Item 1. Financial Statements
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)
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|
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|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
67,494
|
|
|
$
|
84,594
|
|
|
Trade accounts receivable, less allowance for doubtful accounts and sales returns of $1,786 and $1,906, respectively
|
44,204
|
|
|
43,359
|
|
|
Inventories, net
|
26,315
|
|
|
25,155
|
|
|
Prepaid expenses and other current assets
|
5,951
|
|
|
5,171
|
|
|
Total current assets
|
143,964
|
|
|
158,279
|
|
|
Property and equipment, net
|
44,761
|
|
|
44,719
|
|
|
Goodwill
|
152,616
|
|
|
152,616
|
|
|
Other intangible assets, net
|
107,253
|
|
|
110,456
|
|
|
Other assets
|
1,953
|
|
|
1,929
|
|
|
Total assets
|
$
|
450,547
|
|
|
$
|
467,999
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Borrowings under revolving line of credit
|
$
|
19,234
|
|
|
$
|
24,232
|
|
|
Accounts payable
|
4,390
|
|
|
4,150
|
|
|
Accrued liabilities
|
32,768
|
|
|
33,676
|
|
|
Deferred revenue
|
1,488
|
|
|
1,621
|
|
|
Total current liabilities
|
57,880
|
|
|
63,679
|
|
|
Convertible senior notes, net of debt issuance costs
|
224,328
|
|
|
224,076
|
|
|
Term loan, net of debt issuance costs
|
59,611
|
|
|
59,601
|
|
|
Accrued liabilities, net of current portion
|
1,743
|
|
|
1,759
|
|
|
Deferred income taxes
|
2,027
|
|
|
1,915
|
|
|
Total liabilities
|
345,589
|
|
|
351,030
|
|
|
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 42,796,266 and 42,659,234 shares, respectively
|
43
|
|
|
42
|
|
|
Additional paid-in capital
|
318,470
|
|
|
313,442
|
|
|
Accumulated other comprehensive loss
|
(1,659
|
)
|
|
(1,910
|
)
|
|
Accumulated deficit
|
(211,896
|
)
|
|
(194,605
|
)
|
|
Total stockholders’ equity
|
104,958
|
|
|
116,969
|
|
|
Total liabilities and stockholders’ equity
|
$
|
450,547
|
|
|
$
|
467,999
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
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|
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|
|
|
Three months ended March 31,
|
|
|
2016
|
|
2015
|
|
Revenue
|
$
|
62,884
|
|
|
$
|
57,422
|
|
|
Cost of products sold
|
16,082
|
|
|
14,802
|
|
|
Amortization of acquired inventory step-up
|
—
|
|
|
251
|
|
|
Gross profit
|
46,802
|
|
|
42,369
|
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative
|
40,789
|
|
|
36,942
|
|
|
Research, development and other technology
|
16,337
|
|
|
15,261
|
|
|
Medical device excise tax
|
—
|
|
|
806
|
|
|
Acquisition transaction, integration and legal costs
|
292
|
|
|
10,391
|
|
|
Intangible asset amortization
|
3,203
|
|
|
3,170
|
|
|
Contingent consideration expense
|
100
|
|
|
1,024
|
|
|
Total operating expenses
|
60,721
|
|
|
67,594
|
|
|
Operating loss
|
(13,919
|
)
|
|
(25,225
|
)
|
|
Other expense:
|
|
|
|
|
Interest expense
|
(3,342
|
)
|
|
(1,754
|
)
|
|
Foreign currency transaction gain (loss)
|
175
|
|
|
(179
|
)
|
|
Total other expense
|
(3,167
|
)
|
|
(1,933
|
)
|
|
Loss before income tax expense
|
(17,086
|
)
|
|
(27,158
|
)
|
|
Income tax expense
|
205
|
|
|
147
|
|
|
Net loss
|
$
|
(17,291
|
)
|
|
$
|
(27,305
|
)
|
|
|
|
|
|
|
Net loss per share —
|
|
|
|
|
Basic and diluted
|
$
|
(0.40
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Foreign currency translation adjustments
|
251
|
|
|
(912
|
)
|
|
Comprehensive loss, net of tax
|
$
|
(17,040
|
)
|
|
$
|
(28,217
|
)
|
|
|
|
|
|
|
Weighted average common shares outstanding —
|
|
|
|
|
Basic and diluted
|
42,697,323
|
|
|
42,155,844
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2016
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(17,291
|
)
|
|
$
|
(27,305
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Depreciation and amortization
|
6,890
|
|
|
6,131
|
|
|
Stock-based compensation expense
|
3,413
|
|
|
3,190
|
|
|
Amortization of debt issuance costs
|
281
|
|
|
244
|
|
|
Provision for excess and obsolete inventories
|
196
|
|
|
167
|
|
|
Contingent consideration expense
|
100
|
|
|
1,024
|
|
|
Deferred income taxes
|
126
|
|
|
95
|
|
|
Net change in operating assets and liabilities
|
(6,159
|
)
|
|
(6,007
|
)
|
|
Net cash used in operating activities
|
(12,444
|
)
|
|
(22,461
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
Capital expenditures
|
(1,226
|
)
|
|
(1,780
|
)
|
|
Payments for acquisitions
|
—
|
|
|
(30,000
|
)
|
|
Net cash used in investing activities
|
(1,226
|
)
|
|
(31,780
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Repayments on line of credit, net
|
(4,998
|
)
|
|
—
|
|
|
Proceeds from the exercise of stock options and employee stock purchase plan
|
1,615
|
|
|
2,678
|
|
|
Payment of contingent consideration
|
(88
|
)
|
|
(143
|
)
|
|
Net cash (used in) provided by financing activities
|
(3,471
|
)
|
|
2,535
|
|
|
Effect of exchange rate changes on cash
|
41
|
|
|
(160
|
)
|
|
Net decrease in cash and cash equivalents
|
(17,100
|
)
|
|
(51,866
|
)
|
|
Cash and cash equivalents at beginning of period
|
84,594
|
|
|
95,505
|
|
|
Cash and cash equivalents at end of period
|
$
|
67,494
|
|
|
$
|
43,639
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid for interest
|
$
|
1,421
|
|
|
$
|
9
|
|
|
Cash paid for income taxes
|
$
|
194
|
|
|
$
|
185
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 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 pacemaker and defibrillator cardiac leads. In June 2014, the Company acquired AngioScore, Inc., a leading developer, manufacturer and marketer of cardiovascular, specialty balloon catheters, and in January 2015, the Company acquired the 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 and reserves for receivables, inventories, deferred income tax assets, contingent consideration liabilities for acquisitions, stock-based compensation expense, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.
The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read 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, 2015
. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, statutory tax withholding requirements and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is in the process of determining the method of adoption and assessing the impact of ASU 2016-09 on its results of operations, financial position, and consolidated financial statements.
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. For public 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 method of adoption and assessing the impact of ASU 2016-02 on its results of operations, financial position, and consolidated financial statements.
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
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive 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 August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 for all entities by one year. As a result, ASU 2014-09 is now effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method and date of adoption and assessing the impact of ASU 2014-09 on its results of operations, financial position, and consolidated financial statements.
The Company has considered all other recently issued accounting pronouncements and does not believe they are of significance, or potential significance, to the Company.
NOTE 2 — DEBT
The following table summarizes our total gross outstanding debt as of
March 31, 2016
and
December 31, 2015
and the maturity dates of our borrowing arrangements:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
(amounts in thousands)
|
March 31, 2016
|
|
December 31, 2015
|
|
Maturity Date
|
|
Weighted Average Interest Rate
|
|
Convertible Senior Notes
|
$
|
230,000
|
|
|
$
|
230,000
|
|
|
June 1, 2034
|
|
2.625%
|
|
Term Loan Facility
|
60,000
|
|
|
60,000
|
|
|
December 7, 2020
|
|
(1)
|
|
Revolving Loan Facility
|
19,234
|
|
|
24,232
|
|
|
December 7, 2020
|
|
(1)
|
|
Total
|
$
|
309,234
|
|
|
$
|
314,232
|
|
|
|
|
|
|
|
|
|
(1)
|
The interest rates on the Term Loan Facility and Revolving Loan Facility are described below.
|
Convertible Notes
On June 3, 2014, the Company sold
$230 million
aggregate principal amount of
2.625%
Convertible Senior Notes due 2034 (the “Notes”) under an underwriting agreement dated May 28, 2014. Interest is paid semi-annually in arrears on December 1 and June 1 of each year, commencing December 1, 2014. The Notes 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 without any such condition.
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 SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Term Loan Facility and Revolving Loan Facility
On December 7, 2015, the Company entered into a term credit and security agreement (the “Term Loan Credit Agreement”) and a revolving credit and security agreement (the “Revolving Loan Credit Agreement,” and together with the Term Loan Credit Agreement, the “Credit Agreements”) with MidCap Financial Trust and the other lenders party thereto. The Credit Agreements replaced the Credit and Security Agreement (the “Wells Fargo Credit Agreement”) entered into by the Company and Wells Fargo Bank, National Association on February 25, 2011. The Term Loan Credit Agreement provides for a
five
-year
$60 million
Term Loan Facility and the Revolving Loan Credit Agreement provides for a
five
-year
$50 million
Revolving Loan Facility. The Revolving Loan Facility may be increased to up to
$70 million
, subject to lender approval. The obligations of the Company under the Credit Agreements are secured by a lien on substantially all of the assets of the Company.
The Term Loan Facility bears interest at the LIBOR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of
7.50%
per annum; provided that the applicable margin will be reduced to
6.50%
if the Company’s EBITDA (as defined in the Term Loan Credit Agreement) is equal to or greater than
$6 million
for a specified prior period and no default or event of default has occurred and is occurring. The Company 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, provided that the Company may postpone making principal payments for an additional 12 months if certain conditions are met and the Administrative Agent and lenders agree to such extension. If the Administrative Agent and lenders do not agree to such extension, the prepayment fee and unearned portion of the exit fee will be waived.
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
March 31, 2016
, the borrowing base was
$38.6 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
0.5%
per annum. The Revolving Loan Facility is subject to a minimum balance, such that the Company pays the greater of (i) interest accrued on the actual amount drawn under the Revolving Loan Facility and (ii) interest accrued on
35%
of the average borrowing base prior to the first anniversary of the Revolving Loan Facility and
50%
of the average borrowing base thereafter. The Company may prepay and re-borrow amounts borrowed under the revolving line of credit without penalty.
The Credit Agreements require us to maintain minimum cash and cash equivalents of not less than
$10 million
and achieve net revenue in excess of certain specified thresholds. These agreements also contain certain restrictive covenants that limit and in some circumstances prohibit, our ability to, among other things, incur additional debt, sell, lease or transfer our assets, pay dividends on our common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase our common stock, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganization transactions. The Company was in compliance with its debt covenants as of
March 31, 2016
.
The Credit Agreements contain customary events of default, including the failure to make required payments, the failure to comply with certain covenants or other agreements, the occurrence of a material adverse change, failure to pay certain
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
other indebtedness and certain events of bankruptcy or insolvency. 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
March 31, 2016
.
As of
March 31, 2016
, the Term Loan Facility and Revolving Loan Facility had outstanding balances of
$60.0 million
and
$19.2 million
, respectively. The interest rate on the Term Loan Facility was
8.00%
at
March 31, 2016
and the weighted average interest rate on the Revolving Loan Facility was
4.95%
at
March 31, 2016
.
NOTE 3 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
Inventories
Inventories, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
Raw materials
|
$
|
9,680
|
|
|
$
|
10,838
|
|
|
Work in process
|
3,488
|
|
|
2,914
|
|
|
Finished goods
|
13,147
|
|
|
11,403
|
|
|
|
$
|
26,315
|
|
|
$
|
25,155
|
|
Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Equipment held for rental or loan
|
$
|
58,304
|
|
|
$
|
55,774
|
|
|
Manufacturing equipment and computers
|
38,182
|
|
|
37,862
|
|
|
Leasehold improvements
|
9,213
|
|
|
8,984
|
|
|
Furniture and fixtures
|
5,008
|
|
|
4,841
|
|
|
Building and improvements
|
1,306
|
|
|
1,306
|
|
|
Land
|
270
|
|
|
270
|
|
|
Less: accumulated depreciation
|
(67,522
|
)
|
|
(64,318
|
)
|
|
|
$
|
44,761
|
|
|
$
|
44,719
|
|
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Accrued payroll and employee-related expenses
|
$
|
14,764
|
|
|
$
|
15,797
|
|
|
Contingent consideration
|
5,165
|
|
|
5,154
|
|
|
Accrued clinical study expense
|
3,392
|
|
|
3,868
|
|
|
Accrued interest
|
2,568
|
|
|
913
|
|
|
Deferred rent
|
1,476
|
|
|
1,485
|
|
|
Accrued royalties
|
1,025
|
|
|
1,044
|
|
|
Accrued sales, income and excise taxes
|
875
|
|
|
1,318
|
|
|
Accrued legal costs
|
870
|
|
|
713
|
|
|
Other accrued expenses
|
4,376
|
|
|
5,143
|
|
|
Total accrued liabilities
|
34,511
|
|
|
35,435
|
|
|
Less: long-term portion
|
(1,743
|
)
|
|
(1,759
|
)
|
|
Accrued liabilities, current portion
|
$
|
32,768
|
|
|
$
|
33,676
|
|
Contingent Consideration
The Company recorded contingent liabilities as part of the AngioScore acquisition in June 2014 and the product acquisition from Upstream Peripheral Technologies, Ltd. (“Upstream”) in January 2013. The following table presents changes to the Company’s acquisition-related contingent consideration for the period ending March 31, 2016:
|
|
|
|
|
|
|
|
|
Contingent Consideration Liability
|
|
Beginning balance, January 1, 2016
|
$
|
5,153
|
|
|
Contingent consideration payments
|
(88
|
)
|
|
Contingent consideration accretion expense
|
100
|
|
|
Ending balance, March 31, 2016
|
$
|
5,165
|
|
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill is allocated to the Company’s reporting units based on an analysis of both the relative historical and expected benefits. As of
March 31, 2016
, the Company’s U.S. Medical and International Medical reporting segments held
$130.4 million
and
$22.2 million
, respectively, of allocated goodwill. There were no changes to goodwill during the three months ended
March 31, 2016
.
Acquired intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
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
|
(24,243
|
)
|
|
(21,040
|
)
|
|
|
$
|
107,253
|
|
|
$
|
110,456
|
|
___________________
|
|
|
|
(1)
|
In January 2015, the Company acquired the 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 completed its acquisition of AngioScore, Inc.
|
|
|
|
|
(3)
|
In January 2013, the Company acquired certain product lines from Upstream. As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements.
|
There have been no events or circumstances since the last analysis as of
December 31, 2015
to indicate that the amount of goodwill may not be recoverable.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — STOCK-BASED COMPENSATION
The Company maintains equity plans that provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, performance stock units (“PSUs”) and stock appreciation rights. The plans provide that stock options may be granted with exercise prices not less than the fair market value at the date of grant. Options granted through
March 31, 2016
generally vest over
four years
and expire
ten years
from the date of grant. Restricted stock awards granted to non-employee members of the Board of Directors vest over
one year
. Restricted stock units granted to certain employees of the Company vest over
four years
.
The Compensation Committee of the Board of Directors approved a grant of PSUs to certain of the Company’s officers in June 2014 and a grant of PSUs to the Company’s new Chief Financial Officer in September 2015 upon the commencement of her employment. PSUs vest based on achieving specified performance measurements over a
three
-year “cliff” performance period plus an additional one year “cliff” time vesting. Earned PSUs vest
75%
upon completion of the
three
-year performance period and
25%
one
year after the performance period. The PSUs have payout opportunities of between
0%
and
250%
. The performance targets include a compounded annual growth rate for revenue over a three-year period and Adjusted EBITDA for the year ended December 31, 2016.
At
March 31, 2016
, there were
0.9 million
shares available for future issuance under the Company’s equity plans, assuming issuance of PSUs at target performance.
On March 15, 2016, the Company’s Board of Directors adopted, subject to stockholder approval at the Company’s annual meeting of stockholders in June 2016, The Spectranetics Corporation 2016 Incentive Award Plan (the “2016 Plan”), which authorizes the issuance for award grants of
2,500,000
shares of the Company’s common stock, plus the number of shares of common stock remaining available for future grants under the Company’s Amended and Restated 2006 Incentive Award Plan (the “2006 Plan”) on the date the Company’s stockholders approve the 2016 Plan. Upon approval of the 2016 Plan by the Company’s stockholders, no further awards will be made under the 2006 Plan.
Valuation and Expense Information
The Company recognized stock-based compensation expense of
$3.4 million
and
$3.2 million
for the three months ended
March 31, 2016
and
2015
, respectively. This expense consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards that are ultimately expected to vest during the period, (2) restricted stock awards issued to certain of the Company’s directors, (3) restricted stock units issued to certain of the Company’s employees, (4) PSUs issued to certain of the Company’s officers, and (5) the fair value of shares issued under the Company’s employee stock purchase plan. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for non-performance related awards on a straight-line basis over the service period.
With respect to the 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 over a
three
-year period as determined by the Compensation Committee of the Board of Directors. The Company estimates the fair value of the PSUs based on its closing stock price at the time of grant and its estimates of achieving such performance targets and records compensation expense on a graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award. Over the performance period, the number of shares of common stock that will ultimately vest and 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 PSU award agreement.
The fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant.
The following is a summary of the assumptions used for the stock options granted during the
three
months ended
March 31, 2016
and
2015
, respectively, using the Black-Scholes pricing model:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
|
Expected life (years)
|
5.77
|
|
|
5.72
|
|
|
Risk-free interest rate
|
1.22
|
%
|
|
1.38
|
%
|
|
Expected volatility
|
46.26
|
%
|
|
42.56
|
%
|
|
Expected dividend yield
|
—
|
|
|
—
|
|
The weighted average grant date fair value of options granted during the
three
months ended
March 31, 2016
and
2015
was
$6.54
and
$13.88
, respectively.
The following table summarizes stock option activity during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Avg.
Remaining
Contractual Term
(In Years)
|
|
Aggregate Intrinsic
Value
|
|
Options outstanding at January 1, 2016
|
2,566,088
|
|
|
$
|
14.04
|
|
|
|
|
|
|
Granted
|
889,664
|
|
|
14.80
|
|
|
|
|
|
|
Exercised
|
(48,507
|
)
|
|
9.93
|
|
|
|
|
|
|
Forfeited
|
(37,132
|
)
|
|
17.90
|
|
|
|
|
|
|
Options outstanding at March 31, 2016
|
3,370,113
|
|
|
$
|
14.26
|
|
|
7.15
|
|
$
|
9,286,121
|
|
|
Options exercisable at March 31, 2016
|
1,784,813
|
|
|
$
|
10.97
|
|
|
5.37
|
|
$
|
8,899,385
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value based on the Company’s closing stock price of
$14.52
as of
March 31, 2016
that would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares underlying in-the-money options exercisable as of
March 31, 2016
was approximately
1.3 million
. The total intrinsic value of options exercised was
$0.2 million
and
$4.9 million
during the
three
months ended
March 31, 2016
and
2015
, respectively.
The following table summarizes restricted stock award activity during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Restricted stock awards outstanding at January 1, 2016
|
26,463
|
|
|
$
|
27.41
|
|
|
Vested/released
|
(2,867
|
)
|
|
34.89
|
|
|
Restricted stock awards outstanding at March 31, 2016
|
23,596
|
|
|
$
|
26.51
|
|
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes restricted stock unit activity during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Restricted stock units outstanding at January 1, 2016
|
204,893
|
|
|
$
|
24.08
|
|
|
Awarded
|
190,776
|
|
|
14.98
|
|
|
Forfeited
|
(10,370
|
)
|
|
23.83
|
|
|
Restricted stock units outstanding at March 31, 2016
|
385,299
|
|
|
$
|
19.58
|
|
The following table summarizes PSU activity during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
|
Performance stock units outstanding at January 1, 2016
|
496,656
|
|
|
$
|
22.82
|
|
|
Vested/released
|
(18,101
|
)
|
|
23.43
|
|
|
Forfeited
|
(7,943
|
)
|
|
23.43
|
|
|
Performance stock units outstanding at March 31, 2016
|
470,612
|
|
|
$
|
22.79
|
|
As of
March 31, 2016
, there was
$19.0 million
of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s equity plans, using the Company’s current estimate of performance for the PSUs. Assuming the minimum of
0%
and maximum of
250%
payout opportunities for the PSUs, the range of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s equity plans was between
$16.2 million
and
$36.7 million
as of
March 31, 2016
. This expense is based on an assumed future forfeiture rate of approximately
6.68%
per year for stock options and restricted stock units for Company employees and is expected to be recognized over a weighted-average period of approximately
2.8
years.
Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (“ESPP”). The ESPP, as amended in 2012, provides for the sale of up to
700,000
shares of common stock to eligible employees, limited to the lesser of
2,500
shares per employee per
six
-month period or a fair market value of
$25,000
per employee per calendar year. Stock purchased under the ESPP is restricted from sale for
one
year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each
six
-month period. The purchase price is equal to
85%
of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective
six
-month offering period. This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP is compensatory for financial reporting purposes. At
March 31, 2016
, there were
no
shares available for future issuance under this plan. On December 9, 2015, the Company’s Board of Directors adopted, subject to stockholder approval at the Company’s annual meeting of stockholders in June 2016, an amendment to the ESPP to increase the number of shares of common stock available for sale under the ESPP by
1,000,000
shares. The amendment is effective as of January 1, 2016, the first day of the current semi-annual offering period under the ESPP.
The fair value of the shares offered within the semi-annual purchase periods under the ESPP is determined on the date of grant using the Black-Scholes option-pricing model. The expected term of
six months
is based upon the offering period of the ESPP. Expected volatility is determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate is based on the six-month U.S. Treasury daily yield rate. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders. The Company recognized compensation expense related to the ESPP of
$0.4 million
and
$0.2 million
for the
three
months ended
March 31, 2016
and
2015
, respectively.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 restricted stock 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
months ended
March 31, 2016
and
2015
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
months ended
March 31, 2016
and
2015
. Stock options, restricted stock, PSUs, and shares issuable upon the conversion of the Notes outstanding at
March 31, 2016
and
2015
, which are excluded from the computation of diluted net loss per share for the
three
months ended
March 31, 2016
and
2015
, are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Options to purchase common stock
|
3,370,113
|
|
|
2,529,744
|
|
|
Non-vested restricted stock
|
408,895
|
|
|
211,685
|
|
|
Non-vested PSUs
|
470,612
|
|
|
487,158
|
|
|
Shares issuable upon conversion of the Notes
|
7,337,459
|
|
|
7,337,459
|
|
|
Potentially dilutive common shares
|
11,587,079
|
|
|
10,566,046
|
|
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 March 31,
|
|
|
2016
|
|
2015
|
|
Net loss
|
$
|
(17,291
|
)
|
|
$
|
(27,305
|
)
|
|
Common shares outstanding:
|
|
|
|
|
Historical common shares outstanding at beginning of period
|
42,632,771
|
|
|
42,034,063
|
|
|
Weighted average common shares issued
|
64,552
|
|
|
121,781
|
|
|
Weighted average common shares outstanding — basic
|
42,697,323
|
|
|
42,155,844
|
|
|
Effect of dilution — stock options
|
—
|
|
|
—
|
|
|
Weighted average common shares outstanding — diluted
|
42,697,323
|
|
|
42,155,844
|
|
|
Net loss per share — basic and diluted
|
$
|
(0.40
|
)
|
|
$
|
(0.65
|
)
|
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were 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
months ended
March 31, 2016
and
2015
, a portion of research, development and other technology expenses, and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.
Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was
$3.4 million
and
$2.9 million
for the three months ended
March 31, 2016
and
2015
, respectively. Revenue is based upon transfer prices, which provide for intersegment profit eliminated upon consolidation.
International Medical
The International Medical segment has its headquarters in the Netherlands, and 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 Stellarex DCB products are available for sale in Europe and certain other international markets but are 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. Certain U.S.-incurred research, development and other technology expenses, and general and administrative expenses have been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summary financial information relating to operating 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
March 31,
|
|
|
2016
|
|
2015
|
|
Revenue:
|
|
|
|
|
U.S. Medical:
|
|
|
|
|
Disposable products
|
$
|
50,475
|
|
|
$
|
45,487
|
|
|
Laser, service, and other
|
2,507
|
|
|
3,113
|
|
|
Subtotal
|
52,982
|
|
|
48,600
|
|
|
International Medical:
|
|
|
|
|
Disposable products
|
8,533
|
|
|
7,457
|
|
|
Laser, service, and other
|
1,369
|
|
|
1,365
|
|
|
Subtotal
|
9,902
|
|
|
8,822
|
|
|
Total revenue
|
$
|
62,884
|
|
|
$
|
57,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
|
Segment operating loss:
|
|
|
|
|
U.S. Medical
|
$
|
(12,328
|
)
|
|
$
|
(24,926
|
)
|
|
International Medical
|
(1,591
|
)
|
|
(299
|
)
|
|
Total operating loss
|
$
|
(13,919
|
)
|
|
$
|
(25,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Segment assets:
|
|
|
|
|
U.S. Medical
|
$
|
412,733
|
|
|
$
|
430,956
|
|
|
International Medical
|
37,814
|
|
|
37,043
|
|
|
Total assets
|
$
|
450,547
|
|
|
$
|
467,999
|
|
For the
three
months ended
March 31, 2016
and
2015
,
no
individual customer represented 10% or more of consolidated revenue.
No
individual countries, other than the United States, represented at least 10% of consolidated revenue for the
three
months ended
March 31, 2016
or
2015
.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
Revenue
|
|
|
|
|
Disposable products:
|
|
|
|
|
Vascular intervention
|
$
|
41,912
|
|
|
$
|
36,513
|
|
|
Lead management
|
17,096
|
|
|
16,431
|
|
|
Total disposable products
|
59,008
|
|
|
52,944
|
|
|
Laser, service, and other
|
3,876
|
|
|
4,478
|
|
|
Total revenue
|
$
|
62,884
|
|
|
$
|
57,422
|
|
NOTE 8 — INCOME TAXES
The Company maintains a valuation allowance against substantially all of its deferred tax assets, in excess of its nettable deferred tax liabilities, that it does not consider to meet the more-likely-than-not criteria for recognition. 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, 2016
. The Company does, however, expect to incur current state and foreign tax expense during
2016
. In addition, the Company expects to incur deferred U.S. federal and state tax expense in
2016
, primarily representing 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.
In assessing the realizability of deferred tax assets (“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 temporary differences become deductible. Management considers the Company’s projected future taxable income and tax planning strategies in making this assessment. Because the Company expects to generate losses during the Stellarex development period through 2017, it believes that it will not be generating sufficient taxable income to realize DTAs. 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 that 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.
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. The Company’s significant legal proceedings are discussed below. The costs associated with such proceedings or other legal proceedings that may be commenced could have a material adverse effect on the Company’s future consolidated results of operations, financial position, or cash flows.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For certain cases described herein, management is unable to provide a meaningful estimate of the possible loss, if any, or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages may not have been sought; (iii) damages may be determined to be unsupported; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties. For these cases, however, the Company does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Company’s financial condition, though the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.
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 “Court”), alleging patent infringement (the “Northern District of California Action”). In this action, AngioScore, the plaintiff, sought injunctive relief and damages. In June 2014, AngioScore amended its complaint (i) to allege that TriReme’s Chief Executive Officer, Konstantino, who is a former founder, officer, and member of the board of directors of AngioScore, breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while he served as a member of the AngioScore board of directors, and (ii) to add claims against the other defendants for aiding and abetting that breach.
Trial on the breach of fiduciary duty case occurred in April 2015. In July 2015, the 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 is liable for the acts of TriReme and Quattro. In its ruling, the Court found that Konstantino breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while serving on the AngioScore board of directors and failing to present that corporate opportunity to AngioScore. Konstantino subsequently launched the product through TriReme, Quattro and QT Vascular. The Court awarded AngioScore
$20.034 million
against all defendants plus disgorgement from Konstantino of all benefits he accrued from his breach of fiduciary duties, including amounts he received for assigning his intellectual property rights to the Chocolate balloon, a royalty on past and future sales of the Chocolate balloon, and all of his shares and options in QT Vascular. The defendants have filed an appeal of the ruling.
Trial on the patent infringement case was held in September 2015. The jury found against AngioScore in the patent infringement case and found that certain of the asserted claims of the patent are invalid. The patent infringement verdict has no impact on the Court’s findings or award of damages in connection with the breach of fiduciary duty claims or the ability of AngioScore to recover fees and costs advanced to Konstantino, as discussed below. The Court entered judgment in both the breach of fiduciary duty case and the patent infringement case in October 2015.
TriReme Inventorship
In June 2014, TriReme sued AngioScore in the 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. AngioScore moved to dismiss this litigation in January 2015, asserting that Dr. Lotan previously assigned any rights he may have had in the patents to AngioScore in 2003. In March 2015, the Court granted AngioScore’s motion to dismiss this case. TriReme appealed the Court’s ruling, and on February 5, 2016, an appellate court reversed the Court’s ruling dismissing the case and remanded the case for further proceedings.
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Konstantino Indemnification and Advancement of Fees
In May 2014, AngioScore sued Konstantino in the Superior Court for the County of Alameda, State of California, seeking a declaratory judgment that AngioScore owes no indemnification obligations to Konstantino under the indemnification agreement between AngioScore and Konstantino (the “AngioScore Indemnification Agreement”) resulting from AngioScore’s claim that Konstantino breached his fiduciary duties to AngioScore while serving as a member of the board of directors of AngioScore (the “Alameda Action”). In November 2014, the court stayed the Alameda Action pending the outcome of the Northern District of California Action.
In May 2014, Konstantino sued AngioScore in the Delaware Court of Chancery (the “Delaware Action”) seeking a ruling that, under the AngioScore Indemnification Agreement, AngioScore must indemnify and advance Konstantino’s attorneys’ fees and costs related to the defense of the breach of fiduciary duty claims in the Northern District of California Action and the Alameda Action and his pursuit of the Delaware Action for advancement of fees. In June 2014, AngioScore filed counter-claims against Konstantino for violating the AngioScore Indemnification Agreement, which requires, in part, that he cooperate in identifying other sources of advancement, and AngioScore filed a third-party complaint against TriReme, Quattro, and QT Vascular seeking contribution from the defendant companies for amounts advanced to Konstantino. Konstantino filed a motion for summary judgment that he is entitled to advancement from AngioScore and, in August 2014, the court granted the motion. In September 2014, AngioScore filed amended counterclaims and an amended third-party complaint that included additional defendant TriReme Singapore. The defendant companies filed a motion to dismiss the amended third-party complaint on the grounds that it failed to state a claim and the court does not have jurisdiction over three of the defendant companies that were incorporated in Singapore. In October 2015, the court denied the defendant companies’ motion to dismiss, and the Company filed a motion for summary judgment against the defendant companies seeking reimbursement and contribution of fees the Company advanced to Konstantino. In November 2015, the court granted in part the Company’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 moving forward until such fees and costs equal the fees and costs paid by AngioScore. Thereafter, the fees and costs will be advanced 50% by TriReme and 50% by AngioScore.
The Company cannot at this time determine the likelihood of any outcome and, as of March 31, 2016, has
no
amounts accrued for potential damages. During the three months ended March 31, 2016, the Company incurred
$0.2 million
in 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
On August 27, 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. On December 18, 2015, the court appointed lead plaintiff and lead counsel. On March 1, 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 intends to defend itself vigorously. The Company cannot at this time determine the likelihood of any outcome or whether the impact will be material and, as of
March 31, 2016
, has
no
amounts accrued for potential damages in this case. An adverse outcome could have a material adverse effect on the Company’s business, results of operations or financial condition.
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.
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, 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, 2015
. 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, 2015
. 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 primarily single-use medical devices 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 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 broad portfolio of VI devices consists of laser and aspiration catheters, AngioSculpt
®
scoring balloon catheters, which are the specialty balloon market leader, support catheters, and the Stellarex™ drug-coated balloon (“DCB”) catheters, which we sell in Europe and currently are 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 and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads.
|
|
|
|
|
•
|
Laser, service, and other: Our proprietary excimer laser system, the CVX-300
®
, is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple minimally invasive cardiovascular procedures. We sell, rent and service our CVX-300 laser systems.
|
During the
three
months ended
March 31, 2016
, our disposable products generated 94% of our revenue, of which VI products accounted for 71% and LM products accounted for 29%. The remainder of our revenue is derived from sales and rental of our laser system and related services.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Approximately half of our disposable product revenue is currently derived from products used with our proprietary CVX-300
excimer laser system. Our laser catheters contain up to 250 small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter.
Recent Developments
In February 2016, we received 510(k) regulatory clearance for our Bridge™ Occlusion Balloon product. Bridge is a balloon designed to dramatically reduce blood loss in the event of a tear in the superior vena cava during a lead extraction procedure. The device is designed to give the physician adequate time to safely transition the patient for surgical repair and to give the surgeon the benefit of a clear field of view to repair the tear. Although a superior vena cava tear is a rare occurrence, we believe that this product is an important innovation in an effort to accomplish our goal of reducing the risk of mortality during lead extraction procedures.
In April 2016, Professor Thomas Zeller presented 12-month interim data from the ILLUMENATE Global Study at the Charing Cross Symposium in London, England. The ILLUMENATE Global Study is a prospective, multicenter, single-arm study designed to assess the clinical performance of the Stellarex DCB in the superficial femoral and popliteal arteries. Interim results from the first 153 of 371 patients enrolled demonstrate a primary patency rate at 12 months of 84.7%. Primary patency is a key and objective indicator of clinical effectiveness. These results are consistent with the results of the ILLUMENATE First-In-Human Study, validating the early results of the Stellarex DCB.
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
March 31, 2016
and
2015
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
March 31, 2016
Compared with Three Months Ended
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
% of
revenue (1)
|
|
2015
|
|
% of
revenue (1)
|
|
change
|
|
% change
|
|
Revenue
|
$
|
62,884
|
|
|
100
|
%
|
|
$
|
57,422
|
|
|
100
|
%
|
|
$
|
5,462
|
|
|
10
|
%
|
|
Gross profit (2)
|
46,802
|
|
|
74
|
%
|
|
42,369
|
|
|
74
|
%
|
|
4,433
|
|
|
10
|
%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
40,789
|
|
|
65
|
%
|
|
36,942
|
|
|
64
|
%
|
|
3,847
|
|
|
10
|
%
|
|
Research, development and other technology
|
16,337
|
|
|
26
|
%
|
|
15,261
|
|
|
27
|
%
|
|
1,076
|
|
|
7
|
%
|
|
Medical device excise tax
|
—
|
|
|
—
|
%
|
|
806
|
|
|
1
|
%
|
|
(806
|
)
|
|
(100
|
)%
|
|
Acquisition transaction, integration and legal costs
|
292
|
|
|
—
|
%
|
|
10,391
|
|
|
18
|
%
|
|
(10,099
|
)
|
|
(97
|
)%
|
|
Intangible asset amortization
|
3,203
|
|
|
5
|
%
|
|
3,170
|
|
|
6
|
%
|
|
33
|
|
|
1
|
%
|
|
Contingent consideration expense
|
100
|
|
|
—
|
%
|
|
1,024
|
|
|
2
|
%
|
|
(924
|
)
|
|
(90
|
)%
|
|
Total operating expenses
|
60,721
|
|
|
97
|
%
|
|
67,594
|
|
|
118
|
%
|
|
(6,873
|
)
|
|
(10
|
)%
|
|
Operating loss
|
(13,919
|
)
|
|
(22
|
)%
|
|
(25,225
|
)
|
|
(44
|
)%
|
|
11,306
|
|
|
(45
|
)%
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(3,342
|
)
|
|
(5
|
)%
|
|
(1,754
|
)
|
|
(3
|
)%
|
|
(1,588
|
)
|
|
91
|
%
|
|
Foreign currency transaction gain (loss)
|
175
|
|
|
—
|
%
|
|
(179
|
)
|
|
—
|
%
|
|
354
|
|
|
(198
|
)%
|
|
Loss before income tax expense
|
(17,086
|
)
|
|
(27
|
)%
|
|
(27,158
|
)
|
|
(47
|
)%
|
|
10,072
|
|
|
(37
|
)%
|
|
Income tax expense
|
205
|
|
|
—
|
%
|
|
147
|
|
|
—
|
%
|
|
58
|
|
|
39
|
%
|
|
Net loss
|
$
|
(17,291
|
)
|
|
(27
|
)%
|
|
$
|
(27,305
|
)
|
|
(48
|
)%
|
|
$
|
10,014
|
|
|
(37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide installed base of laser systems
|
1,418
|
|
|
|
|
1,309
|
|
|
|
|
109
|
|
|
8
|
%
|
___________________________________
|
|
|
|
(1)
|
Percentage amounts may not add due to rounding.
|
|
|
|
|
(2)
|
Includes the impact of $0.3 million of amortization of acquired inventory step-up in 2015.
|
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
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in thousands, except for percentages)
|
2016
|
|
% of revenue (1)
|
|
2015
|
|
% of revenue (1)
|
|
$
change
|
|
% change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposable products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vascular intervention
|
$
|
41,912
|
|
|
67
|
%
|
|
$
|
36,513
|
|
|
64
|
%
|
|
$
|
5,399
|
|
|
15
|
%
|
|
Lead management
|
17,096
|
|
|
27
|
%
|
|
16,431
|
|
|
29
|
%
|
|
665
|
|
|
4
|
%
|
|
Total disposable products
|
59,008
|
|
|
94
|
%
|
|
52,944
|
|
|
92
|
%
|
|
6,064
|
|
|
11
|
%
|
|
Laser, service, and other
|
3,876
|
|
|
6
|
%
|
|
4,478
|
|
|
8
|
%
|
|
(602
|
)
|
|
(13)
|
%
|
|
Total revenue
|
$
|
62,884
|
|
|
100
|
%
|
|
$
|
57,422
|
|
|
100
|
%
|
|
$
|
5,462
|
|
|
10
|
%
|
|
|
|
|
(1)
|
Percentage amounts may not add due to rounding.
|
Revenue increased
$5.5 million
, or
10%
, from
$57.4 million
for the quarter ended
March 31, 2015
to
$62.9 million
for the quarter ended
March 31, 2016
. The increase was primarily due to an increase in VI disposables revenue, described further below.
VI revenue, which includes revenue from products used in the peripheral and coronary vascular systems, increased
$5.4 million
, or
15%
, from
$36.5 million
for the quarter ended
March 31, 2015
to
$41.9 million
for the quarter ended
March 31, 2016
. The increase in VI revenue was driven primarily by unit volume increases in peripheral atherectomy products and, to a lesser extent, unit volume increases in our coronary atherectomy products. In the U.S., we have placed additional focus on our coronary business following the acquisition of AngioScore, which increased our portfolio of coronary 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
$0.7 million
, or
4%
(
5%
on a constant currency basis) from
$16.4 million
for the quarter ended
March 31, 2015
to
$17.1 million
for the quarter ended
March 31, 2016
. The growth was primarily due to global market penetration of our mechanical tools and an increase in the average selling price of certain products, particularly our laser sheath products.
Laser, service, and other revenue decreased
$0.6 million
, or
13%
, from
$4.5 million
for the quarter ended
March 31, 2015
to
$3.9 million
for the quarter ended
March 31, 2016
, primarily due to lower sales of laser systems in the U.S., where most laser systems are placed under rental programs.
We placed
44
laser systems with new customers during the quarter ended
March 31, 2016
compared with
54
during the quarter ended
March 31, 2015
. Of these laser placements,
26
lasers were newly manufactured during 2016, and
18
lasers were redeployed from a previous institution. The new placements during the quarter ended
March 31, 2016
brought our worldwide installed base of laser systems to
1,418
(
1,034
in the U.S.) as of
March 31, 2016
, compared to
1,309
(
953
in the U.S.) as of
March 31, 2015
.
Geographically, revenue in the U.S. increased
$4.4 million
, or
9%
, from
$48.6 million
for the quarter ended
March 31, 2015
to
$53.0 million
for the quarter ended
March 31, 2016
, primarily due to an increase in VI revenue, and, to a lesser extent, an increase in LM revenue, partially offset by a small decline in laser, service, and other revenue. International revenue increased
$1.1 million
, or
12%
(
16%
on a constant currency basis), from
$8.8 million
for the quarter ended
March 31, 2015
to
$9.9 million
for the quarter ended
March 31, 2016
. The increase in international revenue was primarily due to an increase in
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Stellarex revenue and, to a lesser extent, an increase in LM revenue for the quarter ended
March 31, 2016
compared with the quarter ended
March 31, 2015
.
Gross margin was
74%
for the quarter ended
March 31, 2016
, with no significant change as compared with the quarter ended
March 31, 2015
. Improvement in our average selling price, increased production efficiencies and a higher sales mix of disposable products were factors that were favorable to our margin outcome, although these improvements were offset by lower margins on the small base of laser revenue during the quarter ended
March 31, 2016
.
Operating expenses
Total operating expenses decreased
$6.9 million
, or
10%
, from
$67.6 million
for the quarter ended
March 31, 2015
to
$60.7 million
for the quarter ended
March 31, 2016
. The following table shows the changes in operating expenses for the three months ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in thousands, except for percentages)
|
2016
|
|
% of revenue (1)
|
|
2015
|
|
% of revenue (1)
|
|
$
change
|
|
% change
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
$
|
40,789
|
|
|
65
|
%
|
|
$
|
36,942
|
|
|
64
|
%
|
|
$
|
3,847
|
|
|
10
|
%
|
|
Research, development and other technology
|
16,337
|
|
|
26
|
%
|
|
15,261
|
|
|
27
|
%
|
|
1,076
|
|
|
7
|
%
|
|
Medical device excise tax
|
—
|
|
|
—
|
%
|
|
806
|
|
|
1
|
%
|
|
(806
|
)
|
|
(100)
|
%
|
|
Acquisition transaction, integration and legal costs
|
292
|
|
|
—
|
%
|
|
10,391
|
|
|
18
|
%
|
|
(10,099
|
)
|
|
(97)
|
%
|
|
Intangible asset amortization
|
3,203
|
|
|
5
|
%
|
|
3,170
|
|
|
6
|
%
|
|
33
|
|
|
1
|
%
|
|
Contingent consideration expense
|
100
|
|
|
—
|
%
|
|
1,024
|
|
|
2
|
%
|
|
(924
|
)
|
|
(90)
|
%
|
|
Total operating expenses
|
$
|
60,721
|
|
|
97
|
%
|
|
$
|
67,594
|
|
|
118
|
%
|
|
$
|
(6,873
|
)
|
|
(10)
|
%
|
(1)
Percentage amounts may not add due to rounding.
Selling, general and administrative.
Selling, general and administrative (“SG&A”) expenses increased
$3.8 million
, or
10%
, from
$36.9 million
for the quarter ended
March 31, 2015
to
$40.8 million
for the quarter ended
March 31, 2016
, primarily due to higher commissions expense on higher revenue and the expansion of our sales and marketing teams to support the launch of the Stellarex DCB products in Europe. As a percentage of revenue, SG&A costs were substantially flat compared to the first quarter of 2015.
Research, development and other technology.
Research, development and other technology expenses increased
$1.1 million
, or
7%
, from
$15.3 million
for the quarter ended
March 31, 2015
to
$16.3 million
for the quarter ended
March 31, 2016
. 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. Costs associated with the Stellarex DCB research, development and clinical studies increased $1.7 million, and royalty expense increased $0.3 million on higher revenue for the quarter ended
March 31, 2016
. These increases were partially offset by decreases in other research, development and clinical trial projects, including the EXCITE trial that concluded its 12-month follow up period during the first quarter of 2015.
Medical device excise tax.
The Patient Protection and Affordable Care Act of 2010 imposed a medical device excise tax on medical device manufacturers on their sales in the U.S. of certain devices, which was effective January 1, 2013. Legislation enacted in December 2015 suspended the medical device excise tax for 2016 and 2017, resulting in no expense incurred for the quarter ended
March 31, 2016
, compared to
$0.8 million
for the quarter ended
March 31, 2015
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Acquisition transaction, integration and legal costs.
We incurred
$0.3 million
of costs related to the AngioScore and Stellarex acquisitions for the quarter ended
March 31, 2016
, which was primarily related to accruals for retention bonuses and $0.2 million in 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.
In the quarter ended
March 31, 2015
, we incurred
$10.4 million
of costs related to acquisitions. Of this amount,
$8.0 million
was comprised of legal fees associated with a patent infringement and breach of fiduciary duty matter. We also incurred $0.4 million of severance, retention and consulting costs for the integration of AngioScore. Stellarex acquisition costs of $1.9 million primarily included legal and investment banking fees related to the closing of the acquisition and non-recurring costs associated with establishing manufacturing operations to support the Stellarex program.
Intangible asset amortization.
As part of our recent acquisitions, we acquired certain intangible assets, which are being amortized over periods from two to 12 years. We recorded
$3.2 million
of amortization expense related to these intangible assets for the quarters ended
March 31, 2016
and 2015. See Note 4, “Goodwill and Intangible Assets,” of the condensed consolidated financial statements for further discussion.
Contingent consideration expense.
For the quarters ended
March 31, 2016
and
March 31, 2015
, we recorded
$0.1 million
and
$1.0 million
of contingent consideration expense, respectively, related to our contingent consideration liabilities from the AngioScore and Upstream acquisitions, due to the passage of time (i.e., accretion). The year-over-year decrease was primarily due to the remeasurement of our contingent consideration liability during 2015, which eliminated the liability for future revenue-related contingent payments.
Other expense
Total other expense increased
$1.2 million
, or
64%
, from
$1.9 million
for the quarter ended
March 31, 2015
to
$3.2 million
for the quarter ended
March 31, 2016
. The following table shows the changes in other expense for the three months ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in thousands, except for percentages)
|
2016
|
|
% of revenue (1)
|
|
2015
|
|
% of revenue (1)
|
|
$
change
|
|
% change
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
$
|
(3,342
|
)
|
|
(5
|
)%
|
|
$
|
(1,754
|
)
|
|
(3
|
)%
|
|
$
|
(1,588
|
)
|
|
91
|
%
|
|
Foreign currency transaction gain (loss)
|
175
|
|
|
—
|
%
|
|
(179
|
)
|
|
—
|
%
|
|
354
|
|
|
(198)
|
%
|
|
Total other expense
|
$
|
(3,167
|
)
|
|
(5
|
)%
|
|
$
|
(1,933
|
)
|
|
(3
|
)%
|
|
$
|
(1,234
|
)
|
|
64
|
%
|
|
|
|
|
(1)
|
Percentage amounts may not add due to rounding.
|
The increase in other expense was primarily due to an increase in interest expense of
$1.6 million
for the quarter ended
March 31, 2016
, compared with the quarter ended
March 31, 2015
, which was primarily related to the Term Loan Facility and Revolving Loan Facility entered into by the Company in late 2015. In addition, other expense was impacted by a
$0.4 million
fluctuation in foreign currency transaction impact from a loss to a gain for the quarter ended
March 31, 2016
, compared with the quarter ended
March 31, 2015
. The foreign currency impact largely resulted from the settlement of dollar-based intercompany transactions with our Dutch subsidiary, whose functional currency is the euro, and a strengthening of the euro during the quarter ended
March 31, 2016
.
Income tax expense
We recorded income tax expense of
$0.2 million
and
$0.1 million
for the quarters ended
March 31, 2016
and 2015, respectively, consisting of current foreign and state income tax expense and deferred federal and state income tax expense.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
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 further 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 decreased
$10.0 million
, from
$27.3 million
for the quarter ended
March 31, 2015
to
$17.3 million
for the quarter ended
March 31, 2016
. The decrease in net loss was primarily due to an increase in gross profit, as a result of increased sales, and a decrease in acquisition-related costs, described above.
Liquidity and Capital Resources
As of
March 31, 2016
, we had cash and cash equivalents of
$67.5 million
, a decrease of
$17.1 million
from
$84.6 million
at
December 31, 2015
.
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 described below under “Credit Facilities” 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 described below under “Credit Facilities.” 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.
We have generated and used cash as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
(in thousands)
|
2016
|
|
2015
|
|
Net cash used in operating activities
|
$
|
(12,444
|
)
|
|
$
|
(22,461
|
)
|
|
Net cash used in investing activities
|
(1,226
|
)
|
|
(31,780
|
)
|
|
Net cash (used in) provided by financing activities
|
(3,471
|
)
|
|
2,535
|
|
Operating Activities.
For the three months ended
March 31, 2016
, cash used in operating activities was
$12.4 million
. This compared with cash used in operating activities of
$22.5 million
for the three months ended
March 31, 2015
. The primary sources and uses of cash during the first quarter of 2016 were:
|
|
|
|
•
|
During the first quarter of 2016, our net loss of
$17.3 million
included approximately
$11.0 million
of net non-cash expenses, which primarily related to
$6.9 million
of depreciation and amortization and
$3.4 million
of stock-based compensation.
|
|
|
|
|
•
|
During the first quarter of 2016, cash used as a result of a net increase in operating assets and liabilities of approximately
$6.2 million
was primarily due to an increase in equipment held for rental or loan of approximately
$2.5 million
as a result of placement activity of our laser systems through our rental and evaluation programs, an increase in inventories of approximately
$1.3 million
primarily due to increased sales demand and higher disposables
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
production, and 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.
The primary sources and uses of cash during the first quarter of 2015 were:
|
|
|
|
•
|
During the first quarter of 2015, our net loss of
$27.3 million
included approximately $10.9 million of non-cash expenses, which were primarily related to $6.1 million of depreciation and amortization, $3.2 million of stock-based compensation and $1.0 million of contingent consideration expense.
|
|
|
|
|
•
|
During the first quarter of 2015, cash used as a result of the net change in operating assets and liabilities of approximately $6.0 million was primarily due to an increase in equipment held for rental or loan of $3.7 million as a result of placement activity of our laser systems through our rental and evaluation program, a decrease in accounts payable and accrued liabilities of $1.6 million, primarily due to the payment of liabilities accrued in 2014 for annual bonuses and fourth quarter commissions, an increase in prepaid expenses and other current and non-current assets of $1.4 million, primarily due to prepayments for trade shows, conventions, and simulator training programs, and an increase in inventory of approximately $1.2 million, primarily due to increased sales demand and higher disposables and laser production. These uses of cash during the first quarter of 2015 were partially offset by a decrease in accounts receivable of approximately $1.7 million, primarily due to cash collections from higher sales in the prior quarter.
|
Investing Activities.
For the three months ended
March 31, 2016
, cash used in investing activities was
$1.2 million
, consisting entirely of capital expenditures. This compared with cash used in investing activities of
$31.8 million
in the three months ended
March 31, 2015
, consisting of
$30.0 million
of payments for the Stellarex acquisition and
$1.8 million
of capital expenditures. The capital expenditures for the three months ended
March 31, 2016
and 2015 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 used in financing activities for the three months ended
March 31, 2016
was
$3.5 million
, consisting primarily of repayments on the line of credit, net, of
$5.0 million
, partially offset by the exercise of stock options and sales of common stock under our employee stock purchase plan of
$1.6 million
. In the three months ended
March 31, 2015
, cash provided by financing activities was
$2.5 million
, consisting primarily of the exercise of stock options and sales of common stock under our employee stock purchase plan of
$2.7 million
. In the three months ended
March 31, 2016
and 2015, we paid
$0.1 million
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 three months ended
March 31, 2016
was primarily due to an increase in the impact of granting extended terms, generally no more than 90 days, to certain customers, which are longer than our typical 30 day terms. Additionally, we have increased sales to our international distributors, which are granted longer terms. Inventory turns are calculated by dividing annualized cost of sales for the quarter by ending inventory.
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Days Sales Outstanding
|
63
|
|
60
|
|
Inventory Turns
|
2.3
|
|
2.4
|
At
March 31, 2016
, we had no significant capital lease obligations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Future Investments and Contingent Consideration Related to Acquisitions
On January 27, 2015, we completed the acquisition of the Stellarex DCB assets and made a cash payment of $30 million. In addition, as planned, the Stellarex acquisition requires 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 related to revenue and regulatory milestones. No contingent revenue-based payment was incurred in 2015, and we do not expect to make any contingent revenue-based payments in the future. We expect to make a $5 million payment in 2016 for the coronary CE mark approval. As of
March 31, 2016
, the contingent consideration liability related to the AngioScore acquisition was approximately $4.9 million.
Credit Facilities
On December 7, 2015, the Company and AngioScore Inc., as borrowers (jointly, the “Borrowers”) entered into a term credit and security agreement (the “Term Loan Credit Agreement”) and a revolving credit and security agreement (the “Revolving Loan Credit Agreement”, and together with the Term Loan Credit Agreement, the “Credit Agreements”) with MidCap Financial Trust and the other lenders party thereto. The Credit Agreements replaced the Credit and Security Agreement (the “Wells Fargo Credit Agreement”) entered into by the Company and Wells Fargo Bank, National Association on February 25, 2011. The Term Loan Credit Agreement provides for a five-year $60 million term loan facility (the “Term Loan Facility”) and the Revolving Loan Credit Agreement provides for a five-year $50 million revolving loan facility (the “Revolving Loan Facility”). The Revolving Loan Facility may be increased to up to $70 million, subject to lender approval. The obligations of the Borrowers under the Credit Agreements are secured by a lien on substantially all of the assets of the Borrowers. For more information, see Note 2, “Debt,” of the condensed consolidated financial statements included in Part I, Item 1 of this report.
As of
March 31, 2016
, the Term Loan Facility and Revolving Loan Facility had outstanding balances of
$60.0 million
and
$19.2 million
, respectively. The borrowing base on the Revolving Loan Facility was
$38.6 million
as of
March 31, 2016
, 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. The interest rate on the Term Loan Facility was
8.00%
at
March 31, 2016
and the weighted average interest rate on the Revolving Loan Facility was
4.95%
at
March 31, 2016
.
Convertible Senior Notes
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, beginning December 1, 2014. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
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.
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.
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures in this report. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures for the respective periods can be found in the tables below. An explanation of the manner in which our management uses these non-GAAP measures to conduct and evaluate our business and the reasons management believes these non-GAAP measures provide 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
|
|
|
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
|
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
|
$
|
52,982
|
|
|
$
|
—
|
|
|
$
|
52,982
|
|
|
$
|
48,600
|
|
|
9
|
%
|
|
9
|
%
|
|
International
|
9,902
|
|
|
331
|
|
|
10,233
|
|
|
8,822
|
|
|
12
|
%
|
|
16
|
%
|
|
Total revenue
|
$
|
62,884
|
|
|
$
|
331
|
|
|
$
|
63,215
|
|
|
$
|
57,422
|
|
|
10
|
%
|
|
10
|
%
|
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
|
|
|
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
|
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
|
$
|
41,912
|
|
|
$
|
139
|
|
|
$
|
42,051
|
|
|
$
|
36,513
|
|
|
15
|
%
|
|
15
|
%
|
|
Lead management
|
17,096
|
|
|
158
|
|
|
17,254
|
|
|
16,431
|
|
|
4
|
%
|
|
5
|
%
|
|
Laser, service, and other
|
3,876
|
|
|
34
|
|
|
3,910
|
|
|
4,478
|
|
|
(13
|
)%
|
|
(13
|
)%
|
|
Total revenue
|
$
|
62,884
|
|
|
$
|
331
|
|
|
$
|
63,215
|
|
|
$
|
57,422
|
|
|
10
|
%
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Loss to Non-GAAP Net Loss
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
|
Net loss, as reported
|
|
$
|
(17,291
|
)
|
|
$
|
(27,305
|
)
|
|
Acquisition transaction, integration and other costs (1)
|
|
292
|
|
|
10,391
|
|
|
Amortization of acquired inventory step-up (2)
|
|
—
|
|
|
251
|
|
|
Acquisition-related intangible asset amortization (3)
|
|
3,203
|
|
|
3,170
|
|
|
Contingent consideration expense (4)
|
|
100
|
|
|
1,024
|
|
|
Non-GAAP net loss
|
|
$
|
(13,696
|
)
|
|
$
|
(12,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Loss Per Share to Non-GAAP Net Loss Per Share
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
|
Net loss per share, as reported
|
|
$
|
(0.40
|
)
|
|
$
|
(0.65
|
)
|
|
Acquisition transaction, integration and other costs (1)
|
|
0.01
|
|
|
0.25
|
|
|
Amortization of acquired inventory step-up (2)
|
|
—
|
|
|
0.01
|
|
|
Acquisition-related intangible asset amortization (3)
|
|
0.07
|
|
|
0.08
|
|
|
Contingent consideration expense (4)
|
|
—
|
|
|
0.02
|
|
|
Non-GAAP net loss per share (5)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.30
|
)
|
_________________
|
|
|
|
1)
|
Acquisition transaction, integration and other costs relate to the AngioScore and Stellarex acquisitions, which closed on June 30, 2014 and January 27, 2015, respectively, and included investment banking fees, accounting, consulting, and legal fees, severance
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
and retention costs, and non-recurring costs associated with establishing manufacturing operations to support the Stellarex program. In addition, these costs included $0.2 million and $8.0 million in the three months ended March 31, 2016, and 2015, respectively, for legal fees, including legal fees and costs advanced, associated with a patent and breach of fiduciary duty matter in which AngioScore is the plaintiff.
|
|
|
|
2)
|
Amortization of acquired inventory step-up relates to the inventory acquired in the AngioScore acquisition.
|
|
|
|
|
3)
|
Acquisition-related intangible asset amortization relates primarily to intangible assets acquired in the AngioScore acquisition in June 2014 and the Stellarex acquisition in January 2015.
|
|
|
|
|
4)
|
Contingent consideration expense primarily represents the accretion of the estimated contingent consideration liability related to future amounts payable to former AngioScore stockholders, based on sales of the AngioScore products and achievement of regulatory milestones.
|
|
|
|
|
5)
|
Per share amounts may not add due to rounding.
|
Management uses the non-GAAP financial measures as supplemental measures to analyze the underlying trends in our business, assess the performance of our core operations, establish operational goals and forecasts that are used in allocating resources and evaluate our performance period over period on a comparable basis and in relation to our competitors’ operating results. In general, the income or expenses that are excluded from non-GAAP financial measures are intended to enhance the comparability of results between periods and are non-cash costs or non-recurring costs.
The impact of foreign exchange rates is highly variable and difficult to predict. We use a constant currency basis to show the impact from foreign exchange rates on current period revenue compared to prior period revenue using the prior period’s foreign exchange rates. In order to properly understand the underlying business trends and performance of our ongoing operations, we believe that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our revenue.
We believe that presenting the non-GAAP financial measures used in this report provides investors greater transparency to the information used by our management for financial and operational decision-making and allows investors to see our results “through the eyes” of management. We also believe that providing this information better enables our investors to understand our operating performance and evaluate the methodology used by management to evaluate and measure such performance.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Some limitations associated with using these non-GAAP financial measures are provided below:
|
|
|
|
•
|
Management exercises judgment in determining which types of charges or other items should be excluded from the non-GAAP financial measures used.
|
|
|
|
|
•
|
Amortization expense, while not requiring cash settlement, is an ongoing and recurring expense, has a material impact on GAAP net loss, and reflects an economic cost to us not reflected in non-GAAP net loss.
|
|
|
|
|
•
|
Items such as the acquisition transaction and integration costs and contingent consideration expense, excluded from non-GAAP net (loss) income, can have a material impact on cash flows and GAAP net loss and reflect economic costs to us not reflected in non-GAAP net loss.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
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.
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in conformity with 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
2015
Annual Report on Form 10-K. During the
three
months ended
March 31, 2016
, 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
three
months ended
March 31, 2016
, compared with the
three
months ended
March 31, 2015
, caused a decrease of approximately
$0.3 million
in consolidated revenue and an increase of approximately
$0.1 million
in consolidated net loss.
Based on our overall foreign currency exchange rate exposure as of
March 31, 2016
, a 10% appreciation or depreciation of the U.S. dollar would have had a positive or negative impact on our consolidated revenue for the
three
months ended
March 31, 2016
of approximately
$0.6 million
, and a 20% appreciation or depreciation of the U.S. dollar would have had a positive or negative impact on our consolidated revenue for the
three
months ended
March 31, 2016
of approximately
$1.3 million
.
As of
March 31, 2016
, we are exposed to interest rate risk related to our Revolving Loan Facility and our 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 $0.8 million for an annual period on the $19.2 million and $60.0 million balances outstanding as of
March 31, 2016
under our Revolving Loan Facility and Term Loan Facility, respectively. The Notes are at fixed rates, and therefore are not subject to market risk.
Item 4.
Controls and Procedures
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
March 31, 2016
. Our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of
March 31, 2016
.
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.