Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - SPECTRANETICS CORP | ex32206302017.htm |
| EX-32.1 - EXHIBIT 32.1 - SPECTRANETICS CORP | ex32106302017.htm |
| EX-31.2 - EXHIBIT 31.2 - SPECTRANETICS CORP | ex31206302017.htm |
| EX-31.1 - EXHIBIT 31.1 - SPECTRANETICS CORP | ex31106302017.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
June 30, 2017
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-19711
The Spectranetics Corporation
(Exact name of Registrant as specified in its charter)
Delaware | 84-0997049 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9965 Federal Drive
Colorado Springs, Colorado 80921
(719) 633-8333
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company) | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
As of August 4, 2017, there were 44,045,716 outstanding shares of Common Stock.
TABLE OF CONTENTS
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2017 and December 31, 2016 | ||
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2017 and June 30, 2016 | ||
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and June 30, 2016 | ||
ii
Part I—FINANCIAL INFORMATION
Item 1. Financial Statements
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)
June 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 57,537 | $ | 57,237 | |||
Trade accounts receivable, less allowance for doubtful accounts and sales returns of $1,734 and $1,629, respectively | 47,434 | 43,565 | |||||
Inventories, net | 29,565 | 27,642 | |||||
Prepaid expenses and other current assets | 7,738 | 7,088 | |||||
Total current assets | 142,274 | 135,532 | |||||
Property and equipment, net | 46,268 | 44,827 | |||||
Goodwill | 149,803 | 148,811 | |||||
Other intangible assets, net | 92,391 | 98,229 | |||||
Other assets | 2,617 | 2,679 | |||||
Total assets | $ | 433,353 | $ | 430,078 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Borrowings under revolving line of credit | $ | 26,162 | $ | 24,712 | |||
Accounts payable | 6,537 | 6,230 | |||||
Accrued liabilities | 39,483 | 34,381 | |||||
Deferred revenue | 2,024 | 1,619 | |||||
Total current liabilities | 74,206 | 66,942 | |||||
Convertible senior notes, net of debt issuance costs | 225,617 | 225,095 | |||||
Term loan, net of debt issuance costs | 88,011 | 59,664 | |||||
Accrued liabilities, net of current portion | 1,656 | 1,688 | |||||
Deferred income taxes | 2,671 | 2,366 | |||||
Total liabilities | 392,161 | 355,755 | |||||
Commitments and contingencies (Note 9) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued | — | — | |||||
Common stock, $.001 par value; authorized 120,000,000 shares; issued and outstanding 43,896,489 and 43,303,298 shares, respectively | 44 | 43 | |||||
Additional paid-in capital | 341,810 | 332,701 | |||||
Accumulated other comprehensive loss | (4,809 | ) | (5,696 | ) | |||
Accumulated deficit | (295,853 | ) | (252,725 | ) | |||
Total stockholders’ equity | 41,192 | 74,323 | |||||
Total liabilities and stockholders’ equity | $ | 433,353 | $ | 430,078 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | $ | 74,714 | $ | 67,748 | $ | 144,394 | $ | 130,632 | |||||||
Cost of products sold | 18,482 | 16,983 | 36,533 | 33,065 | |||||||||||
Gross profit | 56,232 | 50,765 | 107,861 | 97,567 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, general and administrative | 45,549 | 40,643 | 91,205 | 81,432 | |||||||||||
Research, development and other technology | 19,901 | 17,657 | 37,751 | 33,994 | |||||||||||
Acquisition transaction, integration and legal costs | 9,157 | 500 | 9,344 | 792 | |||||||||||
Intangible asset amortization | 2,919 | 3,202 | 5,838 | 6,405 | |||||||||||
Contingent consideration expense | — | 67 | — | 167 | |||||||||||
Total operating expenses | 77,526 | 62,069 | 144,138 | 122,790 | |||||||||||
Operating loss | (21,294 | ) | (11,304 | ) | (36,277 | ) | (25,223 | ) | |||||||
Other expense: | |||||||||||||||
Interest expense | (3,598 | ) | (3,294 | ) | (7,007 | ) | (6,636 | ) | |||||||
Foreign currency transaction gain (loss) | 656 | (158 | ) | 773 | 17 | ||||||||||
Total other expense | (2,942 | ) | (3,452 | ) | (6,234 | ) | (6,619 | ) | |||||||
Loss before income tax expense | (24,236 | ) | (14,756 | ) | (42,511 | ) | (31,842 | ) | |||||||
Income tax expense | 368 | 150 | 617 | 355 | |||||||||||
Net loss | $ | (24,604 | ) | $ | (14,906 | ) | $ | (43,128 | ) | $ | (32,197 | ) | |||
Net loss per share — | |||||||||||||||
Basic and diluted | $ | (0.56 | ) | $ | (0.35 | ) | $ | (0.99 | ) | $ | (0.75 | ) | |||
Other comprehensive income (loss), net of tax | |||||||||||||||
Foreign currency translation adjustments | 704 | (3,231 | ) | 887 | (2,980 | ) | |||||||||
Comprehensive loss, net of tax | $ | (23,900 | ) | $ | (18,137 | ) | $ | (42,241 | ) | $ | (35,177 | ) | |||
Weighted average common shares outstanding — | |||||||||||||||
Basic and diluted | 43,734,418 | 42,804,453 | 43,613,473 | 42,750,888 | |||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (43,128 | ) | $ | (32,197 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 13,699 | 13,862 | |||||
Stock-based compensation expense | 7,589 | 6,609 | |||||
Excess tax benefit from stock option exercises | 1,075 | — | |||||
Amortization of debt issuance costs | 588 | 565 | |||||
Provision for excess and obsolete inventories | 777 | 345 | |||||
Contingent consideration expense | — | 167 | |||||
Deferred income taxes | 305 | 213 | |||||
Net change in operating assets and liabilities | (7,865 | ) | (3,881 | ) | |||
Net cash used in operating activities | (26,960 | ) | (14,317 | ) | |||
Cash flows from investing activities: | |||||||
Capital expenditures | (2,606 | ) | (2,734 | ) | |||
Net cash used in investing activities | (2,606 | ) | (2,734 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of term loan | 30,000 | — | |||||
Proceeds from (repayments on) line of credit, net | 1,450 | (5,000 | ) | ||||
Cash paid for debt issuance costs | (1,766 | ) | — | ||||
Proceeds from the exercise of stock options and employee stock purchase plan, net of tax withholdings on stock compensation awards | 446 | 1,850 | |||||
Payment of contingent consideration | (79 | ) | (88 | ) | |||
Net cash provided by (used in) financing activities | 30,051 | (3,238 | ) | ||||
Effect of exchange rate changes on cash | (185 | ) | 38 | ||||
Net increase (decrease) in cash and cash equivalents | 300 | (20,251 | ) | ||||
Cash and cash equivalents at beginning of period | 57,237 | 84,594 | |||||
Cash and cash equivalents at end of period | $ | 57,537 | $ | 64,343 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid for interest | $ | 6,316 | $ | 6,006 | |||
Cash paid for income taxes | $ | 243 | $ | 364 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — GENERAL
The accompanying condensed consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly-owned subsidiaries. These entities are collectively referred to as the “Company.” All intercompany balances and transactions have been eliminated in consolidation.
The Company develops, manufactures, markets, and distributes medical devices used in minimally invasive procedures within the cardiovascular system. The Company’s devices and products are available in over 65 countries and are used to cross, prepare, and treat arterial blockages in the legs and heart and to remove and support the removal of pacemaker and defibrillator cardiac leads. In June 2014, the Company acquired AngioScore, Inc. (“AngioScore”), a leading developer, manufacturer and marketer of cardiovascular, specialty balloon catheters, and in January 2015, the Company acquired Stellarex™ (“Stellarex”) drug-coated balloon (“DCB”) assets from Covidien LP.
The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management must make certain estimates, judgments, and assumptions based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment; intangible assets and goodwill; valuation allowances for receivables, inventories, sales returns and deferred income tax assets; 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.
The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.
Pending Acquisition by Philips
On June 27, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Philips Holding USA Inc. (“Parent”), and HealthTech Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides for the acquisition of the Company by Parent in a two-step all cash transaction, consisting of a tender offer (the “Offer”) followed by a subsequent back-end merger (the “Merger”, and collectively with the Offer the “Philips Transaction”). The Merger Agreement was approved by the Company’s Board of Directors (the “Board”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Parent caused Merger Sub to commence the Offer for all of the Company’s outstanding shares of common stock (the “Shares”), at a purchase price of $38.50 per Share, net to the seller in cash, without interest and subject to any required withholding of taxes. The Offer commenced on July 12, 2017 and will remain open until 12:00 midnight, New York City time, on August 9, 2017 (one minute after 11:59 P.M., New York City time, on August 8, 2017), unless the Offer is extended. If at the scheduled expiration time of the Offer any of the conditions to the Offer have not been satisfied or waived by Parent and Merger Sub, Parent will cause Merger Sub to extend the Offer to permit the satisfaction of all Offer conditions. Closing of the Philips Transaction is subject to customary conditions.
During the three months ended June 30, 2017, the Company incurred approximately $9.0 million of acquisition transaction, integration and legal costs related to the Philips Transaction.
4
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under ASU 2017-04, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance becomes effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted, and applied prospectively. The Company is currently evaluating this guidance and its impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance becomes effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company is in the process of determining the timing of adoption and assessing the impact of ASU 2016-16 on its consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is in the process of determining the timing of adoption and assessing the impact of ASU 2016-15 on its consolidated statements of cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017. The adoption resulted in an increase to the net operating loss carryforward deferred tax asset and a corresponding valuation allowance of $9.6 million attributable to excess tax benefits not previously recognized as they did not reduce income taxes payable. The Company historically accounted for excess tax benefits on the statement of cash flows as a financing activity. Upon adoption of this standard, excess tax benefits for the three and six months ended June 30, 2016 totaling $0.6 million and $1.1 million, respectively, are classified along with other income tax cash flows as an operating activity. The Company has elected to adopt this portion of the standard on a prospective basis beginning in 2017. Prior periods have not been adjusted. The presentation requirement for cash flows related to taxes paid for withheld shares had no impact on any of the periods presented in the condensed consolidated statement of cash flows since such payments have historically been presented as a financing activity. The Company elected to continue to estimate forfeitures over the service period of the award, rather than as they occur.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize on its balance sheet the assets and liabilities for the rights and obligations created by leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. Lessor accounting is largely unchanged from previous GAAP. However, changes were made to align the guidance with the lessor guidance and the new revenue recognition guidance under ASU 2014-09 referenced below. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is in the process of determining the timing and method of adoption as well as assessing the impact of ASU 2016-02 on its consolidated financial statements.
5
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 contains a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 provides for amendments to ASU 2014-09, reducing the complexity when applying the guidance for identifying performance obligations and improving the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 provides for amendments to ASU 2014-09, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy U.S. GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which makes minor corrections or minor improvements to ASU 2014-09 that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Under ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, issued in August 2015, these amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, and either the full retrospective method or the modified retrospective transition method is allowed. The Company will adopt the guidance for the fiscal year beginning after December 15, 2017 and apply the modified retrospective method. The modified retrospective method requires the disclosure of the difference between revenue and costs that would have been recognized under U.S. GAAP in the current period and the amounts that are recognized under the new standard. While a significant portion of the Company’s revenue will continue to be in the scope of the leasing guidance, the Company is in the process of reviewing its sales contracts to identify any other changes as a result of the new guidance. The Company expects to complete its analysis by the end of the third quarter of 2017 and does not expect significant changes. The Company is not aware of other significant matters that will result from its adoption of the revenue standard.
The Company has considered all other recently issued accounting pronouncements and does not believe they are of significance, or potential significance, to the Company.
6
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventories
Inventories, net, consisted of the following (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Raw materials | $ | 11,305 | $ | 11,070 | |||
Work in process | 5,396 | 4,787 | |||||
Finished goods | 12,864 | 11,785 | |||||
$ | 29,565 | $ | 27,642 | ||||
Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Equipment held for rental or loan | $ | 68,248 | $ | 62,972 | |||
Manufacturing equipment and computers | 42,798 | 40,656 | |||||
Leasehold improvements | 10,835 | 10,453 | |||||
Furniture and fixtures | 5,252 | 5,099 | |||||
Building and improvements | 1,306 | 1,306 | |||||
Land | 270 | 270 | |||||
Less: accumulated depreciation | (82,441 | ) | (75,929 | ) | |||
$ | 46,268 | $ | 44,827 | ||||
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Accrued payroll and employee-related expenses | $ | 19,070 | $ | 22,890 | |||
Accrued clinical study expense | 2,546 | 2,723 | |||||
Accrued interest | 1,171 | 1,016 | |||||
Deferred rent | 1,426 | 1,443 | |||||
Accrued royalties | 1,539 | 1,313 | |||||
Accrued legal costs | 910 | 847 | |||||
Accrued sales and income taxes | 943 | 1,208 | |||||
Contingent consideration | 200 | 279 | |||||
Other accrued expenses (1) | 13,334 | 4,350 | |||||
Total accrued liabilities | 41,139 | 36,069 | |||||
Less: long-term portion | (1,656 | ) | (1,688 | ) | |||
Accrued liabilities, current portion | $ | 39,483 | $ | 34,381 | |||
(1) Included in this balance is approximately $8.9 million of accrued external professional services expenses related to the pending Philips Transaction described in Note 1.
7
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2017 was as follows (in thousands).
U.S. Medical | International Medical | Total | |||||||||
Balance as of December 31, 2016 | $ | 130,410 | $ | 18,401 | $ | 148,811 | |||||
Impact of changes in foreign currency and other | — | 992 | 992 | ||||||||
Balance as of June 30, 2017 | $ | 130,410 | $ | 19,393 | $ | 149,803 | |||||
Goodwill is allocated to the Company’s reporting units based on an analysis of both the relative historical and expected benefits. Goodwill denominated in foreign currencies within International Medical is remeasured in U.S. dollars at the applicable period-end exchange rate. There have been no events or circumstances since the last analysis as of December 31, 2016 to indicate that the amount of goodwill may not be recoverable.
Acquired intangible assets consisted of the following (in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Acquired as part of Stellarex acquisition: (1) | |||||||
In-process research and development | $ | 13,680 | $ | 13,680 | |||
Technology | 9,000 | 9,000 | |||||
Trademark and trade names | 400 | 400 | |||||
Transition services agreement | 530 | 530 | |||||
Acquired as part of AngioScore acquisition: (2) | |||||||
Technology | 73,510 | 73,510 | |||||
Customer relationships | 23,320 | 23,320 | |||||
Trademark and trade names | 4,380 | 4,380 | |||||
In-process research and development | 1,254 | 1,254 | |||||
Distributor relationships | 1,940 | 1,940 | |||||
Non-compete agreements | 580 | 580 | |||||
Acquired as part of Upstream acquisition (3) | |||||||
Technology | 2,172 | 2,172 | |||||
Non-compete agreement | 200 | 200 | |||||
Patents | 530 | 530 | |||||
Less: accumulated amortization | (39,105 | ) | (33,267 | ) | |||
$ | 92,391 | $ | 98,229 | ||||
___________________
(1) | In January 2015, the Company acquired Stellarex DCB assets, which included, among other things, the intellectual property, machinery and equipment, and inventories used in connection with the Stellarex DCB catheter. |
(2) | In June 2014, the Company acquired AngioScore. |
(3) | In January 2013, the Company acquired certain product lines from Upstream Peripheral Technologies Ltd. (“Upstream”). As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements. |
8
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 — DEBT
The following table summarizes the Company’s total outstanding debt as of June 30, 2017 and December 31, 2016 and significant terms of the Company’s borrowing arrangements (in thousands):
As of | |||||||||||
June 30, 2017 | December 31, 2016 | Maturity Date | Weighted Average Interest Rate | ||||||||
Convertible Senior Notes | $ | 230,000 | $ | 230,000 | June 1, 2034 | 2.625% | |||||
Term Loan Facility | 90,000 | 60,000 | March 1, 2021 | (1) | |||||||
Revolving Loan Facility | 26,162 | 24,712 | March 1, 2021 | (1) | |||||||
346,162 | 314,712 | ||||||||||
Less debt issuance cost | (6,372 | ) | (5,241 | ) | |||||||
Total | $ | 339,790 | $ | 309,471 | |||||||
(1) | The interest rates on the Term Loan Facility and Revolving Loan Facility are described below. |
Convertible Notes
In June 2014, the Company sold $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (the “Notes”). Interest is paid semi-annually in arrears on December 1 and June 1 of each year. The Notes will mature on June 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Notes. The initial conversion rate of the Notes is 31.9020 shares of the Company’s common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $31.35 per share). The conversion rate is subject to adjustment upon the occurrence of certain events specified in the indenture governing the Notes. Holders may surrender their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date. On or after June 5, 2018 and prior to June 5, 2021, the Company may redeem any or all of the Notes in cash if the closing price of the Company’s common stock exceeds 130% of the conversion price then in effect for a specified number of days, and on or after June 5, 2021, the Company may redeem the Notes in cash without any such condition. In such case, the redemption price for the Notes will equal 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Holders of the Notes may require the Company to repurchase all or a portion of their Notes on each of June 5, 2021, June 5, 2024 and June 5, 2029, or following a fundamental change (as defined in the indenture governing the Notes), in each case, at a repurchase price in cash equal to 100% of the principal amount of the Notes being repurchased plus accrued and unpaid interest to, but excluding, the date of repurchase.
The Notes are subject to customary events of default, which may result in the acceleration of the maturity of the Notes.
The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with any of the Company’s unsecured indebtedness that is not so subordinated, are effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.
The Company received $222.5 million from the issuance of the Notes, net of $7.5 million of debt issuance costs incurred. The debt issuance costs are being amortized over a seven year period using the effective interest method. The Company used all of the net proceeds to fund the acquisition of AngioScore.
9
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Term Loan Facility and Revolving Loan Facility
On June 9, 2017, the Company entered into (i) an amended and restated term credit and security agreement (as amended, the “Term Loan Credit Agreement”), dated June 9, 2017 (the “Closing Date”), by and among the Company and AngioScore, as borrowers (jointly, the “Borrowers”), MidCap Financial Trust, as administrative agent (the “Term Administrative Agent”) and as a lender, and the other lenders party thereto and (ii) an amended and restated revolving credit and security agreement (as amended, the “Revolving Loan Credit Agreement,” and together with the Term Loan Credit Agreement, the “Credit Agreements”), dated the Closing Date, by and among the Borrowers, MidCap Funding IV Trust, as administrative agent (the “Revolving Administrative Agent” and, together with the Term Administrative Agent, the “Agents”) and the lenders party thereto. The Credit Agreements replace the Term Credit and Security Agreement (the “Original Term Loan Credit Agreement”) and the Revolving Credit and Security Agreement (the “Original Revolving Loan Credit Agreement” and, together with the Original Term Loan Credit Agreement, the “Original Credit Agreements”), each dated December 7, 2015, by and among the Borrowers, MidCap Financial Trust, as administrative agent and the other lenders party thereto. The Term Loan Credit Agreement provides for a $90 million term loan facility (the “Term Loan Facility”) and the Revolving Loan Credit Agreement provides for a $50 million revolving loan facility (the “Revolving Loan Facility” and together with the “Term Loan Facility”, the “Facilities”). Both Facilities expire on March 1, 2021. The Revolving Loan Facility may be increased to up to $70 million at the Company’s request and with approval of the Revolving Administrative Agent and the Revolving Loan Facility lenders. The obligations of the Borrowers under the Credit Agreements are secured by a lien on substantially all of the assets of the Borrowers.
The Term Loan Facility bears interest at the LIBOR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of 7.15% per annum; provided that the applicable margin will be reduced to 5.95% if the Company’s EBITDA (as defined in the Term Loan Credit Agreement) is equal to or greater than $12,500,000 for a specified prior period and certain other conditions are met. The Borrowers may prepay all or a portion of the Term Loan Facility subject to certain conditions and a prepayment fee, as specified in the Credit Agreements. The Term Loan Facility is subject to an exit fee of 4.0% of the amount advanced under the Term Loan Facility. Interest-only payments are due during the first 24 months of the Term Loan Facility, with principal payments beginning thereafter in equal monthly installments until maturity.
The Company may borrow under the Revolving Loan Facility subject to borrowing base limitations, which allow the Company to borrow based on the value of eligible accounts receivable and inventory balances. As of June 30, 2017, the borrowing base was $41.6 million, based on the Company’s accounts receivable and inventory balances. Amounts drawn under the Revolving Loan Facility bear interest at the LIBOR Rate (as defined in the Revolving Loan Credit Agreement) plus 4.45% per annum, while the undrawn portion is subject to an unused line fee of 0.50% per annum. The Revolving Loan Facility is subject to a minimum balance, such that the Borrowers pay the greater of (i) interest accrued on the actual amount drawn under the Revolving Loan Facility and (ii) interest accrued on 50% of the average Borrowing Base (as defined in the Revolving Loan Credit Agreement). The Borrowers may prepay and re-borrow amounts borrowed under the revolving line of credit without penalty.
The Credit Agreements require the Borrowers to maintain minimum cash and cash equivalents of no less than $10 million, maintain net revenue (as defined in the Credit Agreements) in excess of certain specified minimum thresholds and make certain customary representations and affirmative covenants. These agreements also contain certain restrictive covenants that limit and in some circumstances prohibit the Company’s ability to, among other things, incur additional debt, sell, lease or transfer its assets, pay dividends on the Company’s common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase common stock, enter into transactions with affiliates and enter into certain merger, consolidation or other reorganization transactions. The Company was in compliance with its debt covenants as of June 30, 2017.
The Credit Agreements also contain customary events of default, including payment and covenant defaults, breaches of certain representations and warranties, cross defaults to certain material indebtedness, certain events of bankruptcy and insolvency, certain events under ERISA, material judgments, breaches of material contracts and events resulting in a material adverse effect. Upon the occurrence and continuation of an event of default, amounts due under the Credit Agreements may be accelerated. The Company had no events of default as of June 30, 2017.
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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Because the Term Loan Credit Agreement’s present value does not vary by more than 10% to that of the remaining present value of the Original Term Loan Credit Agreement, the transaction is treated as a debt modification. Thus, fees related to the original lender of $1.7 million have been included in debt issuance costs while $0.0 million of third party legal fees have been expensed. As of June 30, 2017, the Term Loan Facility and Revolving Loan Facility had outstanding balances of $90.0 million and $26.2 million, respectively. At June 30, 2017, the interest rate on the Term Loan Facility was 8.20%, and the monthly weighted average interest rate on the Revolving Loan Facility was 5.50%.
NOTE 5 — STOCK-BASED COMPENSATION
The Company maintains equity plans that provide for the grant of options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock units (“PSUs”), dividend equivalents, cash incentive awards and other stock-based awards. Additionally, the Company maintains an Employee Stock Purchase Plan (“ESPP”) in which eligible employees can purchase common stock on specified dates at 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.
On January 13, 2017, the Compensation Committee of the Board approved the grant of PSU awards (the “2017 PSUs”) to the Company’s named executive officers and certain other employees pursuant to the Company’s 2016 Incentive Award Plan. The award agreement for the 2017 PSUs (the “2017 PSU Grant Form”) provides, among other things, that (i) each 2017 PSU that vests represents the right to receive one share of the Company’s common stock; (ii) the 2017 PSUs vest based on the Company’s achieving specified performance measurements over a performance period of three years, beginning January 1, 2017; (iii) the performance measurements include revenue and EBITDA, each as defined in the 2017 PSU Grant Form; (iv) threshold, target and maximum payout opportunities established for the 2017 PSUs will be used to calculate the number of shares that will be issuable when the award vests, which may range from 0% to 200% of the target amount; (v) any 2017 PSUs that are earned are scheduled to vest and be settled in shares of the Company’s common stock at the end of the performance period; (vi) all or a portion of the 2017 PSUs may vest following a change of control, a termination of service without cause or for good reason or a termination of service by reason of death or disability (each as described in greater detail in the 2017 PSU Grant Form); and (vii) except as provided above, any unvested 2017 PSUs will be forfeited upon a recipient’s termination of employment with the Company.
With respect to the 2017 PSUs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against the specified targets at the end of the three-year performance period as determined by the Compensation Committee of the Board. The Company estimates the fair value of the 2017 PSUs based on its closing stock price at the time of grant and the number of shares that will vest based on the probability of achieving such performance targets and records compensation expense over the performance period of the award. Over the performance period, the number of 2017 PSUs that will ultimately vest, the shares of common stock that will be issued and the related compensation expense is adjusted based upon the Company’s estimate of achieving such performance targets. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable 2017 PSU award agreement.
At June 30, 2017, there were 2.5 million additional shares available for future issuance under the Company’s incentive award plans, assuming issuance of common stock underlying (i) all outstanding PSUs granted in 2016 (the “2016 PSUs”) and the 2017 PSUs at target performance and (ii) the remaining unvested portion of the earned PSUs that were granted to certain of the Company’s officers in June 2014 and to the Company’s Chief Financial Officer in September 2015 upon commencement of her employment (the “2014 PSUs”) at a 97% payout. At June 30, 2017, there were 2.1 million additional shares available, assuming issuance of common stock underlying all outstanding 2016 PSUs and 2017 PSUs at maximum performance and the remaining unvested portion of the earned 2014 PSUs at a 97% payout. At June 30, 2017, there were approximately 0.8 million additional shares available for future issuance under the ESPP.
For the three months ended June 30, 2017 and 2016, amounts charged against income for share-based payment arrangements were $3.8 million and $3.2 million, respectively, and $7.6 million and $6.6 million for the six months ended
11
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017 and 2016, respectively. For the three months ended June 30, 2017 and 2016, amounts charged against income for compensation expense related to the ESPP were $0.3 million and $0.3 million, respectively, and for the six months ended June 30, 2017 and 2016 were $0.6 million and $0.7 million, respectively.
As of June 30, 2017, there was $25.0 million of total unrecognized compensation expense related to share-based compensation arrangements granted under the Company’s incentive award plans, using the Company’s current estimate of performance for the PSUs, which could be higher or lower in the future based on the actual achievement of performance targets.
The weighted average grant date fair value of options granted during the three months ended June 30, 2017 and 2016 were $12.64 and $7.51, respectively, and during the six months ended June 30, 2017 and 2016 were $12.26 and $6.57, respectively.
During the six months ended June 30, 2017, the Company made equity compensation grants consisting of 90,618 stock options, 325,703 RSUs, 33,460 RSAs and 125,565 PSUs.
NOTE 6 — NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss 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 per share is computed in a manner consistent with that of basic net loss 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, and the assumed conversion of shares under the Notes using the “if-converted” method.
Options to purchase common stock, the vesting of RSAs, RSUs and PSUs, and shares issuable upon conversion of the Notes are considered to be potentially dilutive common shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive for the three and six months ended June 30, 2017 and 2016 as a result of the net losses incurred in those periods. Therefore, diluted net loss per share was the same as basic net loss per share for the three and six months ended June 30, 2017 and 2016. Stock options, RSUs, restricted stock awards, PSUs, and shares issuable upon the conversion of the Notes outstanding at June 30, 2017 and 2016, which are excluded from the computation of diluted net loss per share for the three and six months ended June 30, 2017 and 2016, are shown in the table below:
Six Months Ended June 30, | |||||
2017 | 2016 | ||||
Options to purchase common stock | 2,844,797 | 3,317,312 | |||
Non-vested RSAs and RSUs | 534,373 | 389,636 | |||
Non-vested PSUs | 487,847 | 745,942 | |||
Shares issuable upon conversion of the Notes | 7,337,459 | 7,337,459 | |||
Potentially dilutive common shares | 11,204,476 | 11,790,349 | |||
12
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the net loss per share calculation is shown below for the periods indicated (in thousands, except share and per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net loss | $ | (24,604 | ) | $ | (14,906 | ) | $ | (43,128 | ) | $ | (32,197 | ) | |||
Common shares outstanding: | |||||||||||||||
Historical common shares outstanding at beginning of period (1) | 43,716,110 | 42,772,670 | 43,254,655 | 42,632,771 | |||||||||||
Weighted average common shares issued | 18,308 | 31,783 | 358,818 | 118,117 | |||||||||||
Weighted average common shares outstanding — basic and diluted | 43,734,418 | 42,804,453 | 43,613,473 | 42,750,888 | |||||||||||
Net loss per share — basic and diluted | $ | (0.56 | ) | $ | (0.35 | ) | $ | (0.99 | ) | $ | (0.75 | ) | |||
(1) | RSAs that are issued but contingent on a one year vesting period have been excluded from this balance. |
NOTE 7 — SEGMENT REPORTING
The Company operates in one distinct line of business consisting of developing, manufacturing, marketing, and distributing disposable products and a proprietary excimer laser system to treat certain vascular and coronary conditions.
Within this line of business, the Company has two operating segments, which are identified on a geographic basis: (1) U.S. Medical and (2) International Medical. U.S. Medical and International Medical offer substantially the same products and services but operate in different geographic regions, have different distribution networks, and different regulatory environments. The primary performance measure for the operating segments is revenue.
Additional information regarding each operating segment is discussed below.
U. S. Medical
Products offered by this segment include 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 U.S. Food and Drug Administration (“FDA”) and Health Canada. The Company’s products are used in multiple vascular procedures, including peripheral atherectomy, crossing arterial blockages, coronary atherectomy 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 also includes the corporate headquarters of the Company. All manufacturing, research and development, and corporate administrative functions are performed within this operating segment. For the three and six months ended June 30, 2017 and 2016, 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 within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $4.5 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, and $7.3 million and $6.8 million for the six months ended June 30, 2017 and 2016, respectively. Revenue is based upon transfer prices, which provide for intersegment profit eliminated upon consolidation.
13
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
International Medical
The International Medical segment serves Europe, the Middle East, Asia Pacific, Latin America, and Puerto Rico. Products offered by this segment are substantially the same as those offered by U.S. Medical, except that the AngioSculptX™ DCB product is available for sale in Europe and certain other international markets but is not yet approved for sale in the U.S. The Company is subject to product approvals from various international regulatory bodies. The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions.
Summary financial information relating to reportable segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue: | |||||||||||||||
U.S. Medical: | |||||||||||||||
Disposable products | $ | 59,138 | $ | 53,840 | $ | 115,016 | $ | 104,315 | |||||||
Laser, service, and other | 2,450 | 2,494 | 4,985 | 5,001 | |||||||||||
Subtotal | 61,588 | 56,334 | 120,001 | 109,316 | |||||||||||
International Medical: | |||||||||||||||
Disposable products | 11,550 | 10,145 | 21,153 | 18,678 | |||||||||||
Laser, service, and other | 1,576 | 1,269 | 3,240 | 2,638 | |||||||||||
Subtotal | 13,126 | 11,414 | 24,393 | 21,316 | |||||||||||
Total revenue | $ | 74,714 | $ | 67,748 | $ | 144,394 | $ | 130,632 | |||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Segment operating loss: | |||||||||||||||
U.S. Medical | $ | (20,387 | ) | $ | (9,849 | ) | $ | (33,492 | ) | $ | (22,177 | ) | |||
International Medical | (907 | ) | (1,455 | ) | (2,785 | ) | (3,046 | ) | |||||||
Total operating loss | $ | (21,294 | ) | $ | (11,304 | ) | $ | (36,277 | ) | $ | (25,223 | ) | |||
As of | |||||||
June 30, 2017 | December 31, 2016 | ||||||
Segment assets: | |||||||
U.S. Medical | $ | 392,989 | $ | 392,776 | |||
International Medical | 40,364 | 37,302 | |||||
Total assets | $ | 433,353 | $ | 430,078 | |||
For the three and six months ended June 30, 2017 and 2016, no individual customer represented 10% or more of consolidated revenue. No individual country, other than the United States, represented 10% or more of consolidated revenue for the three and six months ended June 30, 2017 or 2016.
14
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue by Product Line
Summary revenue information by product line is shown below (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | |||||||||||||||
Disposable products: | |||||||||||||||
Vascular Intervention | $ | 51,002 | $ | 46,218 | $ | 97,450 | $ | 88,130 | |||||||
Lead Management | 19,686 | 17,767 | 38,719 | 34,863 | |||||||||||
Total disposable products | 70,688 | 63,985 | 136,169 | 122,993 | |||||||||||
Laser, service, and other | 4,026 | 3,763 | 8,225 | 7,639 | |||||||||||
Total revenue | $ | 74,714 | $ | 67,748 | $ | 144,394 | $ | 130,632 | |||||||
NOTE 8 — INCOME TAXES
The Company recorded income tax expense of $0.4 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively, and $0.6 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively, consisting of current foreign and state income tax expense and deferred federal and state income tax expense. The Company’s deferred U.S. federal and state tax expense in 2017 primarily represents an increase in the deferred tax liability related to the difference between tax and book accounting for the portion of its goodwill that is tax-deductible, which is amortized over 15 years for tax purposes but not amortized for book purposes. Given its continuing tax losses, the Company does not expect to incur current U.S. federal tax expense or benefit against its pretax income during the year ending December 31, 2017.
The Company adopted ASU 2016-09 in the first quarter of 2017. The adoption resulted in an increase to the net operating loss carryforward deferred tax asset and a corresponding valuation allowance of $9.6 million attributable to excess tax benefits not previously recognized as they did not reduce income taxes payable. The cumulative adjustment was fully offset by a valuation allowance for the same amount; thus the net effect of both adjustments was zero.
As of December 31, 2016, the Company had gross deferred tax assets (“DTAs”) of approximately $106.9 million. The Company maintains a valuation allowance against substantially all of its DTAs, in excess of its nettable deferred tax liabilities, that it does not consider to meet the more-likely-than-not criteria for recognition. In assessing the realizability of DTAs, management considers whether it is more-likely-than-not that some portion or all of the DTAs will not be realized. The Company’s ability to realize the benefit of its DTAs in future periods will depend on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers 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 continues to record a valuation allowance against substantially all of its DTAs that are in excess of its deferred tax liabilities. 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 DTAs 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 DTAs, the tax provision in that period would be adjusted by the amount of the assets then deemed to be realizable.
15
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 — COMMITMENTS AND CONTINGENCIES
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 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. Otherwise, the Company expenses these costs as incurred. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight”. If the estimate of a probable loss is a range and no amount within the range is more likely than any other amount, then the Company accrues the minimum amount of the range. Unless included in the Company’s legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot 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 business, results of operations, financial position, or liquidity.
TriReme Patent Infringement and Breach of Fiduciary Duty
In July 2012, AngioScore sued TriReme Medical, Inc. (“TriReme”), Eitan Konstantino (“Konstantino”), Quattro Vascular Pte, Ltd. (“Quattro”), and QT Vascular Ltd. (“QT Vascular”), in the U.S. District Court for the Northern District of California (the “District Court”), alleging patent infringement. In June 2014, AngioScore amended its complaint to allege state law claims (i) that Konstantino, a former founder, officer, and director of AngioScore, breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while serving as a director of AngioScore, and (ii) against the other defendants for aiding and abetting that breach. In July 2015, the District Court ruled in favor of AngioScore, finding that Konstantino breached his fiduciary duties to AngioScore, that TriReme and Quattro aided and abetted that breach, and that QT Vascular was liable for the acts of TriReme and Quattro. The District Court awarded AngioScore $20.034 million against all defendants plus disgorgement from Konstantino of all benefits he accrued from his breach of fiduciary duties. In September 2015, a jury found against AngioScore in the patent infringement case.
Following an appeal by the defendants, in July 2016, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) reversed the breach of fiduciary duty and state law rulings on procedural grounds, finding that the District Court lacked jurisdiction to hear the state law claims, and affirmed the District Court’s ruling that the defendants were not entitled to attorneys’ fees in the patent infringement case. In August 2016, AngioScore filed a petition for rehearing of the order reversing the District Court’s breach of fiduciary duty rulings, which the Federal Circuit denied. The Federal Circuit remanded the matter to the District Court for dismissal of the state law claims, which the District Court did in February 2017. On March 3, 2017, AngioScore filed a complaint in California Superior Court, County of Alameda alleging state law claims (i) that Konstantino, a former founder, officer, and director of AngioScore, breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while serving as a director of AngioScore, and (ii) that TriReme, Quattro, and QT Vascular aided and abetted in that breach.
TriReme Inventorship
In June 2014, TriReme sued AngioScore in the District Court seeking to change the inventorship of certain patents owned by AngioScore. TriReme alleged that an Israeli physician, Chaim Lotan, should be named as a co-inventor on three patents owned by AngioScore. Dr. Lotan allegedly assigned any rights he may have had in the three patents to TriReme. In March 2015, the District Court granted AngioScore’s motion to dismiss this case. TriReme appealed the District Court’s ruling, and in February 2016, an appellate court reversed the District Court’s ruling dismissing the case and remanded the case for further proceedings. In January 2017, AngioScore filed a motion for summary judgment, requesting the District Court to
16
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
dismiss the case. On March 9, 2017, the District Court granted AngioScore’s motion for summary judgment and dismissed the case. TriReme has filed an appeal of the District Court’s decision granting summary judgment.
Konstantino Indemnification and Advancement of Fees
In May 2014, Konstantino sued AngioScore in the Delaware Court of Chancery seeking a ruling that AngioScore must indemnify and advance Konstantino’s attorneys’ fees and costs related to the defense of the breach of fiduciary duty claims and his pursuit in Delaware court for advancement of fees. In June 2014, AngioScore filed counter-claims against Konstantino for violating the AngioScore indemnification agreement and filed a third-party complaint against TriReme, Quattro, and QT Vascular seeking contribution from the defendant companies for amounts advanced to Konstantino. The court held in August 2014 that AngioScore was required to advance Konstantino’s attorneys’ fees and costs. AngioScore filed a motion for summary judgment, and in November 2015, the court granted in part AngioScore’s motion and ordered that TriReme is liable for 50% of advanced fees and costs, and must pay all fees and costs to be advanced to Konstantino moving forward until such fees and costs equal the fees and costs paid by AngioScore, and thereafter, the fees and costs must be advanced 50% by TriReme and 50% by AngioScore.
The Company cannot at this time determine the likelihood of any outcome and, as of June 30, 2017 and December 31, 2016, had no amounts accrued for potential damages. During the six months ended June 30, 2017 and 2016, the Company incurred $0.3 million and $0.7 million, respectively, of legal fees associated with these matters. These expenses are included within the “Acquisition transaction, integration and legal costs” line of the condensed consolidated statements of operations and comprehensive loss.
Shareholder Litigation
In August 2015, a person purporting to represent a class of persons who purchased securities of the Company between February 19, 2015 and July 23, 2015 filed a lawsuit against the Company and certain of its officers in the United States District Court for the District of Colorado. The lawsuit asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934, alleging that certain of the Company’s public statements concerning its projected revenue for 2015 were false and misleading. In March 2016, plaintiffs filed an amended complaint, including additional allegations challenging certain statements in addition to those concerning the Company’s projected revenue for 2015. The class period in the amended complaint runs from February 27, 2014 to July 23, 2015. The Company believes that the lawsuit is without merit and is defending itself vigorously. In June 2016, the Company filed a motion to dismiss the amended complaint. Although the Company believes it is reasonably possible for a loss to occur, the Company cannot estimate an amount of loss or a range of loss, if any, or whether the impact will be material and, as of June 30, 2017, had no amounts accrued for potential damages in this case.
Two putative stockholder class action lawsuits have been filed in connection with the proposed Philips Transaction (see Note 1). These actions, Aviles v. Spectranetics Corp., et al., Case No. 1:17-cv-01767, and Parshall v. Spectranetics Corp., et al., Case No. 1:17-cv-01776, were filed on July 21, 2017 in the United States District Court for the District of Colorado. The complaint in the Aviles action alleges that the Company and its directors violated federal securities laws by failing to disclose material information in the Schedule 14D-9 Recommendation Statement filed by the Company in connection with the Philips Transaction (the “Schedule 14D-9”). This complaint seeks, among other things, (i) injunctive relief preventing the consummation of the Offer and the Merger; (ii) rescissory damages or rescission in the event the Offer and the Merger are consummated; (iii) damages; and (iv) an award of plaintiffs’ expenses and attorneys’ fees. The complaint in the Parshall action alleges that Spectranetics, its directors, and other defendants including Philips violated federal securities laws by failing to disclose material information in the Schedule 14D-9. This complaint seeks, among other things, (i) injunctive relief preventing the consummation of the Offer and the Merger; (ii) rescissory damages or rescission in the event the Offer and the Merger are consummated; and (iii) an award of plaintiffs’ expenses and attorneys’ fees. On July 24, 2017, the plaintiff in the Aviles action filed a motion for expedited proceedings and a preliminary injunction. On July 26, 2017, the plaintiff in the Aviles action withdrew his motion for expedited proceedings and a preliminary injunction. At this stage, it is not possible to predict the outcome of the proceedings or their impact on the Company or the Philips Transaction.
17
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
FDA Warning Letter
In May 2016, the Company received a warning letter from the FDA related to observed non-conformities with current Good Manufacturing Practice (“GMP”), as defined by the FDA, at its Colorado Springs, Colorado facility. In January 2016, following an inspection of certain of the Company’s manufacturing facilities from late 2015 to early 2016, the FDA issued the Company a Form 483 notice, identifying certain observed non-conformities with current GMP. Following the receipt of the Form 483, the Company provided written responses to the FDA detailing corrective actions underway to address the FDA’s observations. The FDA warning letter acknowledges the actions already taken by the Company to address the observations. The Company plans to continue to respond timely and fully to the FDA’s requests and the Company is working diligently to fully remediate the FDA’s observations regarding the Colorado Springs facility. Spending in connection with the matter for the six months ended June 30, 2017, was approximately $8.3 million. The Company expects to incur expenses ranging from approximately $10 million to approximately $15 million in 2017 in connection with remediation of the warning letter and upgrading the overall quality system. The Company is continuing to manufacture and ship disposable products from the Colorado Springs facility and currently does not anticipate that customer orders will be impacted while the Company works to resolve the FDA’s concerns. Until the violations are corrected, the Company may be subject to additional regulatory action by the FDA and foreign regulatory agencies, including recalls, delays, suspension or withdrawal of approvals or clearances, and fines or civil penalties.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by those sections. Forward-looking statements include statements about our future plans, estimates, beliefs, and anticipated, expected or projected performance. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “seek,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” “enable,” “potential,” and other words and terms of similar meaning in connection with any discussion of, among other things, the pending Philips Transaction, future operating or financial performance, acquisitions, strategic initiatives and business strategies, clinical trials and FDA submissions, regulatory or competitive environments, our intellectual property, and product development. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. For a description of such risks and uncertainties, which could cause our actual results, performance, or achievements to materially differ from any anticipated results, performance, or achievements, please see the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2016. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that disclose certain risks and factors that may affect our business. This analysis should be read with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016. We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.
Corporate Overview
We develop, manufacture, market and distribute single-use disposable medical devices and a proprietary laser system used in minimally invasive procedures within the cardiovascular system. Our products are used to cross, prepare, and treat arterial blockages in the legs and heart and to remove and support the removal of pacemaker and defibrillator cardiac leads. We believe that the diversified nature of our business allows us to respond to a wide range of physician and patient needs. The innovative products and services we offer are divided into three categories:
• | Vascular Intervention (“VI”): Our devices cross, prepare and treat cardiovascular lesions. Our primary VI devices consist of our laser and aspiration catheters, Stellarex™ drug coated balloon (“DCB”) catheters, AngioSculpt® scoring balloon catheters, support catheters, and the AngioSculptX™ product, which we sell in Europe and currently is not for sale in the U.S. |
• | Lead Management (“LM”): We are a global leader in devices for the removal of pacemaker and defibrillator cardiac leads. Our primary LM devices consist of our excimer laser sheaths, non-laser mechanical sheaths, our Bridge™ Occlusion Balloon, and cardiac lead management accessories. |
• | Laser, service, and other: Our proprietary excimer laser system, the CVX-300®, is the only laser system approved in the U.S., Europe, Japan, China and select other major global markets for use in multiple minimally invasive cardiovascular procedures. We sell, rent and service our CVX-300 laser systems. |
During the six months ended June 30, 2017 and 2016, our disposable products generated 94% of our consolidated revenue, of which VI products accounted for 67% of consolidated revenue and LM products accounted for 27% of consolidated revenue. The remainder of our revenue is derived from sales and rental of our laser system and related services.
Approximately half of our disposable product revenue is currently derived from products used with our proprietary CVX-300 excimer laser system.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Recent Developments
On July 26, 2017, we received pre-market approval from the FDA for our Stellarex DCB product. Stellarex is designed to restore and maintain blood flow to the superficial femoral and popliteal arteries in patients with peripheral arterial disease. Stellarex uses EnduraCoat™ technology, a durable, uniform coating designed to prevent drug loss during transit and facilitate controlled, efficient drug delivery to the treatment site.
On June 27, 2017, the Company entered into the Merger Agreement with Parent and Merger Sub. The Merger Agreement provides for the acquisition of the Company by Parent in a two-step all cash transaction, consisting of the Offer followed by the Merger. The Merger Agreement was approved by the Company’s Board. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Parent caused Merger Sub to commence the Offer for all of the Company’s Shares, at a purchase price of $38.50 per Share, net to the seller in cash, without interest and subject to any required withholding of taxes. The Offer commenced on July 12, 2017 and will remain open until 12:00 midnight, New York City time, on August 9, 2017 (one minute after 11:59 P.M., New York City time, on August 8, 2017), unless the Offer is extended. If at the scheduled expiration time of the Offer any of the conditions to the Offer have not been satisfied or waived by Parent and Merger Sub, Parent will cause Merger Sub to extend the Offer to permit the satisfaction of all Offer conditions.
The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to customary closing conditions, including (1) Shares having been validly tendered and not properly withdrawn that represent, together with the Shares then owned by Merger Sub, at least a majority of the then outstanding Shares (the “Minimum Condition”), (2) the absence of any law, injunction, judgment or other legal restraint that prohibits the consummation of the Offer or the Merger, (3) the expiration or early termination of the waiting periods applicable to the Offer and the Merger under U.S. and foreign antitrust laws, (4) the accuracy of the Company’s representations and warranties contained in the Merger Agreement (subject to Material Adverse Effect (as defined in the Merger Agreement) and materiality qualifiers), (5) the Company’s performance of its obligations under the Merger Agreement in all material respects, and (6) the absence, since the date of the Merger Agreement, of any effect, change, event or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect. Following the consummation of the Offer, subject to the satisfaction or waiver of certain customary conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent, without a meeting or vote of the Company’s stockholders. The Merger will be effected as soon as practicable following the acceptance of the Shares validly tendered and not properly withdrawn in the Offer.
Additional information regarding the pending Philips Transaction is included in our Current Report on Form 8-K filed with the SEC on June 30, 2017.
On June 9, 2017, the Company entered into the Term Loan Credit Agreement and the Revolving Loan Credit Agreement. The Credit Agreements replace the Original Credit Agreements. The Term Loan Credit Agreement provides for a $90 million Term Loan Facility and the Revolving Loan Credit Agreement provides for a $50 million Revolving Loan Facility. The Revolving Loan Facility may be increased to up to $70 million at the Company’s request and with approval of the Revolving Administrative Agent and the Revolving Loan Facility lenders. Both facilities expire on March 1, 2021. The obligations of the Borrowers under the Credit Agreements are secured by a lien on substantially all of the assets of the Borrowers. For additional information, please refer to Note 4, “Debt,” to the condensed consolidated financial statements included in Part I, Item 1 of this report.
In May 2016, we received a warning letter from the FDA related to observed non-conformities with current Good Manufacturing Practice, as defined by the FDA, at our Colorado Springs, Colorado facility. We are working diligently to fully remediate the FDA’s observations regarding the Colorado Springs facility. Spending in connection with the matter for the six months ended June 30, 2017 was approximately $8.3 million. We expect to incur expenses ranging from approximately $10 million to approximately $15 million in 2017 in connection with remediation of the warning letter and upgrading the overall quality system. See Note 9, “Commitments and Contingencies-Warning Letter,” of the condensed consolidated financial statements included in Part I, Item 1 of this report.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Selected Consolidated Statements of Operations Data
The following table presents selected Consolidated Statements of Operations data for the three months ended June 30, 2017 and 2016 based on the percentage of revenue for each line item, and the dollar and percentage change of each of the items. For a detailed discussion of each item, please see the explanations below.
Three Months Ended June 30, 2017 Compared with Three Months Ended June 30, 2016 (dollars in thousands)
Three Months Ended June 30, | ||||||||||||||||||||
2017 | % of revenue (1) | 2016 | % of revenue (1) | change | % change | |||||||||||||||
Revenue | $ | 74,714 | 100 | % | $ | 67,748 | 100 | % | $ | 6,966 | 10 | % | ||||||||
Gross profit | 56,232 | 75 | % | 50,765 | 75 | % | 5,467 | 11 | % | |||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general and administrative | 45,549 | 61 | % | 40,643 | 60 | % | 4,906 | 12 | % | |||||||||||
Research, development and other technology | 19,901 | 27 | % | 17,657 | 26 | % | 2,244 | 13 | % | |||||||||||
Acquisition transaction, integration and legal costs | 9,157 | 12 | % | 500 | 1 | % | 8,657 | nm | ||||||||||||
Intangible asset amortization | 2,919 | 4 | % | 3,202 | 5 | % | (283 | ) | (9 | )% | ||||||||||
Contingent consideration expense | — | — | % | 67 | — | % | (67 | ) | nm | |||||||||||
Total operating expenses | 77,526 | 104 | % | 62,069 | 92 | % | 15,457 | 25 | % | |||||||||||
Operating loss | (21,294 | ) | (29 | )% | (11,304 | ) | (17 | )% | (9,990 | ) | 88 | % | ||||||||
Other expense: | ||||||||||||||||||||
Interest expense | (3,598 | ) | (5 | )% | (3,294 | ) | (5 | )% | (304 | ) | 9 | % | ||||||||
Foreign currency transaction gain (loss) | 656 | 1 | % | (158 | ) | — | % | 814 | nm | |||||||||||
Loss before income tax expense | (24,236 | ) | (32 | )% | (14,756 | ) | (22 | )% | (9,480 | ) | 64 | % | ||||||||
Income tax expense | 368 | — | % | 150 | — | % | 218 | 145 | % | |||||||||||
Net loss | $ | (24,604 | ) | (33 | )% | $ | (14,906 | ) | (22 | )% | $ | (9,698 | ) | 65 | % | |||||
Worldwide installed base of laser systems | 1,574 | 1,442 | 132 | 9 | % | |||||||||||||||
___________________________________
(1) | Percentage amounts may not add due to rounding. |
nm= not meaningful
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Revenue and gross margin
In the following discussion, we disclose all growth rates on an “as reported” basis, and we specify the growth rate on a “constant currency” basis only when it differs from the “as reported” growth rate. See the “Non-GAAP Financial Measures” section below for a discussion of our use of the constant currency financial measure. The following is a summary of revenue by product line for the three months ended June 30, 2017 and 2016 (in thousands, except for percentages):
For the Three Months Ended June 30, | ||||||||||||||||||||
2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | |||||||||||||||
Revenue: | ||||||||||||||||||||
Disposable products: | ||||||||||||||||||||
Vascular Intervention | $ | 51,002 | 68 | % | $ | 46,218 | 68 | % | $ | 4,784 | 10 | % | ||||||||
Lead Management | 19,686 | 26 | % | 17,767 | 26 | % | 1,919 | 11 | % | |||||||||||
Total disposable products | 70,688 | 95 | % | 63,985 | 94 | % | 6,703 | 10 | % | |||||||||||
Laser, service, and other | 4,026 | 5 | % | 3,763 | 6 | % | 263 | 7 | % | |||||||||||
Total revenue | $ | 74,714 | 100 | % | $ | 67,748 | 100 | % | $ | 6,966 | 10 | % | ||||||||
(1) | Percentage amounts may not add due to rounding. |
Revenue increased $7.0 million, or 10% (11% on a constant currency basis), from $67.7 million for the quarter ended June 30, 2016 to $74.7 million for the quarter ended June 30, 2017. The increase was primarily due to an increase in disposables revenue, described further below.
VI revenue, which includes revenue from products used in the peripheral and coronary vascular systems, increased $4.8 million, or 10% (11% on a constant currency basis), from $46.2 million for the quarter ended June 30, 2016 to $51.0 million for the quarter ended June 30, 2017. The increase in VI revenue was driven primarily by equal increases in our peripheral atherectomy and coronary atherectomy products.
LM revenue, which includes revenue from excimer laser sheaths, mechanical sheaths, and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads, increased $1.9 million, or 11% (12% on a constant currency basis), from $17.8 million for the quarter ended June 30, 2016 to $19.7 million for the quarter ended June 30, 2017. The growth was primarily due to revenue from mechanical tools and accessory products, including our recently-introduced Bridge product.
Laser, service, and other revenue increased $0.3 million, or 7% (8% constant currency), from $3.8 million for the quarter ended June 30, 2016 to $4.0 million for the quarter ended June 30, 2017, with an increase in service revenue.
We placed 60 laser systems during the quarter ended June 30, 2017 compared with 45 during the quarter ended June 30, 2016. Of these laser placements, 34 lasers were newly manufactured, and 26 lasers were redeployed from a previous institution. The new placements during the quarter ended June 30, 2017 brought our worldwide installed base of laser systems to 1,574 (1,126 in the U.S.) as of June 30, 2017, compared to 1,442 (1,032 in the U.S.) as of June 30, 2016.
Geographically, revenue in the U.S. increased $5.3 million, or 9%, from $56.3 million for the quarter ended June 30, 2016 to $61.6 million for the quarter ended June 30, 2017, primarily due to an increase in disposables revenue. International revenue increased $1.7 million, or 15% (18% on a constant currency basis), from $11.4 million for the quarter ended June 30, 2016 to $13.1 million for the quarter ended June 30, 2017. The increase in international revenue was primarily due to an increase in disposables revenue.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Gross margin was 75% for each of the quarters ended June 30, 2017 and 2016. Increased production efficiencies and increased production to support increased sales mostly offset by an unfavorable sales mix kept gross margin for the quarter ended June 30, 2017 consistent with the quarter ended June 30, 2016.
Operating expenses
Total operating expenses increased $15.5 million, or 25%, from $62.1 million for the quarter ended June 30, 2016 to $77.5 million for the quarter ended June 30, 2017. The following table shows the changes in operating expenses for the three months ended June 30, 2017 and 2016 (in thousands, except for percentages):
For the Three Months Ended June 30, | ||||||||||||||||||||
2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | |||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling, general and administrative | $ | 45,549 | 61 | % | $ | 40,643 | 60 | % | $ | 4,906 | 12 | % | ||||||||
Research, development and other technology | 19,901 | 27 | % | 17,657 | 26 | % | 2,244 | 13 | % | |||||||||||
Acquisition transaction, integration and legal costs | 9,157 | 12 | % | 500 | 1 | % | 8,657 | nm | ||||||||||||
Intangible asset amortization | 2,919 | 4 | % | 3,202 | 5 | % | (283 | ) | (9) | % | ||||||||||
Contingent consideration expense | — | — | % | 67 | — | % | (67 | ) | nm | |||||||||||
Total operating expenses | $ | 77,526 | 104 | % | $ | 62,069 | 92 | % | $ | 15,457 | 25 | % | ||||||||
(1)Percentage amounts may not add due to rounding.
nm= not meaningful
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses increased $4.9 million, or 12%, from $40.6 million for the quarter ended June 30, 2016 to $45.5 million for the quarter ended June 30, 2017. The increase in SG&A expenses was primarily due to a $3.1 million increase in our sales and marketing personnel costs related to the expansion of our commercial footprint and a $0.9 million increase in materials related to additional consignment and parts expenses.
Research, development and other technology. Research, development and other technology expenses increased $2.2 million, or 13%, from $17.7 million for the quarter ended June 30, 2016 to $19.9 million for the quarter ended June 30, 2017. Costs included within research, development and other technology expenses are product development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. The increase in research, development and other technology expenses was primarily due to $5.1 million in costs associated with FDA warning letter remediation. The increase was partially offset by a decrease in development costs of approximately $0.6 million due to our receipt of Conformité Européene (CE) mark approval of AngioSculptX under our drug coated AngioSculpt (“DCAS”) program in the third quarter of 2016 and a reduction in development costs of $2.0 million related to the Stellarex DCB as development has been completed and the product was with the FDA awaiting pre-market approval during the second quarter of 2017.
Acquisition transaction, integration and legal costs. We incurred acquisition transaction, integration and legal costs of $9.2 million for the quarter ended June 30, 2017. The expense is primarily due to $9.0 million of external professional services related to the pending Philips Transaction described in “Recent Developments” above.
We incurred $0.5 million of costs related to the AngioScore and Stellarex acquisitions for the quarter ended June 30, 2016, which was primarily related to legal fees associated with a breach of fiduciary duty and patent infringement matter in which AngioScore is the plaintiff, further described in Note 9, “Commitments and Contingencies,” of the condensed consolidated financial statements included in Part I, Item 1 of this report.
Intangible asset amortization. As part of our previous acquisitions, we acquired certain amortizable intangible assets. We recorded $2.9 million of amortization expense related to these intangible assets for the quarter ended June 30, 2017 and
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
$3.2 million for the quarter ended June 30, 2016. See Note 3, “Goodwill and Intangible Assets,” of the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.
Contingent consideration expense. We did not incur any costs related to contingent consideration for the quarter ended June 30, 2017. For the quarter ended June 30, 2016, we recorded approximately $0.1 million of contingent consideration expense related to our contingent consideration liabilities from the AngioScore and Upstream acquisitions due to the passage of time (i.e., accretion).
Other expense
Total other expense decreased $0.5 million, or 15%, from $3.5 million for the quarter ended June 30, 2016 to $2.9 million for the quarter ended June 30, 2017. The following table shows the changes in other expense for the three months ended June 30, 2017 and 2016 (in thousands, except for percentages):
For the Three Months Ended June 30, | ||||||||||||||||||||
2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | |||||||||||||||
Other expense: | ||||||||||||||||||||
Interest expense, net | $ | (3,598 | ) | (5 | )% | $ | (3,294 | ) | (5 | )% | $ | (304 | ) | 9 | % | |||||
Foreign currency transaction gain (loss) | 656 | 1 | % | (158 | ) | — | % | 814 | nm | |||||||||||
Total other expense | $ | (2,942 | ) | (4 | )% | $ | (3,452 | ) | (5 | )% | $ | 510 | (15) | % | ||||||
(1) | Percentage amounts may not add due to rounding. |
nm= not meaningful
The decrease in other expense was primarily due to an increase in the foreign currency gain of $0.8 million due to the strengthening of the Euro partially offset by an increase in interest expense, net, of $0.3 million for the quarter ended June 30, 2017, compared with the quarter ended June 30, 2016.
Income tax expense
We recorded income tax expense of $0.4 million and $0.2 million for the quarters ended June 30, 2017 and 2016, respectively, consisting of current foreign and state income tax expense and deferred federal and state income tax expense.
Our ability to realize the benefit of our deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to our history of losses and our planned near-term investments in our growth, we have recorded a valuation allowance against substantially all of our deferred tax assets that are in excess of our deferred tax liabilities. We do not expect to reduce the valuation allowance against our deferred tax assets until we have a sufficient historical trend of taxable income and can predict future taxable income with a higher degree of certainty.
Net loss
Net loss increased $9.7 million, from $14.9 million for the quarter ended June 30, 2016 to $24.6 million for the quarter ended June 30, 2017. Net loss for the quarter ended June 30, 2017 was higher than the net loss for the quarter ended June 30, 2016 primarily due to the increase in operating expenses of $15.5 million, as described above, offset by an increase in gross profit of $5.5 million.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Selected Consolidated Statements of Operations Data
The following table presents selected Consolidated Statements of Operations data for the six months ended June 30, 2017 and 2016 based on the percentage of revenue for each line item, and the dollar and percentage change of each of the items. For a detailed discussion of each item, please see the explanations below.
Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016
Six Months Ended June 30, | ||||||||||||||||||||
(Dollars in thousands) | 2017 | % of revenue (1) | 2016 | % of revenue (1) | change | % change | ||||||||||||||
Revenue | $ | 144,394 | 100 | % | $ | 130,632 | 100 | % | $ | 13,762 | 11 | % | ||||||||
Gross profit | 107,861 | 75 | % | 97,567 | 75 | % | 10,294 | 11 | % | |||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general and administrative | 91,205 | 63 | % | 81,432 | 62 | % | 9,773 | 12 | % | |||||||||||
Research, development and other technology | 37,751 | 26 | % | 33,994 | 26 | % | 3,757 | 11 | % | |||||||||||
Acquisition transaction, integration and legal costs | 9,344 | 6 | % | 792 | 1 | % | 8,552 | nm | ||||||||||||
Intangible asset amortization | 5,838 | 4 | % | 6,405 | 5 | % | (567 | ) | (9 | )% | ||||||||||
Contingent consideration expense | — | — | % | 167 | — | % | (167 | ) | nm | |||||||||||
Total operating expenses | 144,138 | 100 | % | 122,790 | 94 | % | 21,348 | 17 | % | |||||||||||
Operating loss | (36,277 | ) | (25 | )% | (25,223 | ) | (19 | )% | (11,054 | ) | 44 | % | ||||||||
Other expense: | ||||||||||||||||||||
Interest expense | (7,007 | ) | (5 | )% | (6,636 | ) | (5 | )% | (371 | ) | 6 | % | ||||||||
Foreign currency transaction gain (loss) | 773 | 1 | % | 17 | — | % | 756 | nm | ||||||||||||
Loss before income taxes | (42,511 | ) | (29 | )% | (31,842 | ) | (24 | )% | (10,669 | ) | 34 | % | ||||||||
Income tax expense | 617 | — | % | 355 | — | % | 262 | 74 | % | |||||||||||
Net loss | $ | (43,128 | ) | (30 | )% | $ | (32,197 | ) | (25 | )% | $ | (10,931 | ) | 34 | % | |||||
Worldwide installed base of laser systems | 1,574 | 1,442 | 132 | 9 | % | |||||||||||||||
___________________________________
(1) | Percentage amounts may not add due to rounding. |
nm= not meaningful
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Revenue and gross margin
In the following discussion, we disclose all growth rates on an “as reported” basis, and we specify the growth rate on a “constant currency” basis only when it differs from the “as reported” growth rate. See the “Non-GAAP Financial Measures” section below for a discussion of our use of the constant currency financial measure. The following is a summary of revenue by product line for the six months ended June 30, 2017 and 2016:
For the Six Months Ended June 30, | ||||||||||||||||||||
(in thousands, except for percentages) | 2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | ||||||||||||||
Revenue: | ||||||||||||||||||||
Disposable products: | ||||||||||||||||||||
Vascular intervention | $ | 97,450 | 67 | % | $ | 88,130 | 67 | % | $ | 9,320 | 11 | % | ||||||||
Lead management | 38,719 | 27 | % | 34,863 | 27 | % | 3,856 | 11 | % | |||||||||||
Total disposable products | 136,169 | 94 | % | 122,993 | 94 | % | 13,176 | 11 | % | |||||||||||
Laser, service, and other | 8,225 | 6 | % | 7,639 | 6 | % | 586 | 8 | % | |||||||||||
Total revenue | $ | 144,394 | 100 | % | $ | 130,632 | 100 | % | $ | 13,762 | 11 | % | ||||||||
(1)Percentage amounts may not add due to rounding.
Revenue increased $13.8 million, or 11%, from $130.6 million for the six months ended June 30, 2016 to $144.4 million for the six months ended June 30, 2017. The increase was primarily due to an increase in disposables revenue, described further below.
VI revenue increased $9.3 million, or 11%, from $88.1 million for the six months ended June 30, 2016 to $97.5 million for the six months ended June 30, 2017. The increase in VI revenue was driven primarily by equal increases in our peripheral atherectomy and coronary atherectomy products.
LM revenue increased $3.9 million, or 11% (12% on a constant currency basis), from $34.9 million for the six months ended June 30, 2016 to $38.7 million for the six months ended June 30, 2017. The growth was primarily due to revenue from mechanical tools and accessory products, including our recently-introduced Bridge product.
Laser, service, and other revenue increased $0.6 million, or 8%, from $7.6 million for the six months ended June 30, 2016 to $8.2 million for the six months ended June 30, 2017, primarily due to an increase in service revenue.
We placed 103 laser systems during the six months ended June 30, 2017 compared with 89 during the six months ended June 30, 2016. Of these laser placements, 63 lasers were newly manufactured, and 40 lasers were redeployed from a previous institution. The new placements during the six months ended June 30, 2017 brought our worldwide installed base of laser systems to 1,574 (1,126 in the U.S.) as of June 30, 2017, compared to 1,442 (1,032 in the U.S.) as of June 30, 2016.
Geographically, revenue in the U.S. increased $10.7 million, or 10%, from $109.3 million for the six months ended June 30, 2016 to $120.0 million for the six months ended June 30, 2017, primarily due to an increase in disposables revenue. International revenue increased $3.1 million, or 14% (17% on a constant currency basis), from $21.3 million for the six months ended June 30, 2016 to $24.4 million for the six months ended June 30, 2017. The increase in international revenue was primarily due to an increase in disposables revenue.
Gross margin was 75% for each of the six months ended June 30, 2017 and 2016. Increased production efficiencies and increased production to support increased sales mostly offset by an unfavorable sales mix kept gross margin for the six months ended June 30, 2017 consistent with the six months ended June 30, 2016.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Operating expenses
Total operating expenses increased $21.3 million, or 17%, from $122.8 million for the six months ended June 30, 2016 to $144.1 million for the six months ended June 30, 2017. The following table shows the changes in operating expenses for the six months ended June 30, 2017 and 2016:
For the Six Months Ended June 30, | ||||||||||||||||||||
(in thousands, except for percentages) | 2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling, general and administrative | $ | 91,205 | 63 | % | $ | 81,432 | 62 | % | $ | 9,773 | 12 | % | ||||||||
Research, development and other technology | 37,751 | 26 | % | 33,994 | 26 | % | 3,757 | 11 | % | |||||||||||
Acquisition transaction, integration and legal costs | 9,344 | 6 | % | 792 | 1 | % | 8,552 | nm | ||||||||||||
Intangible asset amortization | 5,838 | 4 | % | 6,405 | 5 | % | (567 | ) | (9) | % | ||||||||||
Contingent consideration expense | — | — | % | 167 | — | % | (167 | ) | nm | |||||||||||
Total operating expenses | $ | 144,138 | 100 | % | $ | 122,790 | 94 | % | $ | 21,348 | 17 | % | ||||||||
(1)Percentage amounts may not add due to rounding.
nm= not meaningful
Selling, general and administrative. SG&A expenses increased $9.8 million, or 12%, from $81.4 million for the six months ended June 30, 2016 to $91.2 million for the six months ended June 30, 2017. The increase in SG&A expenses was primarily due to a $6.1 million increase in our sales and marketing personnel costs related to the expansion of our commercial footprint; $1.7 million increase in third-party services related to the expansion of our international presence; and a $1.3 million increase in materials related to additional consignment and parts expenses.
Research, development and other technology. Research, development and other technology expenses increased $3.8 million, or 11%, from $34.0 million for the six months ended June 30, 2016 to $37.8 million for the six months ended June 30, 2017. Costs included within research, development and other technology expenses are product development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. The increase in research, development and other technology expenses was primarily due to $8.3 million in costs associated with FDA warning letter remediation. The increase was partially offset by a decrease in development costs of approximately $1.2 million due to our receipt of Conformité Européene (CE) mark approval of AngioSculptX under our drug coated AngioSculpt (“DCAS”) program in the third quarter of 2016 and a reduction in development costs of $2.9 million related to the Stellarex DCB as development has been completed and was with the FDA awaiting pre-market approval during the six months ended June 30, 2017.
Acquisition transaction, integration and legal costs. We incurred acquisition transaction, integration and legal costs of $9.3 million for the six months ended June 30, 2017. The expense is primarily due to $9.0 million of external professional services related to the pending Philips Transaction described in “Recent Developments” above.
In the six months ended June 30, 2016, we incurred $0.8 million of costs related to the AngioScore and Stellarex acquisitions for the six months ended June 30, 2016, which was primarily related to legal fees associated with a breach of fiduciary duty and patent infringement matter in which AngioScore is the plaintiff, further described in Note 9, “Commitments and Contingencies,” of the condensed consolidated financial statements included in Part I, Item 1 of this report.
Intangible asset amortization. As part of our previous acquisitions, we acquired certain amortizable intangible assets. We recorded $5.8 million and $6.4 million of amortization expense related to these intangible assets for the six months ended June 30, 2017 and 2016, respectively. See Note 3, “Goodwill and Intangible Assets,” of the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.
Contingent consideration expense. We did not incur any costs related to contingent consideration for the six months ended June 30, 2017. For the six ended June 30, 2016, we recorded $0.2 million of contingent consideration expense related to our contingent consideration liabilities from the AngioScore and Upstream acquisitions, due to the passage of time (i.e., accretion).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Other expense
Total other expense decreased $0.4 million, or 6%, from $6.6 million for the six months ended June 30, 2016 to $6.2 million for the six months ended June 30, 2017. The following table shows the changes in other expense for the six months ended June 30, 2017 and 2016:
For the Six Months Ended June 30, | ||||||||||||||||||||
(in thousands, except for percentages) | 2017 | % of revenue (1) | 2016 | % of revenue (1) | $ change | % change | ||||||||||||||
Other expense: | ||||||||||||||||||||
Interest expense, net | $ | (7,007 | ) | (5 | )% | $ | (6,636 | ) | (5 | )% | $ | (371 | ) | 6 | % | |||||
Foreign currency transaction gain (loss) | 773 | 1 | % | 17 | — | % | 756 | nm | ||||||||||||
Total other expense | $ | (6,234 | ) | (4 | )% | $ | (6,619 | ) | (5 | )% | $ | 385 | (6) | % | ||||||
(1)Percentage amounts may not add due to rounding.
nm= not meaningful
The decrease in other expense was primarily due to an increase in the foreign currency gain of $0.8 million due to the strengthening of the Euro partially offset by an increase in interest expense, net, of $0.4 million for the six months ended June 30, 2017, compared with the six months ended June 30, 2016.
Income tax expense
We recorded income tax expense of $0.6 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively, consisting of current foreign and state income tax expense and deferred federal and state income tax expense.
Our ability to realize the benefit of our deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to our history of losses and our planned near-term investments in our growth, we have recorded a valuation allowance against substantially all of our deferred tax assets that are in excess of our deferred tax liabilities. We do not expect to reduce the valuation allowance against our deferred tax assets until we have a sufficient historical trend of taxable income and can predict future taxable income with a higher degree of certainty.
Net loss
Net loss increased $10.9 million, from $32.2 million for the six months ended June 30, 2016 to $43.1 million for the six months ended June 30, 2017. Net loss for the six months ended June 30, 2017 was higher than the net loss for the six months ended June 30, 2016 primarily due to the increase in operating expenses of $21.3 million, as described above, offset by an increase in gross profit of $10.3 million.
Liquidity and Capital Resources
As of June 30, 2017, we had cash and cash equivalents of $57.5 million, an increase of $0.3 million from $57.2 million at December 31, 2016.
Our future liquidity requirements will be influenced by numerous factors. We believe that our cash and cash equivalents, anticipated funds from operations, and other sources of liquidity, which may include additional borrowings under our Revolving Loan Facility or other credit or financing arrangements, will be sufficient to meet our liquidity requirements for at least the next 12 months based on our expected level of operations.
We may need or seek additional funding in the future. In addition to access to available borrowings under our Revolving Loan Facility, we have an effective shelf registration statement on file with the SEC under which we may issue, from time to time, up to $200 million of senior debt securities, subordinated debt securities, common stock, preferred stock and other securities. Our ability to issue debt securities is limited by certain covenants in the Credit Agreements. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
We have generated and used cash as follows (in thousands):
For the Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Net cash used in operating activities | $ | (26,960 | ) | $ | (14,317 | ) | |
Net cash used in investing activities | (2,606 | ) | (2,734 | ) | |||
Net cash provided by (used in) financing activities | 30,051 | (3,238 | ) | ||||
Operating Activities. For the six months ended June 30, 2017, cash used in operating activities was $27.0 million. This compared with cash used in operating activities of $14.3 million for the six months ended June 30, 2016. The primary sources and uses of cash during the six months ended June 30, 2017 follow:
• | During the first six months of 2017, our net loss of $43.1 million included approximately $24.0 million of net non-cash expenses, which consisted primarily of $13.7 million of depreciation and amortization and $7.6 million of stock-based compensation. |
• | During the first six months of 2017, cash used as a result of the net change in operating assets and liabilities of approximately $7.9 million was primarily due to an increase in equipment held for rental or loan of approximately $7.1 million as a result of placement activity of our laser systems through our rental and evaluation programs, an increase in inventories of approximately $2.5 million, primarily due to increased sales demand, an increase in accounts receivable of $3.4 million, due primarily to increased revenue in the period, and an increase in prepaid expense of $0.5 million, primarily due to the timing of payment of the annual insurance premiums. These uses of cash were partially offset by an increase in accounts payable and accrued liabilities of approximately $5.2 million, primarily related to the accrual of expenses related to the merger agreement and an increase in deferred revenue of $0.4 million. |
The primary sources and uses of cash during the first six months of 2016 follow:
• | During the first six months of 2016, our net loss of $32.2 million included approximately $21.8 million of net non-cash expenses, which consisted primarily of $13.9 million of depreciation and amortization and $6.6 million of stock-based compensation. |
• | During the first six months of 2016, cash used as a result of the net increase in operating assets and liabilities of approximately $3.9 million was primarily due to an increase in equipment held for rental or loan of $4.6 million as a result of placement activity of our laser systems through our rental and evaluation programs, an increase in prepaid expenses and other current assets of approximately $0.8 million, primarily due to prepayments for trade shows, conventions, and other marketing programs, and an increase in inventories of approximately $0.8 million, primarily due to increased sales demand and higher disposables production. These uses of cash were partially offset by an increase in accounts payable and accrued liabilities of approximately $2.2 million, primarily due to the timing of compensation-related accruals. |
Investing Activities. For the six months ended June 30, 2017, cash used in investing activities was $2.6 million, consisting entirely of capital expenditures. This compared with cash used in investing activities of $2.7 million for the six months ended June 30, 2016, consisting entirely of capital expenditures. The capital expenditures for the six months ended June 30, 2017 and 2016 included manufacturing equipment upgrades and replacements, additional capital items for research and development projects, and additional computer equipment and software purchases, including capital items required for the Stellarex product line.
Financing Activities. Cash provided by financing activities for the six months ended June 30, 2017 was $30.1 million, consisting primarily of proceeds from our amended term loan of $30.0 million and the net proceeds on our line of credit of $1.5 million and the exercise of stock options and sale of common stock under our employee stock purchase plan of $0.4 million. For the six months ended June 30, 2016, cash used in financing activities was $3.2 million, consisting primarily of repayments on the line of credit, net, of $5.0 million, partially offset by the exercise of stock options and sale of common stock under our
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
employee stock purchase plan of $1.9 million. In the six months ended June 30, 2017 and 2016, we paid $0.1 million and $0.1 million, respectively, in contingent consideration payments related to the Upstream product acquisition.
The table below presents the change in receivables and inventory, in relative terms, through the presentation of financial ratios. Days sales outstanding are calculated by dividing the ending accounts receivable balance, net of allowances for sales returns and doubtful accounts, by the average daily sales for the quarter. The increase in days sales outstanding for the six months ended June 30, 2017 was primarily due to increased revenue in the quarter. Inventory turns are calculated by dividing annualized cost of sales for the quarter by ending inventory.
June 30, 2017 | December 31, 2016 | ||
Days Sales Outstanding | 57 | 55 | |
Inventory Turns | 2.5 | 2.5 | |
At June 30, 2017, we had no significant capital lease obligations.
Future Investments and Contingent Consideration Related to Acquisitions
On January 27, 2015, we completed the acquisition of Stellarex DCB assets and made a cash payment of $30 million. The Stellarex acquisition will require substantial additional investments prior to full commercialization, primarily within research, development and clinical trials.
In connection with the AngioScore acquisition, we agreed to pay additional contingent merger consideration, a portion of which included a cash payment of $5.0 million if the AngioSculptX product received European CE mark approval by December 31, 2016. We received the European CE mark approval during the third quarter of 2016 and made a contingent consideration payment of $5.0 million, $2.7 million of which was classified as a cash flow from financing activities, because it was included as part of the initial measurement of the fair value of the consideration transferred. The remaining $2.3 million of the payment was classified as a cash flow from operating activities, as it was reflected in earnings in the periods subsequent to the acquisition as accretion expense and a change in the fair value of the contingent consideration liability. As a result of the change of control that is scheduled to occur as a result of the Philips Transaction, the AngioScore shareholders would be owed $25 million of additional contingent consideration payments related to the AngioScore acquisition following closing of the Philips Transaction.
Credit Facilities
On June 9, 2017, the Company entered into the Term Loan Credit Agreement and the Revolving Loan Credit Agreement. The Credit Agreements replace the Original Credit Agreements. The Term Loan Credit Agreement provides for a $90 million Term Loan Facility and the Revolving Loan Credit Agreement provides for a $50 million Revolving Loan Facility. The Revolving Loan Facility may be increased to up to $70 million at the Company’s request and with approval of the Revolving Administrative Agent and the Revolving Loan Facility lenders. Both facilities expire on March 1, 2021. The obligations of the Borrowers under the Credit Agreements are secured by a lien on substantially all of the assets of the Borrowers. For additional information, please refer to Note 4, “Debt,” to the condensed consolidated financial statements included in Part I, Item 1 of this report.
As of June 30, 2017, the Term Loan Facility and Revolving Loan Facility had outstanding balances of $90.0 million and $26.2 million, respectively. The borrowing base on the Revolving Loan Facility was $41.6 million as of June 30, 2017, based on the Company’s accounts receivable and inventory balances. We may prepay and re-borrow amounts borrowed under the Revolving Loan Facility without penalty. At June 30, 2017, the interest rate on the Term Loan Facility was 8.20%, and the monthly weighted average interest rate on the Revolving Loan Facility was 5.50%.
Convertible Senior Notes
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
In June 2014, we sold $230 million aggregate principal amount of Convertible Senior Notes due 2034 (the “Notes”). Net proceeds from the sale of the Notes were used for the AngioScore acquisition. The Notes bear interest at a rate of 2.625% per annum. We pay interest on the Notes on June 1 and December 1 of each year. The Notes will mature on June 1, 2034 (“maturity date”), unless earlier repurchased, redeemed or converted.
Holders may convert their Notes into shares of our common stock at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
The initial conversion rate is 31.9020 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.35 per share of our common stock). The conversion price is subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a fundamental change occurs or we deliver a redemption notice, in certain circumstances we will increase the conversion rate for a holder that elects to convert its Note in connection with such fundamental change or redemption notice, as the case may be.
Holders may require us to repurchase some or all of their Notes for cash on each of June 5, 2021, June 5, 2024 and June 5, 2029 and upon a fundamental change (as defined in the indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date.
We may not redeem the Notes prior to June 5, 2018. On or after June 5, 2018 and prior to June 5, 2021, we may redeem for cash all or part of the Notes if the closing sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the trading day immediately prior to the date we provide the notice of redemption exceeds 130% of the applicable conversion price for the Notes. On or after June 5, 2021, we may redeem any or all of the Notes in cash. The redemption price for the Notes to be redeemed as described in the two immediately preceding sentences equals 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The Notes are our senior unsecured obligations and rank equal in right of payment with any of our other senior unsecured indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the Notes. The Notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the collateral securing such indebtedness and structurally subordinated to the claims of our subsidiaries’ creditors, including trade creditors. For more information, see Note 4, “Debt,” of the condensed consolidated financial statements included in Part I, Item 1 of this report.
Off-Balance Sheet Arrangements
We maintain no off-balance sheet arrangements that have, or that are reasonably likely to have, a material current or future effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. We maintain operating leases for our offices in Colorado Springs, Colorado; Broomfield, Colorado; Fremont, California; Maple Grove, Minnesota; the Netherlands, Germany and France.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements prepared in accordance with GAAP, we use a non-GAAP financial measure in this report regarding revenue on a constant currency basis. Reconciliations of this non-GAAP financial measure to the most directly comparable GAAP measure for the respective periods can be found in the tables below. An explanation of the manner in which our management uses this non-GAAP measure to conduct and evaluate our business and the reasons management believes this non-GAAP measure provides useful information to investors are provided following the reconciliation tables.
Reconciliation of revenue by geography to non-GAAP revenue by geography on a constant currency basis (in thousands, except percentages) (unaudited) | |||||||||||||||||||||
Three Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | Change | |||||||||||||||||||
Revenue, as reported | Foreign exchange impact as compared to prior period | Revenue on a constant currency basis | Revenue, as reported | As reported | Constant currency basis | ||||||||||||||||
United States | $ | 61,588 | $ | — | $ | 61,588 | $ | 56,334 | 9 | % | 9 | % | |||||||||
International | 13,126 | 305 | 13,431 | 11,414 | 15 | % | 18 | % | |||||||||||||
Total revenue | $ | 74,714 | $ | 305 | $ | 75,019 | $ | 67,748 | 10 | % | 11 | % | |||||||||
Six Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | Change | |||||||||||||||||||
Revenue, as reported | Foreign exchange impact as compared to prior period | Revenue on a constant currency basis | Revenue, as reported | As reported | Constant currency basis | ||||||||||||||||
United States | $ | 120,001 | $ | — | $ | 120,001 | $ | 109,316 | 10 | % | 10 | % | |||||||||
International | 24,393 | 559 | 24,952 | 21,316 | 14 | % | 17 | % | |||||||||||||
Total revenue | $ | 144,394 | $ | 559 | $ | 144,953 | $ | 130,632 | 11 | % | 11 | % | |||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Reconciliation of revenue by product line to non-GAAP revenue by product line on a constant currency basis (in thousands, except percentages) (unaudited) | |||||||||||||||||||||
Three Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | Change | |||||||||||||||||||
Revenue, as reported | Foreign exchange impact as compared to prior period | Revenue on a constant currency basis | Revenue, as reported | As reported | Constant currency basis | ||||||||||||||||
Vascular Intervention | $ | 51,002 | $ | 124 | $ | 51,126 | $ | 46,218 | 10 | % | 11 | % | |||||||||
Lead Management | 19,686 | 155 | 19,841 | 17,767 | 11 | % | 12 | % | |||||||||||||
Laser, service, and other | 4,026 | 26 | 4,052 | 3,763 | 7 | % | 8 | % | |||||||||||||
Total revenue | $ | 74,714 | $ | 305 | $ | 75,019 | $ | 67,748 | 10 | % | 11 | % | |||||||||
Six Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | Change | |||||||||||||||||||
Revenue, as reported | Foreign exchange impact as compared to prior period | Revenue on a constant currency basis | Revenue, as reported | As reported | Constant currency basis | ||||||||||||||||
Vascular Intervention | $ | 97,450 | $ | 233 | $ | 97,683 | $ | 88,130 | 11 | % | 11 | % | |||||||||
Lead Management | 38,719 | 277 | 38,996 | 34,863 | 11 | % | 12 | % | |||||||||||||
Laser, service, and other | 8,225 | 49 | 8,274 | 7,639 | 8 | % | 8 | % | |||||||||||||
Total revenue | $ | 144,394 | $ | 559 | $ | 144,953 | $ | 130,632 | 11 | % | 11 | % | |||||||||
The impact of foreign exchange rates is highly variable and difficult to predict. We use a constant currency basis to show the impact from foreign exchange rates on current period revenue compared to prior period revenue using the prior period’s foreign exchange rates. In order to properly understand the underlying business trends and performance of our ongoing operations, we believe that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our revenue.
We believe that presenting the non-GAAP financial measure used in this report provides investors greater transparency to the information used by our management for financial and operational decision-making and allows investors to see our results “through the eyes” of management. We also believe that providing this information better enables our investors to understand our operating performance and evaluate the methodology used by management to evaluate and measure such performance.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Some limitations associated with using these non-GAAP financial measures are provided below:
• | Revenue growth rates stated on a constant currency basis, by their nature, exclude the impact of changes in foreign currency exchange rates, which may have a material impact on GAAP revenue. |
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
• | Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and therefore other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. |
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. We must make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances and reserves for receivables, inventories and deferred income tax assets, stock-based compensation expense, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, contingent consideration liabilities, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.
Our critical accounting policies and estimates are included in our 2016 Annual Report on Form 10-K. During the six months ended June 30, 2017, there were no significant changes to our critical accounting policies and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in the value of market risk instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are primarily exposed to foreign exchange risk and interest rate risk.
Our reporting currency is the U.S. dollar and our exposure to foreign currency risk is primarily related to sales of our products in Europe, which are denominated primarily in the euro and translated into U.S. dollars. Changes in the exchange rate between the euro and the U.S. dollar could positively or adversely affect our revenue and net loss. In addition, we record foreign currency transaction gains and losses, included in other expense in our condensed consolidated financial statements, which result from intercompany transactions with our Dutch subsidiary, whose functional currency is the euro.
Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets. Currently, we do not hedge against any foreign currencies and, as a result, we could incur gains or losses. The fluctuation in currency rates during the six months ended June 30, 2017 compared with the six months ended June 30, 2016 caused a decrease in consolidated revenue of approximately $0.6 million and an increase in consolidated net loss of $0.9 million.
Based on our overall foreign currency exchange rate exposure as of June 30, 2017, a 10% appreciation or depreciation of the U.S. dollar would have had a positive or negative impact on our consolidated revenue for the six months ended June 30, 2017 of approximately $1.5 million.
The Notes have fixed interest rates, and therefore are not subject to market risk. As of June 30, 2017, we are exposed to interest rate risk related to our $50 million Revolving Loan Facility and our $90 million Term Loan Facility. A 100 basis point fluctuation in market interest rates underlying our Revolving Loan Facility and Term Loan Facility would have the effect of increasing or decreasing our cash interest expense by approximately $1.2 million for an annual period on the $26.2 million Revolving Loan Facility and $90 million Term Loan Facility balances outstanding as of June 30, 2017.
Item 4. Controls and Procedures
35
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of June 30, 2017.
There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II—OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our legal proceedings, please refer to Note 9, “Commitments and Contingencies,” to the condensed consolidated financial statements included in Part I, Item 1 of this report.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2016.
36
Item 6. Exhibits
2.1 | Agreement and Plan of Merger dated as of June 27, 2017, among The Spectranetics Corporation, Philips Holding USA Inc. and HealthTech Merger Sub, Inc. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 30, 2017. |
3.1 | Amended and Restated Certificate of Incorporation. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 16, 2009. |
3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 12, 2014. |
3.3 | Amended and Restated Bylaws. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on April 4, 2011. |
4.1 | Form of Common Stock Certificate of the Company. Incorporated by reference to exhibit previously filed by the Company with its Amendment No. 2 to the Registration Statement, filed January 24, 1992 (File No. 33-44367). |
10.1 | Amended and Restated Term Credit and Security Agreement, dated as of June 9, 2017, by and among The Spectranetics Corporation and AngioScore Inc., as borrowers, MidCap Financial Trust, as administrative agent and a lender, and the other lenders party thereto. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 9, 2017. |
10.2 | Amended and Restated Revolving Credit and Security Agreement, dated as of June 9, 2017, by and among The Spectranetics Corporation and AngioScore Inc., as borrowers, MidCap Funding IV Trust, as administrative agent, and the lenders party thereto. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 9, 2017. |
10.3 | Severance Agreement dated June 27, 2017 by and between the Company and Scott Hutton.* |
31.1* | Rule 13(a)-14(a)/15d-14(a) Certification of Chief Executive Officer. |
31.2* | Rule 13(a)-14(a)/15d-14(a) Certification of Chief Financial Officer. |
32.1** | Section 1350 Certification of Chief Executive Officer. |
32.2** | Section 1350 Certification of Chief Financial Officer. |
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
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Spectranetics Corporation | ||
(Registrant) | ||
August 8, 2017 | /s/ Scott Drake | |
Scott Drake | ||
President and Chief Executive Officer | ||
August 8, 2017 | /s/ Stacy P. McMahan | |
Stacy P. McMahan | ||
Chief Financial Officer | ||
38