided by investing activities 10,474
11,109
Net cash provided by (used in) financing activities 145
(3,999)
Net change in cash and cash equivalents$ (6,581) $ (5,205) Changes in Liquidity Operating Activities Net cash used in operating activities was$17.2 million for the six months endedDecember 31, 2022 , primarily due to the net loss of$18.5 million , and$8.5 million relating to changes in working capital as a result of the payout of annual bonuses and commissions, increased uses of cash to build inventory as we diversify our product offerings, partially offset by non-cash expenditures for the six months endedDecember 31, 2022 . Net cash used in operating activities was$12.3 million for the six months endedDecember 31, 2021 , primarily due to the net loss of$17.6 million , and$8.0 million relating to changes in working capital as a result of the payout of annual bonuses and commissions, partially offset by non-cash expenditures for the six months endedDecember 31, 2021 .
Investing Activities
Net cash provided by investing activities was$10.5 million for the six months endedDecember 31, 2022 , as maturities and sales of marketable securities exceeded marketable security purchases. These amounts were partially offset by additional payments relating to strategic investments and capital expenditures as we continue to grow our business. 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 during this period. 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.
Financing Activities
Net cash provided by financing activities was$0.1 million for the six months endedDecember 31, 2022 , primarily due to proceeds from employee stock purchases, partially offset by payment of payroll taxes on the employee vesting of stock awards. Net cash used in financing activities was$4.0 million for the six months endedDecember 31, 2021 , 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 whether we timely consummate the Abbott Transaction, 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 25 -------------------------------------------------------------------------------- Table of Contents 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 as the pandemic subsides, we expect ourU.S. business to improve. 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, 2022 , 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 funding commitments under loan agreements. If needed, we have the ability to borrow under our senior, secured revolving credit facility, which we intend to extend. We will also consider other options for potential future financings to fund our longer-term objectives. 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.
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 5 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"). InMarch 2022 , the Company entered into the Second Amendment to the Loan Agreement (the "Second Amendment"). The Second Amendment extended the maturity date of the Loan Agreement by one year, toMarch 31, 2023 . We intend to seek an additional extension of the Loan Agreement. 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 1.5% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the Second 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$1.0 million . If we do not comply with the various covenants under the Amended Loan Agreement or an event of default under the Amended Loan Agreement occurs, such as a material adverse change, the interest rate on outstanding amounts will increase by 5% and SVB may, subject to various customary cure rights and the other terms and conditions of the Amended Loan Agreement, decline to provide additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Revolver, and foreclose on all collateral. 26 -------------------------------------------------------------------------------- Table of Contents We are required to pay a fee equal to 0.15% per annum on the unused portion of the Revolver, payable quarterly in arrears. We are not obligated to draw any funds under the Revolver and have not done so under the Revolver since entering into the Loan Agreement. No amounts were outstanding as ofDecember 31, 2022 .
NON-GAAP FINANCIAL INFORMATION
To supplement our condensed consolidated financial statements prepared in accordance with GAAP, our management uses a non-GAAP financial measure referred to as "Adjusted EBITDA." Reconciliations of this non-GAAP measure to the most comparableU.S. GAAP measure for the respective periods can be found in the following table. In addition, an explanation of the manner in which our management uses this measure to conduct and evaluate our business, the economic substance behind our management's decision to use this measure, the substantive reasons why our management believes that this measure provides useful information to investors, the material limitations associated with the use of this measure and the manner in which our management compensates for those limitations is included following the reconciliation table. Three Months Ended Six Months Ended December 31, December 31, 2022 2021 2022 2021 Net loss$ (7,888) $ (8,967) $
(18,519)
712
Less: Provision for income taxes 49 63 30 199
Loss from operations (8,528) (8,559) (19,430) (16,674)
Add: Stock-based compensation 3,547 4,240 7,985 9,912
Add: Depreciation and amortization 1,268 1,287 2,488 2,545
Adjusted EBITDA $ (3,713) $ (3,032) $ (8,957) $ (4,217)
Adjusted EBITDA decreased for the three and six months ended December 31, 2022
as compared to the three and six months ended December 31, 2021 primarily due to
a greater loss from operations and lower stock compensation expense 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 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
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Table of Contents 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.
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 we will grow revenue in the third quarter of fiscal 2023; (v) our expectation that we will incur selling, general and administrative expenses in the third quarter of fiscal 2023 that are higher than the amounts incurred in the three months endedDecember 31, 2022 ; (vi) our expectation that gross margin in the third quarter of fiscal 2023 will be similar to the gross margin in the three months endedDecember 31, 2022 ; (vii) our expectation that we will incur research and development expenses in the third quarter of fiscal 2023 that are higher than the amounts incurred in the three months endedDecember 31, 2022 ; (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, and our consideration of future financing options; (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 intention to extend our loan and security agreement; (xii) the anticipated impact of adoption of recent accounting pronouncements on our financial statements; and (xiii) the proposed transaction with Abbott. 28
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Table of Contents 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 ofthe United States ; approval of products for reimbursement and the level of reimbursement in theU.S. and 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 and agreements 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; successful collaboration on the development of new products; agreements with development partners, advisors and other third parties; the ability of us and these third parties to meet developmental, contractual and other milestones; contractual rights and obligations; technical challenges; 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; our and Abbott's ability to consummate the proposed transaction on a timely basis or at all; our and Abbott's ability to satisfy the conditions precedent to consummation of the proposed transaction, including the ability to secure the applicable regulatory approvals on the terms expected, at all or in a timely manner; the effect of the announcement of the proposed transaction on our ability to retain and hire key personnel and maintain relationships with our key business partners and customers, and others with whom we do business, or on our operating results and businesses generally; the response of competitors to the proposed Abbott transaction; risks associated with the disruption of our management's attention from ongoing business operations due to the proposed Abbott transaction; significant costs associated with the proposed transaction; potential litigation relating to the proposed Abbott transaction; restrictions during the pendency of the proposed Abbott transaction that may impact our ability to conduct our business; 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, 2022 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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