Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION - SPECTRANETICS CORP | ex321ceo10ka2013.htm |
| EX-31.1 - CERTIFICATION - SPECTRANETICS CORP | ex311ceo10ka2013.htm |
| EX-31.2 - CERTIFICATION - SPECTRANETICS CORP | ex312cfo10ka2013.htm |
| EX-23.2 - CONSENT - SPECTRANETICS CORP | ex232consent10ka2013.htm |
| EX-23.1 - CONSENT - SPECTRANETICS CORP | ex231consent10ka2013.htm |
| EXCEL - IDEA: XBRL DOCUMENT - SPECTRANETICS CORP | Financial_Report.xls |
| EX-32.2 - CERTIFICATION - SPECTRANETICS CORP | ex322cfo10ka2013.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 2013 | |
or | |
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 (State or other jurisdiction of incorporation or organization) | 84-0997049 (I.R.S. Employer Identification No.) |
9965 Federal Drive
Colorado Springs, Colorado 80921
(Address of principal executive offices and zip code)
Registrant’s Telephone Number, Including Area Code:
(719) 633-8333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
The aggregate market value of the voting stock of the Registrant, as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter was $750,195,357, as computed by reference to the closing sale price of the voting stock held by non-affiliates on such date. As of February 20, 2014, there were outstanding 41,328,716 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K, as amended.
TABLE OF CONTENTS
PART II | ||
PART IV | ||
EXPLANATORY NOTE
The sole purpose of this Amendment No. 1 on Form 10-K/A (the “Amendment”) to the Annual Report on Form 10-K for the year ended December 31, 2013 of The Spectranetics Corporation (the “Company”), originally filed with the Securities and Exchange Commission on February 28, 2014 (the “Form 10-K”), is to amend the audit report of EKS&H LLLP to add a reference to the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2011.
As required by Rule 12b-15, the Company’s principal executive officer and principal financial officer are providing currently dated certifications on Exhibits 31.1, 31.2, 32.1 and 32.2. Accordingly, the Company hereby amends Item 15 of the Form 10-K to add such reports as exhibits.
Except as described above, the Amendment does not modify or update any other items or disclosures contained in the Form 10-K. The disclosures contained in the Form 10-K have not been updated to reflect events, results or developments that have occurred after February 28, 2014, or to modify or update those disclosures affected by subsequent events. This Amendment should be read in conjunction with the Company’s other filings with the Securities and Exchange Commission, together with any amendments to those filings.
PART II
ITEM 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements in Part IV, Item 15 on page F-1 of this Annual Report.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) | Documents Filed as a Part of The Report |
(1) | Consolidated Financial Statements |
See Index to Consolidated Financial Statements on page F-1 of this Form 10-K.
(2) | Financial Statement Schedules |
Schedule II—Valuation and Qualifying Accounts is included within the Consolidated Financial Statements. All other schedules are omitted because the required information is inapplicable.
(3) | Exhibits |
See Exhibit Index immediately following the Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Colorado Springs, State of Colorado, on this 5th day of September, 2014.
THE SPECTRANETICS CORPORATION | ||
By: | /s/ GUY A. CHILDS | |
Guy A. Childs Chief Financial Officer | ||
2
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page | |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
The Spectranetics Corporation:
We have audited the accompanying consolidated balance sheets of The Spectranetics Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we have also audited financial statement Schedule II–Valuation and Qualifying Accounts (Schedule II) for the years ended December 31, 2013 and 2012. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-2
The Spectranetics Corporation
February 28, 2014
Page 2 of 2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein for the years ended December 31, 2013 and 2012. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Denver, Colorado
February 28, 2014
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Spectranetics Corporation
Denver, Colorado
We have audited the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss), Stockholders’ Equity, and Cash Flows of The Spectranetics Corporation and Subsidiaries (the “Company”) for the year ended December 31, 2011. Our audit also included the financial statement schedule II for the year ended December 31, 2011. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule II for the year ended December 31, 2011, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ EKS&H LLLP
March 15, 2012
Denver, Colorado
F-4
Consolidated Balance Sheets
December 31, 2013 and 2012
2013 | 2012 | ||||||
(In thousands, except share amounts) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 128,395 | $ | 37,775 | |||
Trade accounts receivable, less allowance for doubtful accounts and sales returns of $782 and $589, respectively | 26,766 | 19,945 | |||||
Inventories, net | 9,476 | 9,288 | |||||
Deferred income taxes, current portion, net | 445 | 313 | |||||
Prepaid expenses and other current assets | 2,748 | 2,506 | |||||
Total current assets | 167,830 | 69,827 | |||||
Property and equipment, net | 28,281 | 27,006 | |||||
Goodwill | 14,846 | 13,296 | |||||
Other intangible assets, net | 5,609 | 20 | |||||
Other assets | 591 | 620 | |||||
Total assets | $ | 217,157 | $ | 110,769 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 2,587 | $ | 1,996 | |||
Accrued liabilities | 18,819 | 16,001 | |||||
Deferred revenue | 1,819 | 2,196 | |||||
Total current liabilities | 23,225 | 20,193 | |||||
Accrued liabilities, net of current portion | 1,215 | 991 | |||||
Contingent consideration, noncurrent portion | 1,352 | — | |||||
Deferred income taxes, noncurrent portion, net | 1,365 | 888 | |||||
Total liabilities | 27,157 | 22,072 | |||||
Commitments and contingencies (Note 16) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued | — | — | |||||
Common stock, $0.001 par value. Authorized 60,000,000 shares; issued and outstanding 41,230,286 and 34,887,763 shares, respectively | 41 | 35 | |||||
Additional paid-in capital | 284,494 | 183,140 | |||||
Accumulated other comprehensive loss | (305 | ) | (618 | ) | |||
Accumulated deficit | (94,230 | ) | (93,860 | ) | |||
Total stockholders’ equity | 190,000 | 88,697 | |||||
Total liabilities and stockholders’ equity | $ | 217,157 | $ | 110,769 | |||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2013, 2012 and 2011
2013 | 2012 | 2011 | |||||||||
(in thousands, except share and per share amounts) | |||||||||||
Revenue | $ | 158,811 | $ | 140,285 | $ | 127,287 | |||||
Cost of products sold | 41,356 | 37,927 | 35,723 | ||||||||
Gross profit | 117,455 | 102,358 | 91,564 | ||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 91,750 | 82,254 | 70,502 | ||||||||
Research, development and other technology | 22,080 | 16,846 | 17,729 | ||||||||
Medical device excise tax | 2,138 | — | — | ||||||||
Intangible asset amortization | 901 | — | — | ||||||||
Contingent consideration expense | 867 | — | — | ||||||||
Intangible asset impairment | 4,490 | — | — | ||||||||
Change in contingent consideration liability | (5,165 | ) | — | — | |||||||
Acquisition-related costs | — | 311 | — | ||||||||
Settlement costs—license agreement dispute | — | — | 1,821 | ||||||||
Litigation charge | — | — | 596 | ||||||||
Federal investigation legal and accrued indemnification credit | — | — | (370 | ) | |||||||
Total operating expenses | 117,061 | 99,411 | 90,278 | ||||||||
Operating income | 394 | 2,947 | 1,286 | ||||||||
Other income (expense): | |||||||||||
Interest income, net | 3 | 8 | 81 | ||||||||
Litigation-related interest expense | — | — | (230 | ) | |||||||
Foreign currency transaction gain (loss) | 5 | (5 | ) | (62 | ) | ||||||
Other income, net | 8 | 10 | 50 | ||||||||
Total other income (expense) | 16 | 13 | (161 | ) | |||||||
Income before income taxes | 410 | 2,960 | 1,125 | ||||||||
Income tax expense | 780 | 734 | 231 | ||||||||
Net (loss) income | $ | (370 | ) | $ | 2,226 | $ | 894 | ||||
Net (loss) income per share: | |||||||||||
Net (loss) income per share, basic | $ | (0.01 | ) | $ | 0.06 | $ | 0.03 | ||||
Net (loss) income per share, diluted | $ | (0.01 | ) | $ | 0.06 | $ | 0.03 | ||||
Other comprehensive income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | 313 | 97 | (270 | ) | |||||||
Comprehensive (loss) income, net of tax | $ | (57 | ) | $ | 2,323 | $ | 624 | ||||
Weighted average common shares outstanding: | |||||||||||
Basic | 38,940,544 | 34,376,847 | 33,458,287 | ||||||||
Diluted | 38,940,544 | 35,766,970 | 34,370,124 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2013, 2012 and 2011
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||
(in thousands, except share amounts) | Shares | Amount | ||||||||||||||||||||
Balances at January 1, 2011 | 33,190,732 | $ | 33 | $ | 171,890 | $ | (96,980 | ) | $ | (445 | ) | $ | 74,498 | |||||||||
Comprehensive loss, net of tax | — | — | — | 894 | (270 | ) | 624 | |||||||||||||||
Exercise of stock options | 539,059 | 1 | 1,267 | — | — | 1,268 | ||||||||||||||||
Shares purchased under employee stock purchase plan | 140,950 | — | 627 | — | — | 627 | ||||||||||||||||
Issuance of restricted stock | 86,667 | — | — | — | — | — | ||||||||||||||||
Paid in capital from stock-based compensation expense | — | — | 2,493 | — | — | 2,493 | ||||||||||||||||
Balances at December 31, 2011 | 33,957,408 | 34 | 176,277 | (96,086 | ) | (715 | ) | 79,510 | ||||||||||||||
Comprehensive income, net of tax | — | — | — | 2,226 | 97 | 2,323 | ||||||||||||||||
Exercise of stock options | 693,707 | 1 | 2,922 | — | — | 2,923 | ||||||||||||||||
Shares purchased under employee stock purchase plan | 146,542 | — | 849 | — | — | 849 | ||||||||||||||||
Issuance of restricted stock and vesting of restricted stock units | 90,106 | — | — | — | — | — | ||||||||||||||||
Paid in capital from stock-based compensation expense | — | — | 3,092 | — | — | 3,092 | ||||||||||||||||
Balances at December 31, 2012 | 34,887,763 | 35 | 183,140 | (93,860 | ) | (618 | ) | 88,697 | ||||||||||||||
Comprehensive income, net of tax | — | — | — | (370 | ) | 313 | (57 | ) | ||||||||||||||
Exercise of stock options | 723,067 | — | 4,053 | — | — | 4,053 | ||||||||||||||||
Shares purchased under employee stock purchase plan | 104,781 | — | 1,172 | — | — | 1,172 | ||||||||||||||||
Issuance of restricted stock and vesting of restricted stock units | 52,175 | — | — | — | — | — | ||||||||||||||||
Issuance of common stock in secondary public offering, net of offering costs | 5,462,500 | 6 | 92,028 | — | — | 92,034 | ||||||||||||||||
Paid in capital from stock-based compensation expense | — | — | 4,101 | — | — | 4,101 | ||||||||||||||||
Balances at December 31, 2013 | 41,230,286 | $ | 41 | $ | 284,494 | $ | (94,230 | ) | $ | (305 | ) | $ | 190,000 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Consolidated Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
2013 | 2012 | 2011 | |||||||||
(in thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net (loss) income | $ | (370 | ) | $ | 2,226 | $ | 894 | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 10,610 | 9,883 | 9,962 | ||||||||
Stock-based compensation expense | 4,101 | 3,092 | 2,493 | ||||||||
Intangible asset impairment | 4,490 | — | — | ||||||||
Change in contingent consideration liability and contingent consideration expense, net | (4,298 | ) | — | — | |||||||
Provision for excess and obsolete inventories | 213 | 156 | 534 | ||||||||
Deferred income taxes | 386 | 378 | (83 | ) | |||||||
Indemnification costs paid | — | (3,225 | ) | (2,672 | ) | ||||||
License agreement settlement | — | (3,000 | ) | — | |||||||
Changes in operating assets and liabilities: | |||||||||||
Trade accounts receivable, net | (6,463 | ) | (1,791 | ) | (2,552 | ) | |||||
Inventories | (359 | ) | (884 | ) | (929 | ) | |||||
Equipment held for rental or loan, net | (6,812 | ) | (6,099 | ) | (5,971 | ) | |||||
Prepaid expenses and other current assets | (265 | ) | (77 | ) | (861 | ) | |||||
Other assets | 31 | 99 | (276 | ) | |||||||
Accounts payable and accrued liabilities | 3,343 | 4,399 | 6,305 | ||||||||
Deferred revenue | (394 | ) | 4 | (101 | ) | ||||||
Net cash provided by operating activities | 4,213 | 5,161 | 6,743 | ||||||||
Cash flows from investing activities: | |||||||||||
Capital expenditures | (4,620 | ) | (3,079 | ) | (2,661 | ) | |||||
Acquisition-related payments | (6,500 | ) | (7,727 | ) | — | ||||||
Proceeds from sale, redemption or maturity of investment securities | — | — | 4,360 | ||||||||
Net cash (used in) provided by investing activities | (11,120 | ) | (10,806 | ) | 1,699 | ||||||
Cash flows from financing activities: | |||||||||||
Net proceeds from stock offering | 92,034 | — | — | ||||||||
Proceeds from the exercise of stock options and employee stock purchase plan | 5,225 | 3,772 | 1,895 | ||||||||
Net cash provided by financing activities | 97,259 | 3,772 | 1,895 | ||||||||
Effect of exchange rate changes on cash | 268 | 10 | (34 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 90,620 | (1,863 | ) | 10,303 | |||||||
Cash and cash equivalents at beginning of year | 37,775 | 39,638 | 29,335 | ||||||||
Cash and cash equivalents at end of year | $ | 128,395 | $ | 37,775 | $ | 39,638 | |||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid during the year for interest | $ | 41 | $ | 46 | $ | 289 | |||||
Cash paid during the year for income taxes | $ | 357 | $ | 135 | $ | 142 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F-8
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Business, and Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, its wholly owned subsidiary, Spectranetics International, B.V., and its wholly owned subsidiaries, Spectranetics Deutschland GmbH and Spectranetics Austria GmbH (collectively, the Company). All intercompany balances and transactions have been eliminated in consolidation. The Company’s primary business is the design, manufacture, marketing, and distribution of single use medical devices used in minimally invasive procedures within the cardiovascular system, many of which are used with the Company’s proprietary excimer laser system, the CVX-300®. The Company has two operating segments that are identified geographically: (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.
Use of Estimates
Preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management of the Company to make several estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such 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; contingent consideration liabilities for acquisitions; stock-based compensation expense; estimated clinical trial expenses; accrued costs 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents of approximately $101.2 million and $8.7 million at December 31, 2013 and 2012, respectively, consisted primarily of money market accounts. At times, the Company maintains deposits in financial institutions in excess of federally insured limits.
Financial Instruments
At December 31, 2013 and 2012, the carrying value of financial instruments approximated the fair value of the instruments based on terms and related interest rates. Financial instruments include cash and cash equivalents, trade accounts receivable and accounts payable.
F-9
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment. Accounts receivable balances are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote.
Inventory
Inventory is recorded at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company calculates inventory reserves for estimated obsolescence or excess inventory based on historical usage and sales, and assumptions about future demand for its products. These estimates for excess and obsolete inventory are reviewed and updated on a quarterly basis. Increases in the inventory reserves result in a corresponding expense, which is recorded to cost of goods sold.
Property and Equipment
Property and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of three to five years for manufacturing equipment, equipment held for rental or loan, computers, and furniture and fixtures. The building the Company owns, which had been a manufacturing facility and now houses certain general operations, is depreciated using the straight-line method over its estimated useful life of 20 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of the identifiable net assets of businesses acquired. Goodwill and intangible assets acquired in a business combination and determined to have indefinite useful lives are not amortized, but instead are tested for impairment at least annually and whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. In evaluating goodwill and indefinite-lived intangible assets, the Company performs an assessment of qualitative factors to determine if goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. The Company conducts its annual impairment test as of December 31 of each year. See further discussion of goodwill and other intangible assets in Note 8 below.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the expected undiscounted cash flows from such asset are separately identifiable and are less than the carrying value. Fair value is determined by reference to quoted market prices, if available, or the utilization of certain valuation techniques such as cash flows discounted at a rate commensurate with the risk involved. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less
F-10
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
selling costs. In 2013, the Company recorded an intangible asset impairment charge for intangible assets acquired earlier in the year, as further discussed in Note 8.
Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or circumstances indicate their carrying amount may not be recoverable. Intangible assets, which consist primarily of core technology intangible assets, are amortized using the straight-line method over periods which currently range from four to twelve years.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue from the sale of the Company’s disposable products is recognized when products are shipped to the customer and title transfers. In general, customers do not have a right of return for credit or refund. However, the Company allows returns under certain circumstances and records an allowance for sales returns based upon an analysis of revenue transactions and historical experience of sales returns and price adjustments. Write-offs to customer account balances for product returns and price adjustments are charged against the allowance for sales returns. Revenue from the sale of CVX-300 laser systems is recognized after completion of contractual obligations, which generally include delivery and installation of the systems. The Company’s field service engineers are responsible for installation of each laser system. The Company generally provides a one-year warranty on laser sales, which includes parts, labor and replacement gas. Upon expiration of the warranty period, the Company offers similar service to its customers under annual service contracts or on a fee-for-service basis. Revenue from fee-for-service arrangements is recognized upon completion of the related service.
The Company accounts for service provided during the one-year warranty or service contract period as a separate unit of accounting in accordance with ASC 605-25, Revenue Recognition—Multiple Element Arrangements. As such, the fair value of this service is deferred and recognized as revenue on a straight-line basis over the related warranty or service contract period, and warranty and service costs are expensed in the period they are incurred. Revenue allocated to the laser element is recognized upon completion of all contractual obligations in the sales contract, which generally include delivery and installation of the laser system. Revenue recognized associated with service performed during the warranty period totaled $0.7 million, $0.4 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company offers four laser system placement programs, which are described below, in addition to the sale of laser systems:
Straight rental program. The Company offers a straight monthly rental program for laser systems, and customers pay rent of $2,500 to $3,500 per month under this program. Rental revenue is invoiced and recognized monthly. The laser system is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is included in cost of revenue based upon the five year expected life of the laser system. Costs to maintain the equipment are expensed as incurred. As of December 31, 2013, 152 laser systems were in place under the straight rental program as compared to 168 at December 31, 2012.
Volume based rental programs. Rental revenue under these programs varies on a sliding scale depending on the customer’s catheter purchases (either unit or dollar volume) each month. Rental revenue is invoiced and recognized monthly. The laser system is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is included in cost of revenue based upon the five year expected life of the laser system.
F-11
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Costs to maintain the equipment are expensed as incurred. As of December 31, 2013, 288 laser systems were in place under the volume based programs as compared to 202 at December 31, 2012.
Capital Included rental program. Under this program, the customer agrees to a catheter price list that includes a per-unit surcharge covering the cost of the laser system. Customers are expected, but not required, to make minimum purchases of catheters at regular intervals, and the Company reserves the right to require the customer to return the laser system if the customer does not make minimum purchases of catheters. The Company recognizes the total surcharge as rental revenue upon shipment of the catheters, believing it to be the best measurement of revenue associated with the customer’s use of the laser system for the month. The laser system is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is included in cost of revenue based upon the five year expected life of the laser system. Costs to maintain the equipment are expensed as incurred. As of December 31, 2013, 131 laser systems were in place under the Capital Included program as compared to 157 at December 31, 2012.
Evaluation program. The Company loans laser systems to institutions for use over a short period, usually three months. The loan of the equipment is to create awareness of the Company’s products and allows users to assess their therapeutic capabilities. While no revenue is earned or recognized in connection with the placement of a loaned laser, sales of disposable products result from the laser placement. The laser system is transferred to the equipment held for rental or loan account upon shipment and depreciation expense is recorded within selling, general and administrative expense based upon the five year expected life of the laser system. Costs to maintain the equipment are expensed as incurred. As of December 31, 2013, 111 laser systems were in place under the evaluation program as compared to 113 at December 31, 2012.
The Company sells to end-users in the United States and internationally as well as to certain international distributors. Sales to international distributors represented approximately 5% of the Company’s total revenue in 2013. Distributor agreements are in place with each distributor, which outline the significant terms of the transactions between the distributor and the Company. The terms and conditions of sales to the Company’s international distributors do not differ materially from the terms and conditions of sales to its domestic and international end-user customers. Sales to distributors are recognized either at shipment or a later date in accordance with the agreed upon contract terms with distributors, provided that the Company has received an order, the price is fixed or determinable, collectibility of the resulting receivable is reasonably assured, all contractual obligations have been met and the Company can reasonably estimate returns. The Company provides products to its distributors at agreed wholesale prices and typically does not provide any special right of return or exchange, discounts, significant sales incentives, price protection or stock rotation rights to any of its distributors.
Deferred Revenue
Deferred revenue was $1.8 million and $2.2 million at December 31, 2013 and 2012, respectively. These amounts primarily relate to payments in advance for various product maintenance contracts in which revenue is initially deferred and recognized over the life of the contract, which is generally one year, and to deferred revenue associated with service provided to customers during the warranty period after the sale of equipment.
Medical Device Excise Tax
The Patient Protection and Affordable Care Act of 2010 imposes a medical device excise tax on medical device manufacturers on their sales in the U.S. of certain devices beginning January 1, 2013. The excise tax is 2.3% of the taxable base and applies to a substantial majority of the Company’s U.S. sales. For the year ended December 31, 2013, the Company incurred $2.1 million of excise tax, which is recorded in the consolidated
F-12
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
statements of operations and comprehensive income (loss) as an operating expense under the caption “Medical device excise tax.”
Stock-Based Compensation
The Company measures all employee stock-based compensation awards using a fair value method and records such expense in its consolidated financial statements in accordance with ASC 718, Stock Compensation. The Company generally estimates the fair value of stock option awards on the date of grant using the Black-Scholes options pricing model. For certain options, which contained vesting provisions that included a share price trigger, the Company estimated the fair value of the options using a trinomial lattice model. The estimated value of the portion of the award that is ultimately expected to vest, taking into consideration estimated forfeitures based on the Company’s historical forfeiture rate, is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. See further discussion and disclosures in Note 6.
Research, Development and Other Technology
Research and development costs are expensed as incurred and totaled $16.3 million, $10.9 million, and $11.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. Research, development and other technology costs include royalty expenses that the Company pays to license certain intellectual property incorporated in the Company’s products. Royalty expenses totaled $2.0 million, $1.8 million, and $3.2 million for the years ended December 31, 2013, 2012, and 2011, respectively.
Clinical trial costs. The Company sponsors clinical trials intended to obtain the necessary clinical data required to obtain approval from the U.S. Food and Drug Administration (FDA) and foreign regulatory agencies to market new applications for its technology. Costs associated with these clinical trials totaled $3.8 million, $4.2 million, and $3.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.
In certain cases, substantial portions of the Company’s clinical trials are performed by third-party clinical research organizations (CROs). These CROs generally bill monthly for services performed and also bill based upon milestone achievement. For example, the Company has contracted with a CRO to provide clinical trial services for the EXCITE ISR study. If the Company prepays CRO fees, the Company records the prepayment as a prepaid asset and amortizes the asset into research, development and other technology expense over the period of time the contracted services are performed, based upon the number of patients enrolled, “patient months” incurred and the duration of the study. The Company also accrues for services as provided, when services are performed before the milestone payments are made. The Company monitors patient enrollment, the progress of clinical studies and related activities through internal reviews of data reported to the Company by the CROs and correspondence with the CROs. The Company periodically evaluates its estimates to determine if adjustments are necessary or appropriate based on information it receives.
Foreign Currency Translation
The Company’s reporting currency is the U.S. dollar. Certain transactions of the Company and its subsidiaries are denominated in currencies other than the U.S. dollar. Spectranetics International, B.V., Spectranetics Deutschland GmbH and Spectranetics Austria GmbH use their local currency (euro) as their functional currency. Accordingly, net assets are translated to U.S. dollars at year-end exchange rates while income and expense accounts are translated at average exchange rates during the year. Adjustments resulting from these translations are reflected in stockholders’ equity as accumulated other comprehensive income (loss). The cash flows from operations in foreign countries are translated at the average rate in the statements of cash flows. Changes in exchange rates with
F-13
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
respect to amounts recorded in the balance sheet result in transaction gains and losses that are reflected in the statements of operations and comprehensive income (loss) as unrealized or realized upon settlement of the transactions.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs of approximately $1.9 million, $1.0 million and $0.5 million were expensed for the years ended December 31, 2013, 2012 and 2011, respectively.
Medical Self-insurance Costs
The Company is partially self-insured for claims relating to employee medical and dental benefit programs. The medical self-insurance program is administered by a third party and contains stop-loss provisions on both an individual claim basis and in the aggregate. The Company records claims incurred as an expense each period, including an estimate of claims incurred but not yet reported which is revised quarterly. The Company uses claims data and historical experience, as applicable, to estimate liabilities.
Income Taxes
The Company accounts for income taxes pursuant to ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and research and development and alternative minimum tax credit carryforwards.
A valuation allowance is required to the extent it is more-likely-than-not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on technical merits, that the position will be sustained upon examination. The Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. There are no significant interest and penalties recognized in the statement of operations or accrued on the balance sheet. See further discussion and disclosures in Note 9.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02 Intangibles—Goodwill and Other, which updated guidance on the periodic testing of indefinite-lived intangible assets for impairment. This guidance allows companies to assess qualitative factors to determine if an indefinite-lived intangible asset might be impaired and whether it is necessary to perform the quantitative impairment test. This guidance was effective for the year ended December 31, 2013. The adoption of this guidance did not have an effect on the Company’s financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income either on the face of the statement
F-14
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
where net income is presented, or as a separate disclosure in the notes to the financial statements. The new disclosure requirements are prospective and were effective for the year ended December 31, 2013. This update only required additional disclosures, and the adoption of this standard did not have a material impact 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 they are of significance, or potential significance, to the Company.
NOTE 2 — INVENTORIES
Inventories, net, consisted of the following (in thousands):
December 31, | |||||||
2013 | 2012 | ||||||
Raw materials | $ | 4,132 | $ | 2,573 | |||
Work in process | 1,696 | 1,887 | |||||
Finished goods | 3,648 | 4,828 | |||||
Total inventories, net | $ | 9,476 | $ | 9,288 | |||
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following (in thousands):
December 31, | |||||||
2013 | 2012 | ||||||
Equipment held for rental or loan | $ | 42,949 | $ | 40,180 | |||
Manufacturing equipment and computers | 24,827 | 22,888 | |||||
Leasehold improvements | 5,697 | 5,024 | |||||
Furniture and fixtures | 2,446 | 2,102 | |||||
Building and improvements | 1,276 | 1,276 | |||||
Land | 270 | 270 | |||||
Less: accumulated depreciation and amortization | (49,184 | ) | (44,734 | ) | |||
Total property and equipment, net | $ | 28,281 | $ | 27,006 | |||
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $8.8 million, $8.9 million and $9.1 million, respectively. In addition, software amortization expense for the years ended December 31, 2013, 2012 and 2011 was $0.9 million, $0.9 million and $0.6 million, respectively.
F-15
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4 — ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 31, | |||||||
2013 | 2012 | ||||||
Accrued payroll and employee-related expenses | $ | 11,007 | $ | 9,951 | |||
Accrued sales, income and excise taxes | 1,659 | 1,003 | |||||
Deferred rent | 1,204 | 800 | |||||
Accrued clinical study expense | 872 | 671 | |||||
Employee stock purchase plan liability | 801 | 602 | |||||
Accrued royalties | 571 | 528 | |||||
Contingent consideration, current portion | 500 | — | |||||
Accrued legal costs | 134 | 489 | |||||
Other accrued expenses | 3,286 | 2,948 | |||||
Total accrued liabilities | 20,034 | 16,992 | |||||
Less: long-term portion | (1,215 | ) | (991 | ) | |||
Accrued liabilities, current portion | $ | 18,819 | $ | 16,001 | |||
NOTE 5 — COMMON STOCK OFFERING
On May 1, 2013, the Company completed an offering of 5,462,500 shares of its common stock at a public offering price of $18.00 per share minus the underwriters’ discount of $1.08 per share. The Company received net proceeds of approximately $92.0 million, after deducting underwriting discounts and commissions and offering expenses (approximately $0.4 million) paid by the Company.
NOTE 6 — STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
At December 31, 2013 and 2012, the Company had two stock-based compensation plans and a 401(k) plan. These plans are described below.
(a) Stock Option Plan
The Company maintains stock option plans that 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 incentive stock options may be granted with exercise prices not less than the fair market value at the date of grant. Options granted through December 31, 2013 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. At December 31, 2013, there were 1.1 million shares available for future issuance under these plans.
F-16
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Valuation and Expense Information
The Company recognized stock-based compensation expense of $4.1 million, $3.1 million and $2.5 million for the years ended December 31, 2013, 2012 and 2011, respectively, which 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 fair value of shares 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. An income tax benefit of $1.4 million, $0.7 million, and $0.5 million related to the exercise of stock options during the years ended December 31, 2013, 2012 and 2011, respectively, will be added to other paid-in capital if, and when, the tax benefit is realized.
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 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 years ended December 31, 2013, 2012 and 2011 using the Black-Scholes pricing model:
Year Ended December 31, | ||||||||
2013 | 2012 | 2011 | ||||||
Expected life (years) | 5.8 | 5.9 | 5.9 | |||||
Risk-free interest rate | 1.37 | % | 0.75 | % | 1.33 | % | ||
Expected volatility | 65.54 | % | 66.35 | % | 66.10 | % | ||
Expected dividend yield | — | — | — | |||||
The weighted average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $10.80, $6.17 and $2.39, respectively.
The following table summarizes stock option activity during the year ended December 31, 2013:
Shares | Weighted Average Exercise Price | Weighted Avg. Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||
Options outstanding at January 1, 2013 | 3,263,830 | $ | 7.02 | |||||||||
Granted | 719,980 | 18.35 | ||||||||||
Exercised | (723,067 | ) | 6.03 | |||||||||
Canceled | (107,509 | ) | 10.44 | |||||||||
Options outstanding at December 31, 2013 | 3,153,234 | $ | 9.72 | 7.20 | $ | 48,182,443 | ||||||
Options exercisable at December 31, 2013 | 1,675,078 | $ | 6.75 | 5.86 | $ | 30,576,084 | ||||||
F-17
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $25.00 on December 31, 2013, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares underlying in-the-money options exercisable as of December 31, 2013 was approximately 1.7 million. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $9.2 million, $5.1 million and $2.3 million, respectively.
The following table summarizes restricted stock award activity during the year ended December 31, 2013:
Shares | Weighted Average Grant-Date Fair Value | |||||
Restricted stock awards outstanding at January 1, 2013 | 48,632 | $ | 9.87 | |||
Awarded | 22,190 | 18.93 | ||||
Vested | (48,632 | ) | 9.87 | |||
Awards outstanding at December 31, 2013 | 22,190 | $ | 18.93 | |||
The following table summarizes restricted stock unit activity during the year ended December 31, 2013:
Shares | Weighted Average Purchase Price | Weighted Avg. Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||
Restricted stock units outstanding at January 1, 2013 | 126,350 | $ | — | |||||||||
Awarded | 89,512 | — | ||||||||||
Vested/Released | (46,700 | ) | — | |||||||||
Forfeited | (10,540 | ) | — | |||||||||
Restricted stock units outstanding at December 31, 2013 | 158,622 | $ | — | 1.5 | $ | 3,965,550 | ||||||
As of December 31, 2013, there was $9.4 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 12.5% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 2.6 years.
(b) Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (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
F-18
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
amended. The ESPP is compensatory for financial reporting purposes. At December 31, 2013, there were approximately 300,000 shares available for future issuance under this plan.
The fair value of the shares offered for the six-month periods beginning January and July 2013 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 is based on the six-month U.S. Treasury daily yield rate. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the years ended December 31, 2013, 2012 and 2011, the Company recognized $0.4 million, $0.3 million and $0.2 million of compensation expense, respectively, related to its ESPP.
(c) 401(k) Plan
The Company maintains a salary reduction savings plan under Section 401(k) of the Internal Revenue Code, which the Company administers for participating employees’ contributions. All full-time employees are covered under the plan after meeting minimum service requirements. The Company accrued and paid matching contributions of $0.9 million, $0.8 million and $0.7 million to the plan for the years ended December 31, 2013, 2012 and 2011, respectively. For all periods presented, Company contributions were based on a match of 50% of each employee’s contribution, with the match-eligible contribution being limited to 6% of the employee’s eligible compensation.
NOTE 7 — BUSINESS COMBINATION
On January 7, 2013, the Company acquired certain products from Upstream Peripheral Technologies Ltd. (Upstream). Prior to the acquisition, these products had generated no revenue. The primary reason for the acquisition was to extend the Company’s product offering in the area of retrograde access tools and leverage its existing sales organization. The Company began selling these products in the U.S. in February 2013 and in Europe in March 2013. Transaction costs associated with this acquisition of approximately $0.3 million were primarily incurred in the fourth quarter of 2012.
Total consideration includes an initial $5.5 million cash payment at closing of the transaction, a $1.0 million cash payment at the time of transfer of product, manufacturing, and regulatory related documentation which was made in February 2013, and additional payments for manufacturing and intellectual property milestones and revenue-based earn-outs for 2014, 2015 and 2016 product sales, subject to an overall cap of $35.5 million.
The Company accounted for the acquisition as a business combination and recorded the assets acquired and the estimated future consideration obligations at their respective fair values as of the acquisition date. The components of the aggregate purchase price for the acquisition were as follows (in thousands):
Cash | $ | 6,500 | |
Fair value of contingent consideration: | |||
Milestone payable, current | 500 | ||
Long-term contingent consideration | 5,650 | ||
Total purchase price | $ | 12,650 | |
F-19
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
At the date of acquisition, the Company recorded total contingent consideration liabilities of $6.2 million. The Company used a probability-weighted approach to estimate the achievement of the intellectual property milestones and the future revenue, and a discount rate of 15%.
From the acquisition date to December 31, 2013, the Company recorded $0.9 million of contingent consideration expense related to the passage of time (i.e. accretion). As of December 31, 2013, the Company reduced the amount of the contingent consideration liability by approximately $5.2 million. This reduction was the result of the Company’s determination that it will realize lower revenue from sales of the Upstream products than was anticipated at the acquisition date, and therefore the Company will owe a correspondingly lower amount of revenue-related contingent payments to the former owners. Some of the factors that influenced the lower future estimated revenue used in the Company’s analysis were slower than anticipated sales growth in 2013, updated market share estimates, which have been revised since the acquisition date, and revised estimates for future years’ growth rates.
As of December 31, 2013, the Company believes that the range of future contingent consideration (undiscounted) that the Company will likely be required to make related to the manufacturing milestone, the intellectual property milestones and the revenue earn-out is between $2 million and $3 million.
The aggregate initial purchase price was allocated to the net assets acquired as follows (in thousands):
Amount assigned | Amortization period (in years) | |||
Tangible assets (inventory and fixed assets) | $ | 100 | ||
Amortizable intangible assets: | ||||
Acquired core technologies | 10,600 | 12 | ||
Non-compete agreement | 400 | 4 | ||
Goodwill | 1,550 | |||
Total purchase price | $ | 12,650 | ||
The acquired core technology intangible assets consist of technical processes, intellectual property and know-how with respect to the products and processes acquired, and are being amortized on a straight-line basis over their assigned estimated useful lives. The Company primarily used the discounted cash flow model approach to derive the fair value of the amortizable intangible assets. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by U.S. GAAP. See Note 8 for a discussion of the impairment of certain of these intangible assets.
F-20
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is deductible for tax purposes. Goodwill was established primarily based on revenue and cash flow projections associated with future technologies, as well as synergies expected to be gained from the integration of these products into the Company’s existing operations, and has been allocated to the Company’s operating segments based on the relative expected benefit as follows (in thousands):
Amount allocated | |||
U.S. Medical | $ | 1,240 | |
International Medical | 310 | ||
Total goodwill | $ | 1,550 | |
If the Company had acquired the Upstream products at the beginning of 2012, net income would have been reduced from $2.2 million to $0.5 million for the year ended December 31, 2012, considering amortization and contingent consideration expense associated with the acquisition. No revenue has been assumed for 2012 as the Upstream products were not commercially available at that time.
NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. The Company’s goodwill relates primarily to the acquisition of the endovascular product lines of Kensey Nash Corporation (KNC) in 2008 for approximately $10.7 million plus milestone payments. The aggregate purchase price was allocated to the tangible and intangible assets acquired, in-process research and development and goodwill. At the acquisition date, $2.9 million was allocated to goodwill, and between 2008 and 2012, the Company made milestone payments in the amount of $10.2 million, which were recorded as additional goodwill.
As discussed in Note 7 above, on January 7, 2013, the Company acquired certain products from Upstream. As part of the acquisition, the Company recorded $1.6 million of additional goodwill as the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired.
The change in the carrying amount of goodwill by reporting unit for the year ended December 31, 2013 was as follows (in thousands):
U.S. Medical | International Medical | Total | |||||||
Balance as of December 31, 2012 | $ | 6,925 | $ | 6,371 | $ | 13,296 | |||
Goodwill acquired during the year (Note 7) | 1,240 | 310 | 1,550 | ||||||
Balance as of December 31, 2013 | $ | 8,165 | $ | 6,681 | $ | 14,846 | |||
As of December 31, 2013, the Company performed an assessment of qualitative factors to determine if it was more-likely-than-not that goodwill might be impaired and whether it was necessary to perform the two-step goodwill impairment test. The qualitative factors assessed included the market capitalization of the Company, economic and market considerations, overall financial performance and other events affecting the reporting units. Based on these qualitative factors, the Company determined that it was not necessary to perform the two-step goodwill impairment test as it was not more-likely-than-not that goodwill might be impaired.
F-21
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Intangible Assets. Acquired intangible assets as of December 31, 2013 and 2012 consisted of the following (in thousands):
December 31, | |||||||
2013 | 2012 | ||||||
Acquired core technologies (Note 7) | $ | 6,310 | $ | — | |||
Non-compete agreement (Note 7) | 200 | — | |||||
Patents | 530 | 4,273 | |||||
Less: accumulated amortization | (1,431 | ) | (4,253 | ) | |||
Net intangible assets | $ | 5,609 | $ | 20 | |||
As part of the Upstream acquisition, the Company acquired certain core technology intangible assets, consisting of technical processes, intellectual property and know-how with respect to the products and processes acquired, which are being amortized on a straight-line basis over their assigned estimated useful lives.
As a result of lower than anticipated sales growth, updated market share estimates, and current year sales, the Company evaluated the acquired intangible assets for impairment as of December 31, 2013. This analysis resulted in an intangible asset impairment charge of approximately $4.5 million. The Company performed a separate impairment analysis for each of the two product technologies acquired, which have separately identifiable cash flows. The Company compared the carrying value of the intangible assets acquired to the undiscounted cash flows expected to result from the assets and determined that the carrying amount of one of the acquired core technology assets and the non-compete agreement asset were not fully recoverable. The Company then determined the fair value of the intangible assets based on estimated future cash flows discounted back to their present value using a discount rate (27%) that reflects the risk profiles of the underlying activities.
In the fourth quarter of 2013, the Company evaluated its patents and wrote off all fully amortized patents that had expired, which had no impact on the Company’s results of operations.
Aggregate amortization expense for amortizing intangible assets was $0.9 million, $0.1 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, estimated amortization expense for intangible assets subject to amortization for the next five years was as follows (in thousands):
Amortization Expense | |||
Years ending December 31: | |||
2014 | $ | 546 | |
2015 | 546 | ||
2016 | 546 | ||
2017 | 514 | ||
2018 | 511 | ||
Thereafter | 2,946 | ||
Total future amortization expense | $ | 5,609 | |
F-22
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 9 — INCOME TAXES
The sources of income before income taxes are as follows (in thousands):
2013 | 2012 | 2011 | |||||||||
United States | $ | (1,298 | ) | $ | 1,413 | $ | (292 | ) | |||
Foreign | 1,708 | 1,547 | 1,417 | ||||||||
Income before income taxes | $ | 410 | $ | 2,960 | $ | 1,125 | |||||
Income tax expense attributable to income before income taxes consists of the following (in thousands):
2013 | 2012 | 2011 | |||||||||
Current: | |||||||||||
Federal | $ | — | $ | — | $ | — | |||||
State | 66 | 84 | 107 | ||||||||
Foreign | 328 | 272 | 207 | ||||||||
394 | 356 | 314 | |||||||||
Deferred: | |||||||||||
Federal | 301 | 295 | 187 | ||||||||
State | 35 | 33 | 63 | ||||||||
Foreign | 50 | 50 | (333 | ) | |||||||
386 | 378 | (83 | ) | ||||||||
Income tax expense | $ | 780 | $ | 734 | $ | 231 | |||||
The Company continues to maintain a valuation allowance for substantially its entire gross deferred tax asset including its U.S. net operating losses. For the year ended December 31, 2013, the Company recorded deferred federal and state tax expense of $0.3 million, representing a deferred tax liability related to the difference between tax and book accounting for its goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.
F-23
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Income tax expense attributable to income before income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following (in thousands):
2013 | 2012 | 2011 | |||||||||
Computed expected tax expense | $ | 140 | $ | 1,006 | $ | 383 | |||||
Increase (reduction) in income taxes resulting from: | |||||||||||
State and local income taxes, net of federal impact | (116 | ) | 94 | 50 | |||||||
Stock-based compensation | 169 | 112 | 1,316 | ||||||||
Nondeductible expenses and municipal interest | 55 | 138 | 262 | ||||||||
Change in valuation allowance | (332 | ) | (1,241 | ) | (1,973 | ) | |||||
Change in deferred rate | 5 | 165 | — | ||||||||
Foreign operations | (49 | ) | (44 | ) | 621 | ||||||
Research and development credit | 908 | 504 | (428 | ) | |||||||
Income tax expense | $ | 780 | $ | 734 | $ | 231 | |||||
F-24
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31 are as follows (in thousands):
2013 | 2012 | ||||||
Deferred tax assets: | |||||||
Current: | |||||||
Accrued liabilities, not deducted until paid for tax purposes | $ | 916 | $ | 906 | |||
Deferred revenue, due to deferral for financial reporting purposes | 541 | 662 | |||||
Inventories, principally due to accrual for obsolescence for financial reporting purposes, net of additional costs inventoried for tax purposes | 638 | 562 | |||||
2,095 | 2,130 | ||||||
Less valuation allowance | (1,650 | ) | (1,817 | ) | |||
Total deferred tax assets, current portion, net | 445 | 313 | |||||
Noncurrent: | |||||||
Net operating loss carryforwards-U.S. and related states | 7,801 | 6,493 | |||||
Charitable contribution carryover | 47 | 31 | |||||
Capital loss carryover | 412 | 409 | |||||
Amortization of intangibles | 1,224 | 1,135 | |||||
Stock compensation expense related to nonqualified stock options | 1,377 | 2,034 | |||||
Research and experimentation tax credit | 966 | 1,873 | |||||
Alternative minimum tax credit | 298 | 298 | |||||
Accrued liabilities, not deducted until paid for tax purposes | 535 | 344 | |||||
12,660 | 12,617 | ||||||
Less valuation allowance | (10,144 | ) | (10,964 | ) | |||
Deferred tax assets, noncurrent portion, net | 2,516 | 1,653 | |||||
Deferred tax liabilities: | |||||||
Noncurrent | |||||||
Equipment, primarily due to differences in cost basis and depreciation methods | (2,663 | ) | (1,667 | ) | |||
Long-lived intangible assets | (1,218 | ) | (874 | ) | |||
Total deferred tax liabilities, noncurrent portion, net | $ | (1,365 | ) | $ | (888 | ) | |
F-25
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
An income tax benefit of $1.4 million, $0.7 million and $0.5 million related to the exercise of stock options for the years ended December 31, 2013, 2012 and 2011, respectively, will be added to other paid-in capital if, and when, the tax benefit is realized.
As of December 31, 2013, the Company has unrestricted United States federal net operating loss carryforwards of approximately $32.7 million to reduce future taxable income, which expire primarily from 2018 through 2033. The Company also has capital loss carryforwards of $1.1 million that expire in 2015 and 2016.
An alternative minimum tax credit carryforward of approximately $0.3 million is available to offset future regular tax liabilities and has no expiration date. For alternative minimum tax purposes, the Company has unrestricted net operating loss carryforwards for United States federal income tax purposes of approximately $32.9 million.
The Company also has research and experimentation tax credit carryforwards for federal income tax purposes at December 31, 2013 of approximately $1.2 million, which are available to reduce future federal income taxes, if any, and expire at varying dates through 2033.
The Company intends to indefinitely reinvest earnings from subsidiaries treated as foreign corporations for U.S. tax purposes.
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The Company’s ability to realize the benefit of its deferred tax assets in future periods will depend on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Due to the Company’s history of losses and its planned near-term investments in its growth, the Company has recorded a full valuation allowance against substantially all of its gross deferred tax assets including its U.S. net operating losses. The Company will continue to assess the need for a valuation allowance in future periods and 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. In the event there is a change in circumstances in the future which would affect the utilization of the Company’s deferred tax assets, the tax provision in that period would be adjusted by the amount of the assets then deemed to be realizable.
ASC 740, Income Taxes, requires reporting of taxes based on tax positions which meet a more-likely-than-not standard and which are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits.
As of December 31, 2013, the Company classified approximately $0.3 million of its credit carryforwards as uncertain. This amount is reported as a reduction of the Company’s deferred tax asset. There were no changes to the Company's uncertain tax positions in 2013. The Company classifies interest and penalties expense related to income tax liabilities as an income tax expense. There are no significant interest and penalties recognized in the statement of operations or accrued on the balance sheet.
The Company files tax returns in the U.S., Puerto Rico, Canada, the Netherlands, Germany and Austria. The tax years 2009 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject. The IRS completed a corporate income tax audit during 2012 for the Company’s 2009 and 2010 tax years. No adjustments were made as a result of the audit.
F-26
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10 — NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding (excluding shares of restricted stock). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted net (loss) income per share is computed in a manner consistent with that of basic net (loss) 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.
Diluted net loss per share was the same as basic net loss per share for the year ended December 31, 2013, as shares issuable upon the exercise of stock options and the vesting of restricted stock were anti-dilutive because of the net loss for that period. As a result, the stock options and restricted stock outstanding representing 2.1 million weighted average shares for the year ended December 31, 2013 were excluded from the diluted net loss per share calculation because their inclusion would have been anti-dilutive.
For the years ended December 31, 2012 and 2011, a weighted average of 0.6 million and 2.1 million stock options, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
A summary of the net (loss) income per share calculation is shown below for the periods indicated:
2013 | 2012 | 2011 | |||||||||
Net (loss) income (in thousands) | $ | (370 | ) | $ | 2,226 | $ | 894 | ||||
Common shares outstanding: | |||||||||||
Historical common shares outstanding at beginning of year | 34,839,131 | 33,883,378 | 33,136,732 | ||||||||
Weighted average common shares issued | 4,101,413 | 493,469 | 321,555 | ||||||||
Weighted average common shares outstanding-basic | 38,940,544 | 34,376,847 | 33,458,287 | ||||||||
Effect of dilution from stock options | — | 1,390,123 | 911,837 | ||||||||
Weighted average common shares outstanding-diluted | 38,940,544 | 35,766,970 | 34,370,124 | ||||||||
Net (loss) income per share, basic | $ | (0.01 | ) | $ | 0.06 | $ | 0.03 | ||||
Net (loss) income per share, diluted | $ | (0.01 | ) | $ | 0.06 | $ | 0.03 | ||||
NOTE 11 — CONCENTRATIONS OF CREDIT RISK
The Company’s investment policy is designed to limit the Company’s exposure to concentrations of credit risk.
The Company’s accounts receivable are due from a variety of health care organizations and distributors throughout the United States, Europe, the Middle East, Latin America and Asia. No single customer represented more than 10% of revenue or accounts receivable for any period. The Company provides for uncollectible amounts upon recognition of revenue and when specific credit problems arise. Management’s estimates for uncollectible amounts have been adequate during historical periods, and management believes that all significant credit risks have been identified at December 31, 2013. The Company has not entered into any hedging transactions nor any transactions involving financial derivatives.
F-27
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 12 — SEGMENT AND GEOGRAPHIC 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 operating 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 product lines, 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 operating segment is discussed below.
(a) U.S. Medical
Products offered by this segment include single-use medical devices used in minimally invasive procedures within the cardiovascular system, including fiber-optic devices and 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 FDA. At December 31, 2013, 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 December 31, 2013, 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 within the International Medical segment.
Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $7.6 million, $7.5 million and $6.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation.
(b) 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 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 based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.
F-28
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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):
2013 | 2012 | 2011 | |||||||||
Revenue: | |||||||||||
U.S. Medical: | |||||||||||
Disposable products | $ | 114,976 | $ | 103,218 | $ | 90,849 | |||||
Service and other, net of allowance for sales returns | 9,833 | 9,081 | 8,719 | ||||||||
Equipment | 5,317 | 5,137 | 6,365 | ||||||||
Subtotal | 130,126 | 117,436 | 105,933 | ||||||||
International Medical: | |||||||||||
Disposable products | 23,143 | 19,304 | 17,895 | ||||||||
Service and other, net of allowance for sales returns | 1,579 | 1,358 | 1,403 | ||||||||
Equipment | 3,963 | 2,187 | 2,056 | ||||||||
Subtotal | 28,685 | 22,849 | 21,354 | ||||||||
Total revenue | $ | 158,811 | $ | 140,285 | $ | 127,287 | |||||
U.S. Medical | International Medical | Total | |||||||||
2013 | |||||||||||
Interest income | $ | 61 | $ | — | $ | 61 | |||||
Interest expense | 58 | — | 58 | ||||||||
Depreciation and amortization expense | 9,217 | 1,393 | 10,610 | ||||||||
Income tax expense | 402 | 378 | 780 | ||||||||
Segment operating (loss) income | (1,276 | ) | 1,670 | 394 | |||||||
Segment net (loss) income | (1,666 | ) | 1,296 | (370 | ) | ||||||
Capital expenditures | 4,406 | 214 | 4,620 | ||||||||
Segment assets | $ | 198,639 | $ | 18,518 | $ | 217,157 | |||||
U.S. Medical | International Medical | Total | |||||||||
2012 | |||||||||||
Interest income | $ | 70 | $ | 1 | $ | 71 | |||||
Interest expense | 63 | — | 63 | ||||||||
Depreciation and amortization expense | 8,705 | 1,178 | 9,883 | ||||||||
Income tax expense | 414 | 320 | 734 | ||||||||
Segment operating income | 1,037 | 1,910 | 2,947 | ||||||||
Segment net income | 656 | 1,570 | 2,226 | ||||||||
Capital expenditures | 3,063 | 16 | 3,079 | ||||||||
Segment assets | $ | 95,181 | $ | 15,588 | $ | 110,769 | |||||
F-29
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
U.S. Medical | International Medical | Total | |||||||||
2011 | |||||||||||
Interest income | $ | 139 | $ | 2 | $ | 141 | |||||
Interest expense | 59 | 231 | 290 | ||||||||
Depreciation and amortization expense | 8,801 | 1,161 | 9,962 | ||||||||
Income tax expense (benefit) | 431 | (200 | ) | 231 | |||||||
Segment operating income | 647 | 639 | 1,286 | ||||||||
Segment net income | 347 | 547 | 894 | ||||||||
Capital expenditures | 2,480 | 181 | 2,661 | ||||||||
Segment assets | $ | 92,446 | $ | 16,590 | $ | 109,036 | |||||
In 2013, 2012 and 2011, no individual customer represented 10% or more of consolidated revenue. There were no individual countries, other than the United States, that represented at least 10% of consolidated revenue in 2013, 2012 or 2011. Long-lived assets, other than financial instruments and deferred tax assets, located in foreign countries are concentrated in Europe, and totaled $11.9 million and $10.6 million as of December 31, 2013 and 2012, respectively.
Revenue by Product Line
For the years ended December 31, | |||||||||||
(in thousands) | 2013 | 2012 | 2011 | ||||||||
Revenue | |||||||||||
Disposable products revenue: | |||||||||||
Vascular intervention | $ | 75,601 | $ | 67,336 | $ | 62,264 | |||||
Lead management | 62,518 | 55,186 | 46,480 | ||||||||
Total disposable products revenue | 138,119 | 122,522 | 108,744 | ||||||||
Service and other, net of allowance for sales returns | 11,412 | 10,439 | 10,122 | ||||||||
Equipment | 9,280 | 7,324 | 8,421 | ||||||||
Total revenue | $ | 158,811 | $ | 140,285 | $ | 127,287 | |||||
NOTE 13 — LEASES
The Company leases office space, furniture, vehicles and equipment under noncancelable operating leases with initial terms that expire at various dates through 2023.
The future minimum payments under noncancelable operating leases as of December 31, 2013, were as follows (in thousands):
F-30
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Operating Leases | |||
Years ending December 31: | |||
2014 | $ | 1,889 | |
2015 | 1,743 | ||
2016 | 1,494 | ||
2017 | 1,512 | ||
2018 | 1,519 | ||
Thereafter | 7,613 | ||
Total minimum lease payments | $ | 15,770 | |
Rent expense under operating leases totaled approximately $2.4 million, $1.9 million, and $1.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.
In 2013, the Company began occupying and paying rent for an additional 20,000 square feet of office space adjacent to the Company’s current headquarters in order to expand its facilities. The leases for both buildings comprising the Company’s headquarters run concurrently through September 2023. The annual base rent of the combined facilities is approximately $1.3 million per year, subject to annual increases of 3 - 4% each year. The Company records the rent expense on a straight-line basis over the term of the lease.
NOTE 14 — DEBT — LINE OF CREDIT
On February 25, 2011, the Company 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. In February 2014, the Company renewed the line of credit for an additional three-year term under substantially the same terms. Under the terms of the Credit Agreement, the Company may borrow under the revolving line of credit subject to borrowing base limitations. These limitations allow the Company 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%, or 3.5% at December 31, 2013. The margins on the base interest rates are subject to reduction if the Company achieves certain annual net income levels. Accrued interest on any outstanding balance under the revolving line is payable monthly in arrears. The Company’s borrowing base, which represents the amount the Company can borrow under the revolving line of credit, was $12.2 million as of December 31, 2013.
The revolving line of credit is secured by a first priority security interest in substantially all of the Company’s assets. The Credit Agreement requires the Company to maintain a minimum of $10.0 million cash and investments at Wells Fargo and requires a lockbox arrangement. The Company is 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, the Company will be subject to certain financial covenants including rolling 12-month adjusted EBITDA and minimum book net worth covenants.
F-31
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 filing, the Company 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 year ended December 31, 2013.
NOTE 15 — SETTLEMENT COSTS—LICENSE AGREEMENT DISPUTE
In January 2012, the Company entered into a Termination and Mutual Release with Medtronic, Inc. (Medtronic). The Termination Agreement terminated a License Agreement between the Company and Medtronic dated February 28, 1997 (the License Agreement). In 2011, the parties disputed whether royalties were owed under the License Agreement. Under the Termination Agreement, the Company paid to Medtronic $3.0 million in January 2012 in settlement of all obligations under the License Agreement, and neither party has any further rights or obligations under the License Agreement, including certain Medtronic rights that if exercised would have been unfavorable to the Company. The Termination Agreement also includes a mutual release under which each of the Company and Medtronic releases the other from all claims, whether known or unknown, arising under the License Agreement. The Company had accrued royalty expenses in the amount of $1.2 million related to the License Agreement prior to the settlement; therefore, the Company recorded $1.8 million as settlement costs—license agreement dispute in the Company’s financial statements for the quarter ended December 31, 2011, because the underlying cause of the dispute and likelihood of a settlement to resolve such dispute existed as of December 31, 2011.
The patents underlying the License Agreement were scheduled to expire in October 2013 and October 2014 in the U.S. and select foreign jurisdictions, respectively. Royalty expenses paid or accrued under the License Agreement for the year ended December 31, 2011 were approximately $1.5 million. Royalty expenses have not been incurred subsequent to the effective date of the Termination Agreement.
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Indemnification of Former Officer
The Company is obligated to indemnify its present and former directors and officers 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 for those proceedings.
The Company has an indemnification obligation with one former officer charged in connection with a previous federal investigation of the Company. In February 2012, a trial resulted in the acquittal of the 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, the defendant filed a notice of appeal. The Company paid its indemnification obligations through the trial during 2012. In January 2014, the appellate court upheld the conviction on the one charge. In February 2014, the appellate court denied defendant’s motion for a rehearing. Additional
F-32
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
expenses may be incurred in future periods depending upon the success or failure of any further appeal to the U.S. Supreme Court, particularly if a successful appeal 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, were 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 claimed an interest in royalties payable under the license and sought 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 Dutch District 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 entitled Mr. Fox to a new trial on the merits, though still taking into evidence the record already in the Dutch court system. A hearing on the merits of the appeal occurred in November 2012. In September 2013, the Dutch Court of Appeals ruled in the Company’s favor and upheld the ruling of the Dutch District Court. The Court of Appeals also awarded the Company a nominal amount as the prevailing party in the appeal. Each party had until December 10, 2013 to file a cassation complaint (appeal) to the Supreme Court of The Netherlands. Neither party filed a cassation complaint.
In May 2011, the Company was served with a lawsuit that named 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 claimed royalties on a license agreement, certain rights to which were allegedly transferred to her, which claims were similar to the claims of Mr. Fox in his litigation. Ms. Sopkin claimed damages of approximately $2 million and also claimed interest on that amount from January 1, 2011. The proceedings formally commenced in July 2011, and a hearing on the claims was held in September 2012. In October 2012, the Dutch District Court rejected Ms. Sopkin’s claims for damages in their entirety and awarded the Company a nominal amount as attorney’s fees. In January 2013, Ms. Sopkin served the Company with a notice of her intent to appeal to the Dutch Court of Appeals. Ms. Sopkin had until January 14, 2014 to file her appellate papers with the Dutch Court of Appeals. She did not file such papers.
The Company has no amounts accrued for the Fox or Sopkin lawsuits.
Cardiomedica
The Company was engaged in a dispute from 1999 until 2011 with Cardiomedica S.p.A. (Cardiomedica), an Italian company, over the existence of a distribution agreement between Cardiomedica and the Company. In
F-33
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2009, a Dutch District Court issued a ruling in favor of Cardiomedica, requiring the Company to pay $0.6 million, which ruling Cardiomedica appealed. In September 2011, the Dutch Court of Appeals issued a ruling in favor of Cardiomedica, requiring the Company to pay to Cardiomedica an additional $0.6 million in damages plus $0.2 million in interest. The Company paid and expensed this amount in September 2011.
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.
NOTE 17 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2013 | 2012 | ||||||||||||||||||||||||||||||
Q1(1) | Q2(1) | Q3(1) | Q4(2) | Q1 | Q2 | Q3 | Q4(3) | ||||||||||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Net sales | $ | 37,675 | $ | 39,453 | $ | 39,763 | $ | 41,920 | $ | 33,269 | $ | 35,035 | $ | 35,230 | $ | 36,751 | |||||||||||||||
Gross profit | 27,356 | 28,828 | 29,710 | 31,561 | 24,301 | 25,515 | 25,606 | 26,936 | |||||||||||||||||||||||
Net (loss) income | (959 | ) | (728 | ) | 434 | 883 | 12 | 636 | 905 | 673 | |||||||||||||||||||||
Net (loss) income per share (4): | |||||||||||||||||||||||||||||||
Basic | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.01 | $ | 0.02 | $ | 0.00 | $ | 0.02 | $ | 0.03 | $ | 0.02 | |||||||||||||
Diluted | $ | (0.03 | ) | $ | (0.02 | ) | $ | 0.01 | $ | 0.02 | $ | 0.00 | $ | 0.02 | $ | 0.03 | $ | 0.02 | |||||||||||||
(1) | During each of the first, second and third quarters of 2013, the Company incurred $0.5 million of medical device excise tax, $0.2 million in contingent consideration expense, and $0.2 million in acquisition-related intangible asset amortization, respectively, expenses which were not incurred in 2012. |
(2) | During the fourth quarter of 2013, the Company incurred $0.6 million of medical device excise tax, $0.2 million in contingent consideration expense, and $0.2 million in acquisition-related intangible asset amortization. In addition, during the fourth quarter of 2013, the Company recorded an intangible asset impairment of $4.5 million and an adjustment to the contingent consideration liability of $5.2 million. For additional discussion, see Notes 7 and 8. |
(3) | During the fourth quarter of 2012, the Company incurred $0.3 million in legal and other costs related to the acquisition of certain products from Upstream. For additional discussion, see Note 7. |
(4) | The sum of the quarterly net income per share amounts may not total to each full year amount because these computations are made independently for each quarter and for the full year, and take into account the weighted average number of common stock equivalent shares outstanding for each period. |
F-34
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Description | Balance at Beginning of Year | Additions Charged (Credited) to Revenue, Costs or Expenses | Deductions(1) | Balance at End of Year | |||||||||||
(In thousands) | |||||||||||||||
Year ended December 31, 2013: | |||||||||||||||
Allowance for doubtful accounts and sales returns | $ | 589 | $ | 1,153 | $ | 960 | $ | 782 | |||||||
Inventory reserves | 914 | 213 | 209 | 918 | |||||||||||
Valuation allowance for deferred tax assets | 12,781 | (987 | ) | — | 11,794 | ||||||||||
Year ended December 31, 2012: | |||||||||||||||
Allowance for doubtful accounts and sales returns | 602 | 959 | 972 | 589 | |||||||||||
Inventory reserves | 925 | 156 | 167 | 914 | |||||||||||
Valuation allowance for deferred tax assets | 14,022 | (1,241 | ) | — | 12,781 | ||||||||||
Year ended December 31, 2011: | |||||||||||||||
Allowance for doubtful accounts and sales returns | $ | 790 | $ | 765 | $ | 953 | $ | 602 | |||||||
Inventory reserves | 779 | 534 | 388 | 925 | |||||||||||
Valuation allowance for deferred tax assets | 18,412 | (1,973 | ) | 2,417 | 14,022 | ||||||||||
(1) | Deductions represent receivables written-off and credits granted for customer returns, inventory write-offs, and reductions in the valuation allowance for deferred tax assets due primarily to the use or expiration of net operating losses. |
F-35
EXHIBIT INDEX
Exhibit Number | Description | |
23.1* | Consent of Independent Registered Public Accounting Firm (KPMG LLP). | |
23.2* | Consent of Independent Registered Public Accounting Firm (EKS&H LLLP). | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31.2* | Rule 13a-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. | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
____________
* Filed herewith
** Furnished herewith