Attached files

file filename
EX-31.2 - CERTIFICATION - SPECTRANETICS CORPex312063012.htm
EX-31.1 - CERTIFICATION - SPECTRANETICS CORPex311063012.htm
EX-32.2 - CERTIFICATION - SPECTRANETICS CORPex322063012.htm
EX-32.1 - CERTIFICATION - SPECTRANETICS CORPex321063012.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED

June 30, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ______    TO ______   
 
Commission file number 0-19711 

The Spectranetics Corporation
(Exact name of Registrant as specified in its charter)
Delaware
84-0997049
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
9965 Federal Drive
Colorado Springs, Colorado 80921
(719) 633-8333
(Address of principal executive offices and telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As of August 2, 2012 there were 34,580,631 outstanding shares of Common Stock. 
 



TABLE OF CONTENTS
 
 
 


ii


Part I—FINANCIAL INFORMATION
Item 1.       Financial Statements

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,659

 
$
39,638

Trade accounts receivable, less allowance for doubtful accounts and sales returns of $600 and $602, respectively
19,443

 
18,123

Inventories, net
9,409

 
8,542

Deferred income taxes, net
610

 
610

Prepaid expenses and other current assets
2,892

 
2,421

Total current assets
60,013

 
69,334

Property and equipment, net
27,503

 
27,249

Goodwill
13,296

 
11,569

Other intangible assets, net
51

 
111

Other assets
639

 
773

Total assets
$
101,502

 
$
109,036

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,326

 
$
1,521

Accrued liabilities
12,906

 
24,256

Deferred revenue
2,335

 
2,183

Total current liabilities
16,567

 
27,960

Accrued liabilities, net of current portion
866

 
706

Deferred income taxes
988

 
860

Total liabilities
18,421

 
29,526

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued

 

Common stock, $.001 par value; authorized 60,000,000 shares; issued and outstanding 34,486,628 and 33,957,408 shares, respectively
34

 
34

Additional paid-in capital
179,355

 
176,277

Accumulated other comprehensive loss
(870
)
 
(715
)
Accumulated deficit
(95,438
)
 
(96,086
)
Total stockholders’ equity
83,081

 
79,510

Total liabilities and stockholders’ equity
$
101,502

 
$
109,036

 
The accompanying notes are an integral part of the condensed consolidated financial statements.


1


THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
35,035

 
$
32,214

 
$
68,304

 
$
62,636

Cost of products sold
9,520

 
9,313

 
18,488

 
18,240

Gross profit
25,515

 
22,901

 
49,816

 
44,396

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
20,355

 
17,624

 
40,963

 
34,991

Research, development and other technology
4,195

 
4,681

 
7,953

 
8,934

Total operating expenses
24,550

 
22,305

 
48,916

 
43,925

Operating income
965

 
596

 
900

 
471

Other income (expense):

 
 
 
 
 
 
Interest (expense) income, net
(2
)
 
21

 
6

 
51

Foreign currency transaction gain (loss)
(114
)
 
(5
)
 
(41
)
 
16

Other, net

 
51

 

 
50

Total other (expense) income
(116
)
 
67

 
(35
)
 
117

Income before income taxes
849

 
663

 
865

 
588

Income tax expense
(213
)
 
(79
)
 
(217
)
 
(158
)
Net income
$
636

 
$
584

 
$
648

 
$
430

 
 
 
 
 
 
 
 
Net income per share —
 
 
 
 
 
 
 
Basic
$
0.02

 
$
0.02

 
$
0.02

 
$
0.01

Diluted
$
0.02

 
$
0.02

 
$
0.02

 
$
0.01

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(275
)
 
66

 
$
(155
)
 
$
325

Comprehensive income, net of tax
$
361

 
$
650

 
$
493

 
$
755

 
 
 
 
 
 
 
 
Weighted average common shares outstanding —
 
 
 
 
 
 
 
Basic
34,271,279

 
33,323,381

 
34,127,007

 
33,280,715

Diluted
35,529,492

 
34,326,654

 
35,324,476

 
34,185,981

 
The accompanying notes are an integral part of the condensed consolidated financial statements.


  



2


THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
648

 
$
430

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

Depreciation and amortization
4,954

 
5,061

Stock-based compensation expense
1,404

 
1,045

Provision for excess and obsolete inventories
96

 
119

Accrued indemnification costs
(3,041
)
 
(790
)
Deferred income taxes
128

 
80

Net change in operating assets and liabilities
(8,479
)
 
(2,591
)
Net cash (used in) provided by operating activities
(4,290
)
 
3,354

Cash flows from investing activities:
 
 
 
Proceeds from sale, redemption or maturity of investment securities

 
3,599

Capital expenditures
(1,664
)
 
(1,796
)
Additional purchase price—Kensey Nash milestone payments
(7,727
)
 

Net cash (used in) provided by investing activities
(9,391
)
 
1,803

Cash flows from financing activities:
 
 
 
Proceeds from the exercise of stock options and employee stock purchase plan
1,674

 
420

Net cash provided by financing activities
1,674

 
420

Effect of exchange rate changes on cash
28

 
(18
)
Net (decrease) increase in cash and cash equivalents
(11,979
)
 
5,559

Cash and cash equivalents at beginning of period
39,638

 
29,335

Cash and cash equivalents at end of period
$
27,659

 
$
34,894

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
34

 
$
25

Cash paid for income taxes
$
130

 
$
57

 
 
 
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 



3

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1 — GENERAL
 
The accompanying condensed consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly-owned Dutch subsidiary, Spectranetics International, B.V., including the accounts of two wholly-owned subsidiaries of Spectranetics International, B.V., Spectranetics Deutschland GmbH and Spectranetics Austria GmbH (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company develops, manufactures, markets and distributes single-use medical devices used in minimally invasive procedures within the cardiovascular system. The Company’s Vascular Intervention products include a range of peripheral and cardiac laser catheters for ablation of occluded arteries above and below the knee (peripheral atherectomy) and within coronary arteries (coronary atherectomy). The Company also markets aspiration and thrombectomy catheters for the removal of thrombus (thrombus management) and support catheters to facilitate crossing of coronary and peripheral arterial blockages (crossing solutions).  In addition, the Company distributes therapeutic infusion system catheters for vascular delivery of drugs and diagnostic agents. The Company’s Lead Management products include excimer laser sheaths and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads.

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets and goodwill, valuation allowances and reserves for receivables, inventories and deferred income tax assets, stock-based compensation, accrued indemnification costs, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.  Certain prior period amounts have been reclassified to conform to the current period presentation.



4

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 2 — NEW ACCOUNTING STANDARDS
 
In June 2011, the Financial Accounting Standards Board (“FASB”) amended guidance for presenting comprehensive income. The amendment requires the Company to present the components of net income and comprehensive income either as one continuous statement or as two consecutive statements. There is no longer the option to present items of other comprehensive income in the statement of stockholders equity. The amended guidance was effective for the Company beginning January 1, 2012 on a retrospective basis, and the Company has elected to present the components of net income and comprehensive income as one continuous statement.

In July 2012, the FASB issued updated guidance on the periodic testing of indefinite-lived intangible assets for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that an indefinite-lived intangible asset might be impaired and whether it is necessary to perform the quantitative impairment test required under current accounting standards. This guidance will be effective for the Company’s fiscal year ending December 31, 2013, with early adoption permitted. The Company has chosen to adopt this guidance for the interim period ended June 30, 2012, and the adoption of this guidance did not have an effect on the Company’s financial position, results of operations or cash flows. 

The Company has considered all other recently issued accounting pronouncements and does not believe that such pronouncements are of significance, or potential significance, to the Company.  


NOTE 3 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
 
Inventories
 
Inventories, net, consisted of the following (in thousands): 
 
June 30, 2012
 
December 31, 2011
Raw materials
$
2,972

 
$
2,311

Work in process
2,305

 
1,830

Finished goods
5,248

 
5,326

Less: Inventory reserves
(1,116
)
 
(925
)
 
$
9,409

 
$
8,542


 
Property and Equipment
 
Property and equipment, net, consisted of the following (in thousands): 
 
June 30, 2012
 
December 31, 2011
Equipment held for rental or loan
$
39,217

 
$
37,373

Manufacturing equipment and computers
22,118

 
21,368

Leasehold improvements
4,889

 
4,621

Furniture and fixtures
2,075

 
1,863

Building and improvements
1,276

 
1,245

Land
270

 
270

Less: accumulated depreciation and amortization
(42,342
)
 
(39,491
)
 
$
27,503

 
$
27,249




5

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands): 
 
June 30, 2012
 
December 31, 2011
Accrued payroll and employee related expenses
$
7,523

 
$
8,064

Accrued acquisition milestone payment (see Note 4)

 
6,000

Accrued legal costs
437

 
496

Accrued sales and value added taxes
752

 
516

Accrued royalty expense
555

 
3,533

Deferred rent
753

 
683

Accrued clinical study expense
549

 
353

Employee stock purchase plan liability
443

 
412

Accrued indemnification costs
10

 
2,900

Other accrued expenses
2,750

 
2,005

Less: long-term portion
(866
)
 
(706
)
Accrued liabilities: current portion
$
12,906

 
$
24,256


NOTE 4 — GOODWILL

In May 2008, the Company acquired the endovascular product lines of Kensey Nash Corporation (“KNC”) for approximately $10.7 million plus contingent milestone payments. The aggregate purchase price was allocated to the tangible and intangible assets acquired, in-process research and development and goodwill.

Under the terms of the agreements between the two companies, the Company agreed to pay KNC up to an additional $14 million based on product development, regulatory and sales milestones. Of the $14 million, up to $8 million was payable based on various product development and regulatory milestones associated with the acquired products, and $6 million was payable based on a sales milestone. As of December 31, 2011, the Company had paid $2.5 million based on the product development and regulatory milestones. These payments were recorded as additional goodwill.
 
In the fourth quarter of 2011, cumulative sales of the acquired products reached $20 million and the sales milestone payment of $6 million became payable. This amount was accrued and recorded as additional goodwill at December 31, 2011 and was paid in February 2012.

In March 2012, the Company entered into a Termination, Settlement Agreement and Mutual Release (the “Termination Agreement”) with KNC. Under the Termination Agreement, a final milestone payment of $1.7 million was made to KNC in March 2012 in connection with product development milestones associated with a smaller version of the ThromCat® XT product, and the parties agreed that no further milestone or other payment obligations will be due. This final milestone payment was recorded as additional goodwill. The Termination Agreement also terminated the principal responsibilities of each party under the various agreements entered into between the Company and KNC in May 2008.

The additional $1.7 million of goodwill was allocated to the U.S. Medical and International Medical segments (see Note 7) based on a percentage of revenue of the acquired products. The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2012 was as follows (in thousands):


6

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
U.S. Medical
International Medical
Total
Balance as of December 31, 2011
$
6,165

$
5,404

$
11,569

Goodwill acquired during the year
760

967

1,727

Balance as of June 30, 2012
$
6,925

$
6,371

$
13,296


The Company evaluates goodwill and other intangible assets for impairment at least annually and whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. There have been no events or circumstances since the last analysis at December 31, 2011 to indicate that the amount of goodwill may not be recoverable.


NOTE 5 — STOCK-BASED COMPENSATION
 
The Company maintains stock option plans which provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights. The plans provide that stock options may be granted with exercise prices not less than the fair market value at the date of grant. Options granted through June 30, 2012 generally vest over four years and expire ten years from the date of grant. Restricted stock awards granted to non-employee members of the Board of Directors vest over one year. Restricted stock units granted to certain officers of the Company vest over four years. On May 31, 2012, at the Company’s 2012 annual meeting of stockholders, stockholders approved an increase of 1,700,000 shares in the maximum number of shares available under The Spectranetics Corporation 2006 Incentive Award Plan. At June 30, 2012, there were 1.9 million shares available for future issuance under these plans. 

In December 2008, the Company issued options to purchase shares of common stock to certain of the Company’s officers and employees subject to a market condition performance target, which would be achieved if and when the average of the closing market prices of the Company’s common stock equaled or exceeded $9.00 per share for a period of ten consecutive trading days. In August 2011, the Company issued options to purchase 400,000 shares of common stock to the Company’s Chief Executive Officer, subject to a market condition performance target, which would be achieved if and when the average of the closing market prices of the Company’s common stock equaled or exceeded $10.00 per share for a period of ten consecutive trading days. The $9.00 and $10.00 performance targets were achieved in March 2012 and, in each case, as of the day the target was achieved, a pro-rata number of options became immediately vested based on a four-year vesting period from the original grant date. The remaining unvested options will continue to vest over the remainder of the four-year period. The achievement of the performance target resulted in the acceleration of expense related to the options granted in 2008, which caused additional stock-based compensation expense of approximately $90,000 for the six months ended June 30, 2012.

Valuation and Expense Information
 
The Company recognized stock-based compensation expense of $0.7 million and $0.5 million for the three months ended June 30, 2012 and 2011, respectively, and $1.4 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively.  This expense consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards that is ultimately expected to vest during the period, (2) restricted stock awards issued to certain of the Company’s directors, (3) restricted stock units issued to certain of the Company’s officers, and (4) the estimated value to be realized by employees related to shares expected to be issued under the Company’s employee stock purchase plan. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for these awards on a straight-line basis over the service period.

For all options which are not subject to a market condition, the fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for


7

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant. The following is a summary of the assumptions used for the stock options granted during the three and six months ended June 30, 2012 and 2011, respectively, using the Black-Scholes pricing model:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Expected life (years)
5.90

 
6.00

 
5.90

 
6.00

Risk-free interest rate
0.73
%
 
1.75
%
 
0.76
%
 
1.76
%
Expected volatility
66.41
%
 
65.56
%
 
66.50
%
 
65.56
%
Expected dividend yield
None

 
None

 
None

 
None

 
The weighted average grant date fair value of options granted during the three months ended June 30, 2012 and 2011 was $5.82 and $2.97, respectively, and during the six months ended June 30, 2012 and 2011 was $5.72 and $2.97, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2012

 
Shares
 
Weighted
 Average
 Exercise Price
 
Weighted Avg.
 Remaining
 Contractual Term
 (In Years)
 
Aggregate Intrinsic
 Value
Options outstanding at January 1, 2012
3,491,561

 
$
5.75

 
 
 
 
Granted
592,252

 
9.69

 
 
 
 
Exercised
(394,235
)
 
4.00

 
 
 
 
Canceled
(162,028
)
 
6.78

 
 
 
 
Options outstanding at June 30, 2012
3,527,550

 
$
6.56

 
7.26

 
$
17,268,720

Options exercisable at June 30, 2012
1,849,248

 
$
6.23

 
5.74

 
$
9,713,205

 
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s stock price of $11.42 as of June 30, 2012, which would have been received by the option holders had all option holders exercised their options as of that date. In-the-money options exercisable as of June 30, 2012 totaled approximately 1.7 million.  The total intrinsic value of options exercised was $2.4 million and $0.6 million during the six months ended June 30, 2012 and 2011, respectively.
 
The following table summarizes restricted stock award activity during the six months ended June 30, 2012
 
Shares
 
Wighted Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2012
74,030

 
$
5.84

Awarded
48,632

 
9.87

Vested/Released
(74,030
)
 
5.84

Restricted stock awards outstanding at June 30, 2012
48,632

 
$
9.87




8

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes restricted stock unit activity during the six months ended June 30, 2012

 
Shares
 
Weighted
 Average
 Purchase Price
 
Weighted Avg.
 Remaining
 Contractual Term
 (In Years)
 
Aggregate Intrinsic
 Value
Restricted stock units outstanding at January 1, 2012
206,800

 
$

 
 
 
 
Awarded

 

 
 
 
 
Vested/Released
(41,700
)
 

 
 
 
 
Forfeited
(5,000
)
 

 
 
 
 
Restricted stock units outstanding at June 30, 2012
160,100

 
$

 
1.67

 
$
1,828,342

 
As of June 30, 2012, there was $5.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. This expense is based on an assumed future forfeiture rate of approximately 13.63% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 2.8 years.
 
Employee Stock Purchase Plan 

In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (“ESPP”).  On May 31, 2012, at the Company’s 2012 annual meeting of stockholders, stockholders approved an increase from 300,000 shares to 700,000 shares in the maximum number of shares available under the ESPP. The ESPP provides for the sale of up to 700,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP is restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period. The purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period.  This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes.

The fair value of the January 2012 offering under the ESPP was determined on the date of grant using the Black-Scholes option-pricing model. The expected term of six months was based upon the offering period of the ESPP. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate was based on the six-month U.S. Treasury daily yield rate. The expected dividend yield was based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the three months ended June 30, 2012 and 2011, the Company recognized $62,000 and $49,000, respectively, and for the six months ended June 30, 2012 and 2011, the Company recognized $140,000 and $89,000, respectively, of compensation expense related to its ESPP.


NOTE 6 — NET INCOME PER SHARE
 
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted net income per share is computed in a manner consistent with that of basic net income per share while giving effect to all potentially dilutive common shares outstanding during the period, which include the assumed exercise of stock options and the assumed vesting of restricted stock using the treasury stock method.

For the three and six months ended June 30, 2012, a weighted average of 0.8 million stock options in each period were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. For the


9

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


three and six months ended June 30, 2011, a weighted average of 2.0 million stock options in each period were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
 
A summary of the net income per share calculation is shown below for the periods indicated (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
636

 
$
584

 
$
648

 
$
430

Common shares outstanding:
 
 
 
 
 
 
 
Historical common shares outstanding at beginning of period
34,099

 
33,268

 
33,883

 
33,137

Weighted average common shares issued
172

 
55

 
244

 
144

Weighted average common shares outstanding — basic
34,271

 
33,323

 
34,127

 
33,281

Effect of dilution — stock options
1,258

 
1,004

 
1,197

 
905

Weighted average common shares outstanding — diluted
35,529

 
34,327

 
35,324

 
34,186

Net income per share — basic
$
0.02

 
$
0.02

 
$
0.02

 
$
0.01

Net income per share — diluted
$
0.02

 
$
0.02

 
$
0.02

 
$
0.01



NOTE 7 — SEGMENT REPORTING
 
The Company operates in one distinct line of business consisting of developing, manufacturing, marketing and distributing a proprietary excimer laser system and disposable products for the treatment of certain coronary and vascular conditions.

Within this line of business, the Company has identified two reportable segments, which were identified on a geographic basis: (1) U.S. Medical and (2) International Medical. U.S. Medical and International Medical offer the same products and services but operate in different geographic regions, have different distribution networks and different regulatory environments. Within U.S. Medical, the Company aggregates its two business units, Vascular Intervention and Lead Management, based on their similar economic, operational and regulatory characteristics, consistent with the authoritative guidance on segment reporting.

Additional information regarding each reportable segment is discussed below.
 
U. S. Medical
 
Products offered by this segment include fiber-optic delivery devices and other non-fiber-optic products (disposables), an excimer laser system (equipment), and the service of the excimer laser system (service). The Company is subject to product approvals from the Food and Drug Administration (“FDA”). At June 30, 2012, FDA-approved products were used in multiple vascular procedures, including coronary and peripheral atherectomy, aspiration and thrombectomy and the removal of cardiac lead wires from patients with pacemakers and cardiac defibrillators. This segment’s customers are primarily located in the United States and Canada.

U.S. Medical is also corporate headquarters for the Company. All manufacturing, research and development as well as corporate administrative functions are performed within this reportable segment. As of June 30, 2012 and 2011, a portion of research, development and other technology expenses and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue, because these expenses support the Company’s ability to generate revenue in the International Medical segment.



10

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $2.0 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively, and $3.8 million and $3.1 million for the six months ended June 30, 2012 and 2011, respectively.  Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation.

International Medical
 
The International Medical segment headquarters is located in the Netherlands, and serves Europe as well as the Middle East, Latin America (including Puerto Rico), Japan and the Pacific Rim. Products offered by this segment are substantially the same as those offered by U.S. Medical.  The International Medical segment is engaged primarily in distribution activities, with no local manufacturing or product development functions. Certain U.S. incurred research, development and other technology expenses and general and administrative expenses have been allocated to International Medical.
 
Summary financial information relating to reportable segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
U.S. Medical:
 
 
 
 
 
 
 
Disposable products
$
25,829

 
$
22,601

 
$
49,966

 
$
44,557

Service and other, net of provision for sales returns
2,217

 
2,149

 
4,547

 
4,314

Equipment sales and rentals
1,117

 
1,737

 
2,478

 
3,176

Subtotal
29,163

 
26,487

 
56,991

 
52,047

International Medical:
 
 
 
 
 
 
 
Disposable products
5,117

 
4,752

 
9,759

 
8,757

Service and other, net of provision for sales returns
298

 
395

 
627

 
750

Equipment sales and rentals
457

 
580

 
927

 
1,082

Subtotal
5,872

 
5,727

 
11,313

 
10,589

Total revenue
$
35,035

 
$
32,214

 
$
68,304

 
$
62,636

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Segment operating income:
 
 
 
 
 
 
 
U.S. Medical
$
469

 
$
52

 
$
49

 
$
43

International Medical
496

 
544

 
851

 
428

Total operating income
$
965

 
$
596

 
$
900

 
$
471

 
 
As of June 30, 2012
 
As of December 31, 2011
 
 
Segment assets:
 
 
 
U.S. Medical
$
84,904

 
$
92,446

International Medical
16,598

 
16,590

Total assets
$
101,502

 
$
109,036



11

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


For the six months ended June 30, 2012 and 2011, no individual customer represented 10% or more of consolidated revenue.  No individual countries, other than the United States, represented at least 10% of consolidated revenue in the six months ended June 30, 2012 or 2011.
 
NOTE 8 — INCOME TAXES
 
The Company continues to maintain a valuation allowance for substantially all of its gross deferred tax assets, including its U.S. net operating losses, and therefore does not expect to incur a current U.S. federal tax expense or benefit against its pretax income (loss) during the year ending December 31, 2012. The Company does, however, expect to incur a current state and foreign tax expense during the year. In addition, the Company expects to incur deferred U.S. federal and state tax expense in 2012, representing a deferred tax liability related to the tax and book difference in accounting for its goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

ASC Topic 740 requires that a valuation allowance be provided if it is more likely than not that some portion or all deferred tax assets will not be realized. The Company’s ability to realize the benefit of its deferred tax assets will depend on the generation of future taxable income through profitable operations. Due to the Company’s history of losses and the lack of sufficient certainty of generating future taxable income, the Company has recorded a full valuation allowance against its deferred tax assets. The Company does not expect to reduce the valuation allowance against its deferred tax assets to below 100% of its gross amount until it has a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

NOTE 9 — RELATED PARTY TRANSACTIONS
 
During the three and six months ended June 30, 2012, the Company paid $8,000 and $29,000, respectively, and during the three and six months ended June 30, 2011, the Company paid $22,000 and $53,000, respectively, to a director of the Company under an agreement whereby the director provides training services to outside physicians on behalf of the Company.

During the three and six months ended June 30, 2011, the Company also paid $23,000 and $48,000, respectively, to a director of the Company for royalties based on the sale of the Company’s QuickCat™ product, related to a patent purchased from the director in 2007. An amendment to the patent purchase agreement for this patent was executed in June 2011, which documents that the patent has been fully paid up as it relates to sales of the QuickCat product. Accordingly, there were no royalty payments to the director during the three and six months ended June 30, 2012, and there will be no future royalty payments to the director related to the QuickCat product.

NOTE 10 — COMMITMENTS AND CONTINGENCIES
 
The Company is generally obligated to indemnify its present and former directors, officers and employees against certain losses and to advance their reasonable legal defense expenses, including in connection with a federal investigation. The Company maintains insurance for claims of this nature, which does not apply in all such circumstances, may be denied or may not be adequate to cover the legal costs or any settlement or judgment in connection with those proceedings.

The Company has indemnification obligations with three former employees who were indicted on charges related to a previous federal investigation of the Company. In February 2012, a trial was held for two of the defendants, which resulted in the acquittal of one defendant on all charges and acquittal of the other defendant on all charges except for one count of making false statements to federal investigators. The sentencing hearing for this defendant occurred in May 2012, and in June 2012, this defendant filed a notice of appeal. On March 12, 2012, the U.S. District Court of Colorado dismissed the charges against the third defendant who had previously been granted a separate trial. The Company was not a party to these trials.

In February 2012, the Company entered into agreements with two of the former employees under which it agreed to reimburse the two former employees an amount not to exceed $1.9 million and $0.5 million, respectively, for legal fees and expenses incurred by them on or after January 1, 2012, including the trial and any appeal that is not successful. In consideration of the former employees’ agreement to this cap on legal fees and expenses, the Company released them from its rights to “clawback” legal fees and expenses advanced by the Company. In addition to the foregoing, each party generally released the


12

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


other from all claims prior to the date of the agreements. The cap on legal fees and expenses, as well as the release and waiver of clawback rights and the general release of claims, are subject to certain exceptions in the case of a mistrial or successful appeal that results in an order for a new trial.

As of December 31, 2011, the Company had a remaining accrual for future indemnification costs of $2.9 million, which was its best estimate of the remaining legal fees and expenses in these matters at that time. In addition, the Company had a liability of $0.4 million of indemnification costs that had been incurred but not paid as of December 31, 2011, for a total of $3.3 million. During the six months ended June 30, 2012, the Company paid $3.0 million of these costs, and reduced the remaining indemnification accrual by $0.1 million based on the actual costs incurred. The total amount remaining to pay as of June 30, 2012 was approximately $0.2 million, which the Company expects to pay during the three months ending September 30, 2012. Additional expenses may be incurred in future periods depending upon the success or failure of an appeal, and in particular, a successful appeal that results in the order of a new trial.

Litigation

The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes and the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements and judgments, where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below. The costs associated with such proceedings or other legal proceedings that may be commenced could have a material adverse effect on the Company’s future consolidated results of operations, financial position or cash flows.

Fox/Sopkin
 
The Company and Spectranetics B.V., the Company’s Dutch subsidiary, are defendants in a lawsuit brought in the District Court of Utrecht, the Netherlands (the “Dutch District Court”) by Kenneth Fox in 2004. Mr. Fox is an inventor named on patents licensed to the Company under a license agreement assigned to Interlase LP. Mr. Fox claims an interest in royalties payable under the license and seeks alleged back royalties of approximately $2.2 million. In June 2010, the Dutch District Court issued a ruling, followed by a decision that dismissed Mr. Fox’s claims in their entirety against both the Company and its Dutch subsidiary.  The court also awarded the Company a nominal amount as attorney’s fees.  In September 2010, Mr. Fox filed and served a notice of appeal to the Dutch court of appeals. Under Dutch law, the appeal entitles Mr. Fox to a new trial on the merits, though still taking into evidence the record that is already in the Dutch court system. A hearing on the merits has been scheduled for November 2012. The Company intends to vigorously defend against Mr. Fox’s claims in this appeal.

In May 2011, the Company was served with a lawsuit that names the Company and the Company’s Dutch subsidiary as defendants. The lawsuit was brought in the Dutch District Court by Barbara Joy Sopkin. Ms. Sopkin claims royalties on a license agreement, certain rights to which were allegedly transferred to her, which claims are similar in nature to the claims of Mr. Fox in his litigation. Ms. Sopkin claims damages of approximately $2 million and also claims interest on that amount from January 1, 2011. The proceedings formally commenced in July 2011 and a hearing has been scheduled for September 2012. The Company intends to vigorously defend against Ms. Sopkin’s claims in this matter. The Company has no amounts accrued for the Fox or Sopkin litigation.
 
Other
 
The Company is involved in other legal proceedings in the normal course of business and does not expect them to have a material adverse effect on its business.





13


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by those sections.  Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.  For a description of such risks and uncertainties, which could cause our actual results, performance or achievements to be materially different from any anticipated results, performance or achievements, please see the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012.  Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that disclose certain risks and factors that may affect our business.  This analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.  We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events. In order to assist the reader in understanding certain terms relating to our business that are used in this quarterly report, we refer you to the glossary included following Part III of our Annual Report on Form 10-K for the year ended December 31, 2011.
 
Corporate Overview
 
We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system. Our products are sold in over 40 countries and are used to treat arterial blockages in the heart and legs as well as the removal of pacemaker and defibrillator leads. During the six months ended June 30, 2012, approximately 64% of our disposable product revenue was from products used in connection with our proprietary excimer laser system, the CVX-300®. Our single-use laser catheters contain up to 250 small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. We believe that our excimer laser system is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple minimally invasive cardiovascular procedures.

Our Vascular Intervention business unit includes a range of peripheral and cardiac laser catheters for ablation of occluded arteries above and below the knee (peripheral atherectomy) and within coronary arteries (coronary atherectomy). We also market aspiration and thrombectomy catheters for the removal of thrombus (thrombus management) and support catheters to facilitate crossing of coronary and peripheral arterial blockages (crossing solutions). In addition, we distribute therapeutic infusion system catheters for vascular delivery of drugs and diagnostic agents. Our Lead Management business unit includes excimer laser sheaths, non-laser sheaths and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads.
 
Recent Developments
 
Product Approvals

In April 2012, we announced FDA approval of our new advanced GlideLight™ Laser Sheath for removal of cardiac leads. We believe GlideLight delivers more precise control to reduce the force required for safe lead extraction. Our current laser sheath, the SLS® II, requires significantly less force to advance than mechanical telescoping sheaths. We believe GlideLight requires 55% less force to advance than SLS II. We conducted a limited market release of GlideLight to gain early experience prior to a broader controlled launch. The commercial roll-out of the GlideLight product commenced in July 2012.

In April 2012, we received reimbursement approval in Japan for certain of our ELCA® coronary laser atherectomy catheters. We initated our launch of this product in Japan starting in May 2012. Over the next several months, we plan to train representatives of our Japanese market authorization holder and distributor in Japan and key Japanese physicians in the use of the ELCA catheters.



14


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Current Clinical Trials

During the second quarter of 2011, the FDA granted approval for an investigational device exemption (“IDE”) related to a multi-center, randomized trial to treat in-stent restenosis (“ISR”) in the legs under the study name EXCITE ISR. The study compares laser ablation using our Turbo-Tandem® and Turbo Elite® laser ablation devices followed by adjunctive balloon angioplasty with balloon angioplasty alone. The first enrollment in the study occurred in June 2011. The planned enrollment is 353 subjects at up to 35 sites in the U.S. Subjects enrolled will be followed at one, six and 12 months after the procedure. The primary endpoint is freedom from Target Lesion Revascularization (“TLR”) through six months following the procedure. The primary safety endpoint is freedom from major adverse events, such as death, major amputation or TLR, at 30 days following the procedure. If the data merit it, we plan to submit a new 510(k) to the FDA based on the six month follow-up data. To date, our primary focus has been completing the necessary work to initiate the sites so that they can begin enrolling patients. That work is substantially complete, and we have now turned our focus to increasing enrollment in the study. As of August 2, 2012, 31 sites are approved to enroll in the study and 89 patients have been enrolled.

In February 2012, we announced six month interim results from the Photo Ablation Using the Turbo-Booster® and Excimer Laser for In-Stent Restenosis Treatment, or PATENT, registry. A total of 90 patients were included by December 2011 at five centers in Germany. Seventy-eight patients have been followed through six months. Interim results presented at the Leipzig Interventional Course 2012 in Leipzig, Germany indicate 76% freedom from TLR at six months.

In the interim results of the PATENT registry, percent diameter stenosis was reduced from 87.1% to 7.5% post-laser atherectomy and balloon angioplasty as measured by angiographic core lab. Procedural success rate, defined as achievement of ≤ 30% final residual restenosis was 98.8%, and Cumulative Major Adverse Events (“MAEs”) were 2.2% from procedure through 30 days following the procedure. Patients saw significant and sustained improvement in ankle brachial index (“ABI”) and walking ability at six months.

The study population included patients with PAD ranging from intermittent claudication to critical limb ischemia (Rutherford class 2-5). Lesions ranged from 1cm to 25cm with average total lesion length of 12.5cm, and 93% were in the superficial femoral artery (“SFA”). Nearly 37% of patients had total occlusions. All patients had stents, 50% of patients were diabetics, and 35% had previously been treated for in-stent restenosis using other therapies.

The PATENT registry follow up was completed in June 2012, and we will collaborate with the physician investigators to publish complete registry results in the near future.

The PATENT registry serves as a feasibility study for the EXCITE ISR trial. Although we believe the interim PATENT registry results are favorable, these results may not predict the results of the EXCITE ISR trial.  Moreover, because there is no control group in a registry, registry results are not as reliable as the results of a controlled clinical trial. 

We are supporting a physician-sponsored pilot study evaluating the use of laser ablation followed by a paclitaxel-coated angioplasty balloon (“PTX PTA”) compared with the use of PTX PTA alone in the treatment of in-stent lesions in above-the-knee arteries. This pilot study, Photoablation Followed by a Paclitaxel-Coated Balloon to Inhibit Restenosis in Instent Femoro-popliteal Obstructions, or PHOTOPAC, is not intended to be used to gain an indication in the U.S. for the use of PTX PTA with laser, but to determine whether the use of laser with PTX PTA provides a benefit over PTX PTA alone and to provide data for potential future studies. The planned enrollment for the PHOTOPAC trial is 50 patients, who will be followed at one, six and 12 months after the procedure. Our support of the PHOTOPAC trial is in the form of an unrestricted research grant. The pilot study is being conducted at up to four sites in Germany. As of August 2, 2012, two sites are approved to enroll in the study and 25 patients have been enrolled.








15


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Results of Operations
 
Financial Results by Geographical Segment
 
Our two reporting segments consist of U.S. Medical, which includes the U.S. and Canada, and International Medical, which includes Europe, the Middle East, Asia Pacific, Latin America and Puerto Rico. U.S. Medical also includes all costs for our corporate headquarters, research and development, and corporate administrative functions. The International Medical segment is engaged primarily in distribution activities, with no local manufacturing or product development functions. As of June 30, 2012 and 2011, a portion of research, development and other technology expenses and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue, because these expenses support our ability to generate revenue in the international segment.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
29,163

 
83
%
 
$
26,487

 
82
%
 
$
56,991

 
83
%
 
$
52,047

 
83
%
International
 
5,872

 
17

 
5,727

 
18

 
11,313

 
17

 
10,589

 
17

Total revenue
 
$
35,035

 
100
%
 
$
32,214

 
100
%
 
$
68,304

 
100
%
 
$
62,636

 
100
%
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Net income (loss)
 
 
 
 
 
 
 
 
United States
 
$
297

 
$
99

 
$
(105
)
 
$
94

International
 
339

 
485

 
753

 
336

Total net income
 
$
636

 
$
584

 
$
648

 
$
430




16


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Selected Consolidated Statements of Comprehensive Income Data
 
The following table presents selected Consolidated Statements of Comprehensive Income data for the three months ended June 30, 2012 and June 30, 2011 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.
 
Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011  
 
Three Months Ended June 30,
 
 
 
 
(Dollars in thousands)
2012
 
% of
revenue (1)
 
2011
 
% of
revenue (1)
 
$ change
 
% change
Revenue
 
 
 
 
 
 
 
 
 
 
 
Disposable products revenue:
 
 
 
 
 
 
 
 
 
 
 
Vascular Intervention
$
17,420

 
50
 %
 
$
15,848

 
49
%
 
$
1,572

 
10
 %
Lead Management
13,526

 
39

 
11,505

 
36

 
2,021

 
18

Total disposable products revenue
30,946

 
88

 
27,353

 
85

 
3,593

 
13

Service and other revenue
2,515

 
7

 
2,544

 
8

 
(29
)
 
(1
)
Laser equipment revenue:
 
 
 
 
 
 
 
 
 
 
 
Equipment sales
409

 
1

 
1,024

 
3

 
(615
)
 
(60
)
Rental fees
1,165

 
3

 
1,293

 
4

 
(128
)
 
(10
)
Total laser equipment revenue
1,574

 
4

 
2,317

 
7

 
(743
)
 
(32
)
Total revenue
35,035

 
100

 
32,214

 
100

 
2,821

 
9

Gross profit
25,515

 
73

 
22,901

 
71

 
2,614

 
11

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
20,355

 
58

 
17,624

 
55

 
2,731

 
15

Research, development and other technology
4,195

 
12

 
4,681

 
15

 
(486
)
 
(10
)
Total operating expenses
24,550

 
70

 
22,305

 
69

 
2,245

 
10

Operating income
965

 
3

 
596

 
2

 
369

 
62

Other (expense) income
 
 
 
 
 
 
 
 
 
 
 
Interest (expense) income, net
(2
)
 

 
21

 

 
(23
)
 
(110
)
Foreign currency transaction loss
(114
)
 

 
(5
)
 

 
(109
)
 
nm

Other income, net

 

 
51

 

 
(51
)
 
(100
)
Income before income taxes
849

 
2

 
663

 
2

 
186

 
28

Income tax expense
(213
)
 
(1
)
 
(79
)
 

 
(134
)
 
170

Net income
$
636

 
2
 %
 
$
584

 
2
%
 
$
52

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide installed base of laser systems
1,037

 
 
 
975

 
 
 
62

 
 
___________________________________
 (1) Percentage amounts may not add due to rounding.
nm = not meaningful
 
Revenue for the three months ended June 30, 2012 was $35.0 million, a 9% increase as compared with $32.2 million for the quarter ended June 30, 2011.  The increase was primarily due to increased Vascular Intervention (“VI”) and Lead Management (“LM”) disposables revenue, partially offset by a 32% decline in laser equipment revenue compared with the three months ended June 30, 2011. On a constant currency basis, total revenue increased 10% as compared with the three months ended June 30, 2011 (see the “Non-GAAP Financial Measures” section below for a discussion of our use of the constant currency financial measure). Our product mix changed slightly as compared with the three months ended June 30, 2011, with 88% of revenue coming from disposables in the second quarter of 2012 compared with 85% from disposables in the second quarter of 2011.  Service and other revenue decreased slightly to 7% of total revenue in the second quarter of 2012 compared


17


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

with 8% of total revenue in the second quarter of 2011. Revenue from laser equipment sales and rentals also decreased to 4% of total revenue in the second quarter of 2012 compared with 7% of total revenue in the second quarter of 2011

VI disposables revenue, which includes products used in both the peripheral and coronary vascular systems, increased 10% to $17.4 million in the second quarter of 2012 as compared with $15.8 million in the second quarter of 2011

VI revenue includes three product categories: peripheral atherectomy, which increased 19%, crossing solutions, which remained flat, and thrombus and coronary management, which decreased 1%, all compared with the three months ended June 30, 2011. Increased peripheral atherectomy product sales were primarily related to higher sales to stand-alone physician clinics, which provide increased access for patients at a potentially lower cost to the healthcare system. In addition, we believe that our peripheral artery disease (“PAD”) awareness program contributed to the increase in peripheral atherectomy sales. Crossing solutions product sales remained flat in spite of an increased number of competitors. Thrombus and coronary management revenue decreased slightly in the U.S. but increased internationally, due in part to increased sales of our ELCA product in Japan, due to recent reimbursement approval.
 
LM revenue grew 18% for the three months ended June 30, 2012 as compared with the three months ended June 30, 2011.  We believe our LM revenue continues to increase primarily as a result of: (1) clinical data supporting the safety and efficacy of removing pacemaker and defibrillator leads, including results from the four-year Lead Extraction in Contemporary Settings (“LExICon”) study published in the February 9, 2010 issue of the Journal of the American College of Cardiology, (2) expanded guidelines for lead extractions set forth by the Heart Rhythm Society, (3) an expanding market for lead extractions due primarily to increasing infection rates and increased indications for lead extraction, (4) our customer-focused LM sales organization and (5) increased revenue in Japan, where reimbursement approval for the LLD® lead locking device in April 2011 allowed us to make available our complete lead management system. We also initiated a limited launch of GlideLight, our next generation lead extraction tool, during the three months ended June 30, 2012. Revenue from GlideLight was modest during the quarter; we have recently begun the commercial roll-out and expect a larger revenue contribution in the second half of 2012.

Laser equipment revenue was $1.6 million for the three months ended June 30, 2012 and $2.3 million for the three months ended June 30, 2011.  The decrease primarily resulted from a decrease in equipment sales revenue, which is included in laser equipment revenue, of 60% as compared with the three months ended June 30, 2011. We sold three laser systems (two sales from inventory and one sale conversion from an evaluation unit) in the second quarter of 2012 as compared with eight laser system sales (six sales from inventory and two sale conversions from rental units) in the same period of 2011. Rental revenue decreased 10% as compared with the three months ended June 30, 2011, primarily due to a decrease in volume-based revenue. Service and other revenue remained relatively flat at $2.5 million in the three months ended June 30, 2012 and 2011.

We placed 28 laser systems with new customers during the three months ended June 30, 2012 compared with 29 during the three months ended June 30, 2011.  Of these laser placements, 14 were transfers from the existing installed base, compared with 16 transfers in the second quarter of 2011. The new placements this quarter brought our worldwide installed base of laser systems to 1,037 (777 in the U.S.) at June 30, 2012

On a geographic basis, revenue in the U.S. was $29.2 million during the quarter ended June 30, 2012, an increase of 10% from the prior year second quarter.  International revenue totaled $5.9 million, an increase of 3% from the second quarter of 2011, or an increase of 10% on a constant currency basis.  The increase in international revenue was primarily due to a 10% increase in LM revenue, primarily in Europe, and a 5% increase in VI revenue. The increases in disposables revenue included increases in both Europe and Asia-Pacific/Latin America (“APLA”).

Gross margin percentage for the second quarter of 2012 was 73% and in the second quarter of 2011 was 71%. The increase was due to a combination of changes in product mix, improved manufacturing efficiencies and higher production volumes. Nearly all of our revenue increase over the prior year quarter was due to increased disposables revenue, which carries a significantly higher gross margin percentage than laser or service revenue. Margins can fluctuate based on a number of factors, including manufacturing efficiencies and product mix.


18


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Operating expenses

Operating expenses increased 10% to $24.6 million in the three months ended June 30, 2012 compared with $22.3 million in the three months ended June 30, 2011. Operating expenses represented 70% of total revenue in the second quarter of 2012 as compared with 69% of total revenue in the second quarter of 2011
 
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses increased 15% to $20.4 million in the three months ended June 30, 2012 compared with $17.6 million in the three months ended June 30, 2011.  SG&A expenses represented 58% of revenue in the second quarter of 2012 compared with 55% of revenue in the second quarter of 2011.

Within SG&A, marketing and selling expenses increased $1.7 million, or 12%, compared with the three months ended June 30, 2011, due primarily to the following:

A $1.3 million increase in VI and LM marketing expense, due primarily to (1) the hiring of PAD awareness managers in selected VI sales territories, whose objective is to increase awareness of PAD in the communities they serve, including physicians likely to diagnose, (2) the establishment of a strategic marketing department charged with evaluating and executing longer-term product strategies and (3) costs associated with the launch of the GlideLight lead extraction laser sheath and increased marketing and physician training events.

A $0.4 million increase in VI, LM and international field sales expense, due primarily to increased incentive compensation on higher revenue and to additional field sales positions.

Also within SG&A, general and administrative expenses increased $1.0 million, or 29%, with increased personnel expenses due primarily to the hiring of our chief executive officer in August 2011, an increase in stock compensation expense, an increase in recruiting expense and an increase in company-wide performance-based incentive compensation expense.

Research, development and other technology. Research, development and other technology expenses of $4.2 million for the three months ended June 30, 2012 decreased $0.5 million, or 10%, compared with the three months ended June 30, 2011. As a percentage of revenue, research, development and other technology expenses decreased to 12% in the second quarter of 2012 from 15% in the second quarter of 2011. We expect these expenses to increase to approximately 13% of revenue for the full year 2012 as product development projects that are currently in the planning stages commence. Costs included within research, development and other technology expenses are product development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors.  Fluctuations in these costs were as follows:
 
Product development costs decreased by nearly $0.6 million compared with the second quarter of 2011 due to a temporary decrease in project activity, as project teams transition from completed projects to new products;  

Clinical studies costs increased by approximately $0.4 million compared with the second quarter of 2011 due primarily to costs related to the EXCITE ISR trial. In the second quarter of 2012, we terminated our contract with our existing clinical research organization (“CRO”) and expensed $0.4 million of deferred milestone payments that would otherwise have been recognized over the full course of the study as work was performed. At the same time, we began working with a new CRO for the EXCITE ISR trial; and

Royalty costs decreased by $0.3 million compared with the second quarter of 2011 due to the termination of a royalty agreement in the first quarter of 2012.
 


19


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Other income (expense)
Interest (expense) income, net. Interest expense was $2,000 in the second quarter of 2012 compared with interest income of $21,000 in the second quarter of 2011. The decrease in interest income in 2012 is due primarily to a lower money market balance.
Foreign currency transaction loss. The foreign currency transaction loss was $0.1 million in the second quarter of 2012 compared with $5,000 in the second quarter of 2011. The realized losses on foreign currency transactions are due primarily to the cash settlement in dollars of intercompany transactions with our Dutch subisidiary, whose functional currency is the euro.
 Income before income taxes
 Pre-tax income for the three months ended June 30, 2012 was $0.8 million, compared with pre-tax income of $0.7 million for the three months ended June 30, 2011.
Income taxes
We continue to maintain a valuation allowance for substantially all of our gross deferred tax assets including our U.S. net operating losses, and therefore we do not expect to incur a current U.S. federal tax expense or benefit against our pretax income (loss) during the year ending December 31, 2012. We do, however, expect to incur a current state and foreign tax expense during the year. In addition, we expect to incur deferred U.S. federal and state tax expense in 2012, representing a deferred tax liability related to the difference between book and tax accounting for our goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

We are required to maintain a valuation allowance if it is more likely than not that some portion or all deferred tax assets will not be realized. Our ability to realize the benefit of our deferred tax assets will depend on the generation of future taxable income through profitable operations. Due to our history of losses and the lack of sufficient certainty of generating future taxable income, we have recorded a full valuation allowance against our deferred tax assets. We do not expect to reduce the valuation allowance against our U.S. deferred tax assets to below 100% of its gross amount until we have a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

We estimated our effective tax rate for the year ending December 31, 2012 taking into account both domestic and foreign jurisdictions. The tax provision recorded during the three months ended June 30, 2012 was based on this estimated effective tax rate. We evaluate our effective tax rate, which is subject to variability, each quarter.

Net income
 We recorded net income for the three months ended June 30, 2012 of $0.6 million, or $0.02 per fully diluted share, compared with net income of $0.6 million, or $0.02 per fully diluted share, in the three months ended June 30, 2011.

Functional currency
 
The functional currency of Spectranetics International B.V., Spectranetics Deutschland GmbH and Spectranetics Austria GmbH is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of comprehensive income using weighted average exchange rates during the period.  Fluctuation in currency rates during the three months ended June 30, 2012 as compared with the three months ended June 30, 2011 caused a decrease in consolidated revenue of approximately $0.4 million and a decrease in consolidated net income of approximately $0.1 million.





20


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Selected Consolidated Statements of Comprehensive Income Data
 
The following table presents selected Consolidated Statements of Comprehensive Income data for the six months ended June 30, 2012 and June 30, 2011 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.
 
Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011  
 
Six Months Ended June 30,
 
 
 
 
(Dollars in thousands)
2012
 
% of
revenue (1)
 
2011
 
% of
revenue (1)
 
$ change
 
% change
Revenue
 
 
 
 
 
 
 
 
 
 
 
Disposable products revenue:
 
 
 
 
 
 
 
 
 
 
 
Vascular Intervention
$
33,831

 
50
%
 
$
30,527

 
49
%
 
$
3,304

 
11
 %
Lead Management
25,894

 
38

 
22,787

 
36

 
3,107

 
14

Total disposable products revenue
59,725

 
87

 
53,314

 
85

 
6,411

 
12

Service and other revenue
5,174

 
8

 
5,064

 
8

 
110

 
2

Laser equipment revenue:
 
 
 
 
 
 
 
 
 
 
 
Equipment sales
1,000

 
1

 
1,641

 
3

 
(641
)
 
(39
)
Rental fees
2,405

 
4

 
2,617

 
4

 
(212
)
 
(8
)
Total laser equipment revenue
3,405

 
5

 
4,258

 
7

 
(853
)
 
(20
)
Total revenue
68,304

 
100

 
62,636

 
100

 
5,668

 
9

Gross profit
49,816

 
73

 
44,396

 
71

 
5,420

 
12

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
40,963

 
60

 
34,991

 
56

 
5,972

 
17

Research, development and other technology
7,953

 
12

 
8,934

 
14

 
(981
)
 
(11
)
Total operating expenses
48,916

 
72

 
43,925

 
70

 
4,991

 
11

Operating income
900

 
1

 
471

 
1

 
429

 
91

Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest income, net
6

 

 
51

 

 
(45
)
 
(88
)
Foreign currency transaction (loss) gain
(41
)
 

 
16

 

 
(57
)
 
(356
)
Other income, net

 

 
50

 

 
(50
)
 
(100
)
Income before income taxes
865

 
1

 
588

 
1

 
277

 
47

Income tax expense
(217
)
 

 
(158
)
 

 
(59
)
 
37

Net income
$
648

 
1
%
 
$
430

 
1
%
 
$
218

 
51
 %
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide installed base of laser systems
1,037

 
 
 
975

 
 
 
62

 
 
___________________________________
 (1) Percentage amounts may not add due to rounding.
 
Revenue for the six months ended June 30, 2012 was $68.3 million, a 9% increase as compared with $62.6 million for the six months ended June 30, 2011.  The increase was primarily due to increased VI and LM disposables revenue and increased service and other revenue, partially offset by a 20% decline in laser equipment revenue compared with the six months ended June 30, 2011. On a constant currency basis, consolidated revenue increased 10% period-over-period. Our product mix changed slightly period-over-period, with 87% of revenue coming from disposables in the six months ended June 30, 2012 compared with 85% from disposables in the six months ended June 30, 2011.  Service and other revenue remained stable at 8% of total revenue in the six months ended June 30, 2012 and 2011. Revenue from laser equipment sales and rentals decreased to 5% of total revenue in the six months ended June 30, 2012 from 7% of total revenue in the six months ended June 30, 2011



21


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

VI disposables revenue, which includes products used in both the peripheral and coronary vascular systems, increased 11% to $33.8 million in the six months ended June 30, 2012 as compared with $30.5 million in the six months ended June 30, 2011.  VI revenue includes three product categories: peripheral atherectomy, which increased 18%, crossing solutions, which decreased 1%, and thrombus and coronary management, which increased 10%, all compared with the six months ended June 30, 2011. Increased peripheral atherectomy product sales were primarily related to higher sales to stand-alone physician clinics, which provide increased access for patients at a potentially lower cost to the healthcare system. In addition, we believe that our PAD awareness program contributed to the increase in peripheral atherectomy sales. The decrease in crossing solutions product sales was due primarily to a decrease in unit volumes due to an increased number of competitors. Thrombus and coronary management revenue increased primarily due to increased sales of our ELCA product in both the U.S. and internationally.

LM revenue grew 14% for the six months ended June 30, 2012 as compared with the six months ended June 30, 2011.  We believe our LM revenue continues to increase primarily as a result of: (1) clinical data supporting the safety and efficacy of removing pacemaker and defibrillator leads, including results from the four-year Lead Extraction in Contemporary Settings (“LExICon”) study published in the February 9, 2010 issue of the Journal of the American College of Cardiology, (2) expanded guidelines for lead extractions set forth by the Heart Rhythm Society, (3) an expanding market for lead extractions due primarily to increasing infection rates and increased indications for lead extraction, (4) our customer-focused LM sales organization and (5) increased revenue in Japan, where reimbursement approval for the LLD® lead locking device in April 2011 allowed us to make available our complete lead management system. We also initiated a limited launch of GlideLight, our next generation lead extraction tool, during the six months ended June 30, 2012. Revenue from GlideLight was modest during the first half of 2012; we have recently begun the commercial roll-out and expect a larger revenue contribution in the second half of 2012.

Laser equipment revenue was $3.4 million for the six months ended June 30, 2012 and $4.3 million for the six months ended June 30, 2011.  This decrease primarily resulted from a decrease in equipment sales revenue, which is included in laser equipment revenue, of 39% year-over-year. We sold six laser systems (all from inventory) in the six months ended June 30, 2012 as compared with 14 laser system sales (nine sales from inventory and five sale conversions from rental units) in the same period of 2011. Rental revenue decreased 8% year-over-year, primarily due to a decrease in volume-based revenue. Service and other revenue increased 2% to $5.2 million in the six months ended June 30, 2012 from $5.1 million in the six months ended June 30, 2011, due primarily to our increased installed base of laser systems.

We placed 53 laser systems with new customers during the six months ended June 30, 2012 compared with 70 during the six months ended June 30, 2011.  Of these laser placements, 27 were transfers from the existing installed base, compared with 37 transfers in the first six months of 2011. The higher number of placements in the first six months of 2011 was primarily because it was the first period in which we could place lasers with office-based physicians due to reimbursement changes in late 2010. Of the 2012 laser placements, seven were with office-based physicians, primarily transfers of underperforming laser systems from hospital environments. In recent quarters, we have placed more focus on redeploying laser systems from hospitals with low laser-based catheter utilization to hospitals or offices where we believe utilization will be higher, in order to increase productivity per laser system. The new placements brought our worldwide installed base of laser systems to 1,037 (777 in the U.S.) at June 30, 2012

On a geographic basis, revenue in the U.S. was $57.0 million during the six months ended June 30, 2012, an increase of 9% from the six months ended June 30, 2011.  International revenue totaled $11.3 million, an increase of 7% from the six months ended June 30, 2011, or an increase of 12% on a constant currency basis.  The increase in international revenue was primarily due to a 14% increase in LM revenue, primarily in Germany, Italy and Japan, and a 9% increase in VI revenue, primarily in Japan. The increases in disposables revenue included increases in both Europe and APLA.

Gross margin percentage for the six months ended June 30, 2012 was 73% and in the six months ended June 30, 2011 was 71%. The increase was due to a combination of changes in product mix, improved manufacturing efficiencies and higher production volumes. Nearly all of our revenue increase over the prior year was due to increased disposables revenue, which carries a significantly higher gross margin percentage than laser or service revenue. Margins can fluctuate based on a number of factors, including manufacturing efficiencies and product mix.



22


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Operating expenses

Operating expenses increased 11% to $48.9 million in the six months ended June 30, 2012 compared with $43.9 million in the six months ended June 30, 2011. Operating expenses represented 72% of total revenue in the six months ended June 30, 2012 as compared with 70% of total revenue in the six months ended June 30, 2011
 
Selling, general and administrative. SG&A expenses increased 17% to $41.0 million in the six months ended June 30, 2012 compared with $35.0 million in the six months ended June 30, 2011.  SG&A expenses represented 60% of revenue in the six months ended June 30, 2012 compared with 56% of revenue in the six months ended June 30, 2011.

Within SG&A, marketing and selling expenses increased $4.4 million, or 16%, period-over-period, due primarily to the following:

A $2.7 million increase in VI and LM marketing expense, due primarily to (1) the hiring of PAD awareness managers in selected VI sales territories, whose objective is to increase awareness of PAD in the communities they serve, including physicians likely to diagnose, (2) the establishment of a strategic marketing department charged with evaluating and executing longer-term product strategies and (3) costs associated with the launch of the GlideLight lead extraction laser sheath and increased marketing and physician training events.

A $1.7 million increase in VI, LM and international field sales expense, due primarily to increased incentive compensation on higher revenue and to additional field sales positions.

Also within SG&A, general and administrative expenses increased $1.6 million, or 21%, with increased personnel expenses due primarily to the hiring of our chief executive officer in August 2011, an increase in stock compensation expense, an increase in recruiting expense, an increase in company-wide performance-based incentive compensation expense and an increase in outside consulting costs associated with regulatory compliance.

Research, development and other technology. Research, development and other technology expenses of $8.0 million for the six months ended June 30, 2012 decreased $1.0 million, or 11%, compared with the six months ended June 30, 2011. As a percentage of revenue, research, development and other technology expenses decreased to 12% in the six months ended June 30, 2012 from 14% in the six months ended June 30, 2011. We expect these expenses to increase to approximately 13% of revenue for the full year 2012 as product development projects that are currently in the planning stages commence. Costs included within research, development and other technology expenses are product development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors.  Fluctuations in these costs were as follows:
  
Product development costs decreased by $1.1 million compared with the six months ended June 30, 2011 due to a temporary decrease in project activity, as project teams transition from completed projects to new products;  

Clinical studies costs increased by approximately $0.8 million compared with the six months ended June 30, 2011 due primarily to increased personnel costs and to costs related to the EXCITE ISR trial. In the second quarter of 2012, we terminated our contract with our existing CRO and expensed $0.4 million of deferred milestone payments that would otherwise have been recognized over the full course of the study as work was performed. At the same time, we began working with a new CRO for the EXCITE ISR trial; and

Royalty costs decreased by $0.7 million compared with the six months ended June 30, 2011 due to the termination of a royalty agreement in the first quarter of 2012.




23


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Other income
Interest income, net. Interest income decreased 88% to $6,000 in the six months ended June 30, 2012 from $51,000 in the six months ended June 30, 2011. The decrease in interest income in 2012 is due primarily to a lower money market balance.
Foreign currency transaction gain (loss). The foreign currency transaction loss was $41,000 in the six months ended June 30, 2012 compared with a gain of $16,000 in the six months ended June 30, 2011. The realized gains and losses on foreign currency transactions are due primarily to the cash settlement in dollars of intercompany transactions with our Dutch subisidiary, whose functional currency is the euro.
 Income before income taxes
 Pre-tax income for the six months ended June 30, 2012 was $0.9 million, compared with pre-tax income of $0.6 million for the six months ended June 30, 2011.
Income taxes
We continue to maintain a valuation allowance for substantially all of our gross deferred tax assets including our U.S. net operating losses, and therefore we do not expect to incur a current U.S. federal tax expense or benefit against our pretax income (loss) during the year ending December 31, 2012. We do, however, expect to incur a current state and foreign tax expense during the year. In addition, we expect to incur deferred U.S. federal and state tax expense in 2012, representing a deferred tax liability related to the difference between book and tax accounting for our goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

We are required to maintain a valuation allowance if it is more likely than not that some portion or all deferred tax assets will not be realized. Our ability to realize the benefit of our deferred tax assets will depend on the generation of future taxable income through profitable operations. Due to our history of losses and the lack of sufficient certainty of generating future taxable income, we have recorded a full valuation allowance against our deferred tax assets. We do not expect to reduce the valuation allowance against our U.S. deferred tax assets to below 100% of its gross amount until we have a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

We estimated our effective tax rate for the year ending December 31, 2012 taking into account both domestic and foreign jurisdictions. The tax provision recorded during the six months ended June 30, 2012 was based on this estimated effective tax rate. We evaluate our effective tax rate, which is subject to variability, each quarter.

Net income
 We recorded net income for the six months ended June 30, 2012 of $0.6 million, or $0.02 per diluted share, compared with net income of $0.4 million, or $0.01 per diluted share, in the six months ended June 30, 2011.

Functional currency
 
The functional currency of Spectranetics International B.V., Spectranetics Deutschland GmbH and Spectranetics Austria GmbH is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of comprehensive income using weighted average exchange rates during the period.  Fluctuation in currency rates during the six months ended June 30, 2012 as compared with the six months ended June 30, 2011 caused a decrease in consolidated revenue of approximately $0.5 million and a decrease in consolidated net income of approximately $0.2 million.






24


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Liquidity and Capital Resources
 
As of June 30, 2012, we had cash and cash equivalents of $27.7 million, a decrease of $11.9 million from $39.6 million at December 31, 2011.

Significant uses of cash in the first six months of 2012 were: (i) $7.7 million of milestone payments to KNC, recorded as goodwill, (ii) a $3.0 million payment in settlement of all obligations under a terminated license agreement, which was accrued as of December 31, 2011, (iii) approximately $3.0 million of payments of our accrued indemnification obligations to former employees, and (iv) approximately $1.7 million in capital expenditures. The first three items were non-recurring payments and the indemnification obligations are substantially complete. We do not currently anticipate disbursements of this type for the foreseeable future. 

We believe that our cash and cash equivalents, anticipated funds from operations and other sources of liquidity will be sufficient to meet our liquidity requirements for the foreseeable future based on our expected level of operations. However, additional funding may be needed or sought earlier than anticipated. In the event that we require additional working capital to fund future operations and any future acquisitions, we may access available borrowings under our revolving line of credit with Wells Fargo Bank described below. We may also enter into credit and financing arrangements with one or more independent institutional lenders, sell shares of our common stock or other equity securities, or sell debt securities. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.
 
Operating Activities. For the six months ended June 30, 2012, cash used in operating activities totaled $4.3 million.  The primary sources and uses of cash were the following:
 
(1)
Our net income of $0.6 million included approximately $6.6 million of non-cash expenses. Non-cash expenses included $5.0 million of depreciation and amortization, $1.4 million of stock-based compensation, $0.1 million of provision for excess and obsolete inventories and $0.1 million of net change in deferred income taxes.
 
(2)
Cash used as a result of a net increase in operating assets and liabilities of approximately $11.5 million was due primarily to the following:
 
An increase in equipment held for rental or loan of $3.2 million as a result of placement activity of our laser systems through our rental and evaluation programs;

The payment of $3.0 million of accrued indemnification costs;

A decrease in accounts payable and accrued liabilities of $2.7 million, due primarily to a $3.0 million payment in settlement of all obligations under a terminated license agreement, which was accrued as of December 31, 2011;

An increase in accounts receivable of approximately $1.4 million, due primarily to higher sales in the last half of the second quarter of 2012 as compared with the fourth quarter of 2011; and

An increase in inventory of approximately $1.0 million, due primarily to meet increased sales demand.

The table below presents the change in receivables and inventory in relative terms, through the presentation of financial ratios.  Days sales outstanding are calculated by dividing the ending accounts receivable balance, net of reserves for sales returns and doubtful accounts, by the average daily sales for the quarter.  Inventory turns are calculated by dividing annualized cost of sales for the quarter by ending inventory. 
 
June 30, 2012
 
December 31, 2011
Days Sales Outstanding
50

 
50

Inventory Turns
4.0

 
4.1

 


25


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Investing Activities. For the six months ended June 30, 2012, cash used by investing activities was $9.4 million, consisting of $7.7 million of payments to KNC recorded as additional goodwill and capital expenditures of $1.7 million.  The capital expenditures included manufacturing equipment upgrades and replacements as well as additional capital items for research and development projects and additional computer equipment and software purchases.
 
Financing Activities. Cash provided by financing activities for the six months ended June 30, 2012 was $1.7 million, comprised entirely of proceeds from the sale of common stock to employees and former employees as a result of exercises of stock options and the employee stock purchase plan.
 
At June 30, 2012, we had no significant debt or capital lease obligations.

Line of Credit

On February 25, 2011, we entered into a Credit and Security Agreement (“Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), acting through its Wells Fargo Business Credit operating division, for a three-year $15.0 million revolving line of credit.  Pursuant to the terms of the Credit Agreement, we may borrow under the revolving line of credit subject to borrowing base limitations.  These limitations allow us to borrow, subject to specified reserves, up to 85% of eligible domestic accounts receivable, defined as receivables aged less than 90 days from the invoice date along with specific exclusions for contra-accounts, concentrations, and other accounts otherwise deemed ineligible by Wells Fargo Business Credit.  Borrowings under the revolving line bear interest at a variable rate equal to the lesser of the Wells Fargo prime rate plus 0.25% or the daily three month LIBOR plus 3.25%.  The margins on the base interest rates are subject to reduction if we achieve certain annual net income levels. Accrued interest on any outstanding balance under the revolving line is payable monthly in arrears. 

The revolving line of credit is secured by a first priority security interest in substantially all of our assets. The Credit Agreement requires us to maintain a minimum of $10.0 million in cash and investments at Wells Fargo and requires a lockbox arrangement. We are required to pay customary fees with respect to the facility, including a 0.25% fee on the average unused portion of the revolving line. If there are borrowings under the revolving line of credit, we will be subject to certain financial covenants including rolling 12-month adjusted EBITDA and minimum book net worth covenants. 
 
The Credit Agreement contains customary events of default, including the failure to make required payments, the failure to comply with certain covenants or other agreements, the occurrence of a material adverse change, failure to pay certain other indebtedness and certain events of bankruptcy or insolvency. Upon the occurrence and continuation of an event of default, amounts due under the Credit Agreement may be accelerated.

As of the date of this report, we had no events of default and no borrowings under the revolving line of credit, and there were no borrowings under the revolving line of credit during the six months ended June 30, 2012. Our borrowing base, which represents the amount we can borrow under the line of credit, was $11.5 million as of June 30, 2012.

Off-Balance Sheet Arrangements
        
We do not maintain any off-balance sheet arrangements that have, or that are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do maintain operating leases for our offices based in Colorado, the Netherlands and Germany.

Healthcare Reform in the U.S.

We continue to assess the impact that federal healthcare reform will have on our business. The Patient Protection and Affordable Care Act includes a 2.3% excise tax on a majority of our U.S. sales, which is scheduled to take effect on January 1, 2013.




26


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), we use certain non-GAAP financial measures in this report. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures for the respective periods can be found in the table below. An explanation of the manner in which our management uses these non-GAAP measures to conduct and evaluate our business and the reasons why management believes that these non-GAAP measures provide useful information to investors is provided following the reconciliation table.

Reconciliation of revenue by geography to non-GAAP revenue by geography
on a constant currency basis
(000's, except percentages)
(unaudited)

 
Three Months Ended
 
 
 
 
June 30, 2012
 
June 30, 2011
 
Change
 
Revenue, as reported
Foreign exchange impact as compared to prior period
Revenue on a constant currency basis
 
Revenue, as reported
 
As reported
Constant currency basis
United States
$
29,163

$

$
29,163

 
$
26,487

 
10
%
10
%
International
5,872

419

6,291

 
5,727

 
3
%
10
%
Total revenue
$
35,035

$
419

$
35,454

 
$
32,214

 
9
%
10
%
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
June 30, 2012
 
June 30, 2011
 
Change
 
Revenue, as reported
Foreign exchange impact as compared to prior period
Revenue on a constant currency basis
 
Revenue, as reported
 
As reported
Constant currency basis
United States
$
56,991

$

$
56,991

 
$
52,047

 
9
%
9
%
International
11,313

522

11,835

 
10,589

 
7
%
12
%
Total revenue
$
68,304

$
522

$
68,826

 
$
62,636

 
9
%
10
%

The impact of foreign exchange rates is highly variable and difficult to predict. We use a constant currency basis to show the impact from foreign exchange rates on current period revenue compared to prior period revenue using the prior period’s foreign exchange rates. In order to properly understand the underlying business trends and performance of our ongoing operations, we believe that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our revenue.
  
We believe that presenting the non-GAAP financial measures used in this report provides investors greater transparency to the information used by our management for 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 management to evaluate and measure such performance.

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 U.S. GAAP. Revenue growth rates stated on a constant currency basis, by their nature, exclude the impact of foreign exchange, which may have a material impact on U.S. GAAP revenue.


27


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.  Significant items subject to estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances and reserves for receivables, inventories and deferred income tax assets, stock-based compensation, accrued indemnification costs, estimated clinical trial expenses, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

Our critical accounting policies and estimates are included in our 2011 Annual Report on Form 10-K, filed with the SEC on March 15, 2012.  During the first six months of 2012, there were no significant changes to our critical accounting policies.





28


Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to a variety of risks, primarily including foreign currency fluctuations. Our exposure to foreign currency fluctuations is primarily related to sales of our products in Europe, which are denominated primarily in the euro.  Changes in the exchange rate between the euro and the U.S. dollar could adversely affect our revenue and net income.  Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets.  Currently, we do not hedge against any foreign currencies and, as a result, we could incur gains or losses.  Fluctuation in currency rates during the three months ended June 30, 2012 as compared with the three months ended June 30, 2011 caused a decrease in consolidated revenue of approximately $0.4 million and a decrease in consolidated net income of approximately $0.1 million.

Based on our overall foreign currency exchange rate exposure as of June 30, 2012, a 10% appreciation or depreciation of the U.S. dollar would have a positive or negative impact on our consolidated revenue for the three months ended June 30, 2012 of approximately $0.4 million and for the six months ended June 30, 2012 of approximately $0.8 million.


Item 4.   Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2012.
 
There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 


29


Part II—OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
For a discussion of the Company’s legal proceedings, please refer to Note 10, “Commitments and Contingencies” to the condensed consolidated financial statements included in Part I, Item 1 of this report.
 
Item 1A.   Risk Factors
 
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
Item 6.           Exhibits
 
 
 
31.1
Rule 13(a)-14(a)/15d-14(a) Certification of Chief Executive Officer.
 
 
31.2
Rule 13(a)-14(a)/15d-14(a) Certification of Chief Financial Officer.
 
 
32.1
Section 1350 Certification of Chief Executive Officer.
 
 
32.2
Section 1350 Certification of Chief Financial Officer.
 
 






30


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
The Spectranetics Corporation
 
(Registrant)
 
 
 
 
August 7, 2012
 
/s/ Scott Drake
 
 
Scott Drake
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
August 7, 2012
 
/s/ Guy A. Childs
 
 
Guy A. Childs
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 


31