UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the fiscal year ended
June 30, 2009
|
|
OR
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
Commission file number:
000-52082
CARDIOVASCULAR SYSTEMS,
INC.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
|
|
41-1698056
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
651 Campus Drive
St. Paul, Minnesota
(Address of principal
executive offices)
|
|
55112-3495
(Zip Code)
|
Registrant’s telephone number, including area code:
(651) 259-1600
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, One-tenth of One Cent ($0.001)
Par Value Per Share
|
|
NASDAQ Global Market
|
Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
|
|
|
|
|
|
Large
accelerated
filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
Smaller
reporting
company
þ
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
As of December 31, 2008, the aggregate market value of the
registrant’s common stock held by non-affiliates of the
registrant was $9,236,344 based on the closing sale price as
reported on the NASDAQ Global Market.
The number of shares of the registrant’s common stock
outstanding as of September 24, 2009 was 14,598,226.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2009
Annual Meeting of Stockholders are incorporated by reference
into Items 10, 11, 12, 13 and 14 of Part III of this
report.
Table of
Contents
We make available, free of charge, copies of our annual report
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act on
our web site,
http://www.csi360.com
,
as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC. We are not
including the information on our web site as a part of, or
incorporating it by reference into, our
Form 10-K.
i
PART I
Special
Note Regarding Forward Looking Statements
This report contains plans, intentions, objectives, estimates
and expectations that constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
which are subject to the “safe harbor” created by
those sections. Forward-looking statements are based on our
management’s beliefs and assumptions and on information
currently available to our management. In some cases, you can
identify forward-looking statements by terms such as
“may,” “will,” “should,”
“could,” “would,” “expect,”
“plans,” “anticipates,”
“believes,” “estimates,”
“projects,” “predicts,”
“potential” and similar expressions intended to
identify forward-looking statements. Examples of these
statements include, but are not limited to, any statements
regarding our future financial performance, results of
operations or sufficiency of capital resources to fund our
operating requirements, and other statements that are other than
statements of historical fact. Our actual results could differ
materially from those discussed in these forward-looking
statements due to a number of factors, including the risks and
uncertainties are described more fully by us in Part I,
Item 1A and Part II, Item 7 of this report and in
our other filings with the SEC. You should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this report. You should read this report
completely and with the understanding that our actual future
results may be materially different from what we expect. Except
as required by law, we assume no obligation to update these
forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in
these forward-looking statements, even if new information
becomes available in the future.
Corporate
Information
We were incorporated as Replidyne, Inc. in Delaware in 2000. On
February 25, 2009, Replidyne, Inc. completed its business
combination with Cardiovascular Systems, Inc., a Minnesota
corporation (“CSI-MN”), in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as
of November 3, 2008, by and among Replidyne, Responder
Merger Sub, Inc., a wholly-owned subsidiary of Replidyne
(“Merger Sub”), and CSI-MN (the “Merger
Agreement”). Pursuant to the Merger Agreement, Merger Sub
merged with and into CSI-MN, with CSI-MN continuing after the
merger as the surviving corporation and a wholly-owned
subsidiary of Replidyne. At the effective time of the merger,
Replidyne changed its name to Cardiovascular Systems, Inc.
(“CSI”) and CSI-MN changed its name to CSI Minnesota,
Inc. As of immediately following the effective time of the
merger, former CSI-MN stockholders owned approximately 80.2% of
the outstanding common stock of the combined company, and
Replidyne stockholders owned approximately 19.8% of the
outstanding common stock of the combined company. Following the
merger of Merger Sub with CSI-MN, CSI-MN merged with and into
CSI, with CSI continuing after the merger as the surviving
corporation. These transactions are referred to herein as the
“merger.” Unless the context otherwise requires, all
references herein to the “Company,” “CSI,”
“we,” “us” and “our” refer to
CSI-MN prior to the completion of the merger and to CSI
following the completion of the merger and the name change, and
all references to “Replidyne” refer to Replidyne prior
to the completion of the merger and the name change.
Replidyne was a biopharmaceutical company focused on
discovering, developing, in-licensing and commercializing
anti-infective products.
CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997,
we engaged in research and development on several different
product concepts that were later abandoned. Since 1997, we have
devoted substantially all of our resources to the development of
the Diamondback 360° and our Viper line of ancillary
products.
Our principal executive office is located at 651 Campus Drive,
St. Paul, Minnesota 55112. Our telephone number is
(651) 259-2800,
and our website is www.csi360.com. The information contained in
or connected to our website is not incorporated by reference
into, and should not be considered part of, this Annual Report
on
Form 10-K.
1
We have received federal registration of certain marks including
“Diamondback 360°” and “CSI.” We have
applied for federal registration of certain marks, including
“ViperWire”, “ViperWire Advance”,
“ViperSheath”, “ViperSlide”,
“ViperTrack”, and “ViperCaddy.” All other
trademarks, trade names and service marks appearing in this
Form 10-K
are the property of their respective owners.
Business
Overview
We are a medical device company focused on developing and
commercializing minimally invasive treatment solutions for
vascular disease. Interventional endovascular treatment of
peripheral artery disease, or PAD, was our initial area of
focus. PAD is caused by the accumulation of plaque in peripheral
arteries, most commonly occurring in the pelvis and legs, and
affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. However, as reported in an article published in Podiatry
Today in 2006, only approximately 2.5 million of those
eight to 12 million people are treated. PAD is a
progressive disease, and, if left untreated, can lead to limb
amputation or death.
Our primary product, the Diamondback
360
®
PAD System, is a catheter-based platform capable of treating a
broad range of plaque types in leg arteries both above and below
the knee and addresses many of the limitations associated with
existing treatment alternatives. In August 2007, the
U.S. Food and Drug Administration, or FDA, granted us
510(k) clearance for use of the Diamondback 360° as a
therapy for treatment of patients with PAD. We commenced a
limited commercial introduction of the Diamondback 360° in
the United States in September 2007 and began a full commercial
launch during the quarter ended March 31, 2008. As of
June 30, 2009, we were selling the Diamondback 360° in
556 accounts that had completed an estimated 15,000 procedures.
The Diamondback 360°’s single-use catheter
incorporates a flexible drive shaft with an offset crown coated
with diamond grit. With the aid of fluoroscopy, the physician
positions the crown at a plaque-containing lesion in the
peripheral artery and removes the plaque by causing the crown to
orbit against it. This mechanism of action creates a smooth
lumen, or channel, in the vessel. The Diamondback 360° is
designed to differentiate between plaque and compliant arterial
tissue, a concept that we refer to as “differential
sanding.” Normal arteries are compliant; they have the
ability to expand and contract as needed to supply blood flow to
the legs and feet. Arteries burdened with fibrotic (moderate)
and/or
calcified (hardened) plaque due to PAD lose their compliance
which makes other therapies such as angioplasty, stenting,
surgical bypass and directional atherectomy problematic. The
Diamondback 360° sands plaque into small particles and
restores both blood flow and vessel compliance. The particles
created by the Diamondback 360° are generally smaller than
red blood cells and are carried away by the bloodstream. The
small size of the particles avoids the need for plaque
collection reservoirs. The Diamondback 360° can treat the
diseased arteries with less than three minutes of sanding time,
potentially reducing the overall procedure time.
We have conducted three clinical trials involving
207 patients to demonstrate the safety and efficacy of the
Diamondback 360° in treating PAD. In particular, our
pivotal OASIS clinical trial was a prospective 20-center United
States study that involved 124 patients with 201 lesions
and successfully met FDA targets. The OASIS Study demonstrated a
low 2.4% incidence of target lesion revascularization at six
months. In addition, the Diamondback 360° achieved a 100%
limb salvage rate at six months in a group of patients with
mostly
below-the-knee
disease. We were the first company to conduct a prospective
multi-center clinical trial with a prior investigational device
exemption, or IDE, in support of a 510(k) clearance for this
device category. We continue to support device performance
through a rigorous clinical program and have initiated two
post-market, randomized feasibility studies to further
differentiate the outcomes of the Diamondback 360° from
those of conventional balloon angioplasty. In addition, we
believe that the Diamondback 360° provides a platform that
can be leveraged across multiple market segments. We are seeking
premarket approval, or PMA, to use the Diamondback 360° to
treat patients with coronary artery disease and have submitted
an IDE to the FDA.
In addition to the Diamondback 360°, we are expanding our
product portfolio through internal product development and
establishment of business relationships. We now offer multiple
accessory devices designed to complement the use of the
Diamondback 360°, and we have entered into distribution
agreements with Invatec, Inc. and Asahi-Intecc, Ltd.
2
Market
Overview
PAD is a circulatory problem in which plaque deposits build up
on the walls of arteries, reducing blood flow to the limbs. The
most common early symptoms of PAD are pain, cramping or fatigue
in the leg or hip muscles while walking. Symptoms may progress
to include numbness, tingling or weakness in the leg and, in
severe cases, burning or aching pain in the leg, foot or toes
while resting. As PAD progresses, additional signs and symptoms
occur, including cooling or color changes in the skin of the
legs or feet, and sores on the legs or feet that do not heal. If
untreated, PAD may lead to critical limb ischemia, a condition
in which the amount of oxygenated blood being delivered to the
limb is insufficient to keep the tissue alive. Critical limb
ischemia often leads to large non-healing ulcers, infections,
gangrene and, eventually, limb amputation or death.
PAD affects approximately eight to 12 million people in the
United States, as cited by the authors of the PARTNERS study
published in the Journal of the American Medical Association in
2001. According to 2007 statistics from the American Heart
Association, PAD becomes more common with age and affects
approximately 12% to 20% of the population over 65 years
old. An aging population, coupled with increasing incidence of
diabetes and obesity, is likely to increase the prevalence of
PAD. In many older PAD patients, particularly those with
diabetes, PAD is characterized by fibrotic (moderate) or
calcified (hardened) plaque deposits that have not been
successfully treated with existing non-invasive treatment
techniques. PAD may involve arteries either above or below the
knee. Arteries above the knee are generally long, straight and
relatively wide, while arteries below the knee are shorter and
branch into arteries that are progressively smaller in diameter.
Despite the severity of PAD, it remains relatively
underdiagnosed. According to an article published in Podiatry
Today in 2006, only approximately 2.5 million of the eight
to 12 million people in the United States with PAD are
diagnosed. Although we believe the rate of diagnosis of PAD is
increasing, underdiagnosis continues due to patients failing to
display symptoms or physicians misinterpreting symptoms as
normal aging. Recent emphasis on PAD education from medical
associations, insurance companies and other groups, coupled with
publications in medical journals, is increasing physician and
patient awareness of PAD risk factors, symptoms and treatment
options. The PARTNERS study advocated increased PAD screening by
primary care physicians.
Physicians treat a significant portion of the 2.5 million
people in the United States who are diagnosed with PAD using
medical management, which includes lifestyle changes, such as
diet and exercise and drug treatment. For instance, within a
reference group of over 1,000 patients from the PARTNERS
study, 54% of the patients with a prior diagnosis of PAD were
receiving antiplatelet medication treatment. While medications,
diet and exercise may improve blood flow, they do not treat the
underlying obstruction and many patients have difficulty
maintaining lifestyle changes. Additionally, many prescribed
medications are contraindicated, or inadvisable, for patients
with heart disease, which often exists in PAD patients. As a
result of these challenges, many medically managed patients
develop more severe symptoms that require procedural
intervention.
Our
Solution
The Diamondback 360° represents a new approach to the
treatment of PAD that provides physicians and patients with a
procedure that addresses many of the limitations of traditional
treatment alternatives. The Diamondback 360°’s
single-use catheter incorporates a flexible drive shaft with an
offset crown coated with diamond grit. Physicians position the
crown at the site of an arterial plaque lesion and remove the
plaque by causing the crown to orbit against it, creating a
smooth lumen, or channel, in the vessel. The Diamondback
360° is a device designed to differentiate between plaque
and compliant arterial tissue, a concept that we refer to as
“differential sanding.”
Normal arteries are compliant; they have the ability to expand
and contract as needed to supply blood flow to the legs and
feet. Arteries burdened with fibrotic (moderate)
and/or
calcified (hardened) plaque due to PAD lose their compliance
which makes other therapies such as angioplasty, stenting,
surgical bypass and atherectomy problematic. The Diamondback
360° sands plaque into small particles and restores both
blood flow and vessel compliance. The particles created by the
Diamondback 360° are generally smaller than red blood cells
and are carried away by the bloodstream. The small size of the
particles avoids the need for plaque collection reservoirs. The
Diamondback 360° can treat the diseased arteries with less
than three minutes of sanding time, potentially reducing the
overall procedure time.
3
We believe that the Diamondback 360° offers the following
key benefits:
Strong
Safety Profile
|
|
|
|
|
|
•
|
Differential Sanding Reduces Risk of Adverse
Events.
The Diamondback 360° is designed to
differentiate between plaque and compliant arterial tissue. The
diamond grit coated offset crown engages and removes plaque from
the artery wall with minimal likelihood of penetrating or
damaging the fragile, internal elastic lamina layer of the
arterial wall because compliant tissue flexes away from the
crown. Furthermore, the Diamondback 360° rarely penetrates
even the middle inside layer of the artery and the two elastic
layers that border it. The Diamondback 360°’s
perforation rate was 2.4% during our pivotal OASIS trial.
Analysis by an independent pathology laboratory of more than 434
consecutive cross sections of porcine arteries treated with the
Diamondback 360° revealed there was minimal to no damage,
on average, to the medial layer, which is typically associated
with restenosis. In addition, the safety profile of the
Diamondback 360° was found to be non-inferior to that of
angioplasty, which is often considered the safest of
interventional methods. This was demonstrated in our OASIS
trial, which had a low 4.8% rate of device-related serious
adverse events, or SAEs.
|
|
|
|
|
•
|
Reduces the Risk of Distal Embolization.
The
Diamondback 360° sands plaque away from artery walls in a
manner that produces particles of such a small size —
generally smaller than red blood cells — that they are
carried away by the bloodstream. The small size of the particles
avoids the need for plaque collection reservoirs on the catheter
and reduces the need for ancillary distal protection devices,
commonly used with directional cutting atherectomy, and also
significantly reduces the risk that larger pieces of removed
plaque will block blood flow downstream.
|
|
|
|
|
•
|
Allows Continuous Blood Flow During
Procedure.
The Diamondback 360° allows for
continuous blood flow during the procedure, except when used in
chronic total occlusions. Other devices may restrict blood flow
due to the size of the catheter required or the use of distal
protection devices, which could result in complications such as
excessive heat and tissue damage.
|
Proven
Efficacy
|
|
|
|
|
|
•
|
Efficacy Demonstrated in a 124-Patient Clinical
Trial.
Our pivotal OASIS clinical trial was a
prospective 20-center study that involved 124 patients with
201 lesions and performance targets were established
cooperatively with the FDA before the trial began. Despite 55%
of the lesions consisting of calcified plaque and 48% of the
lesions having a length greater than three centimeters, the
performance of the device in the OASIS trial successfully met
the FDA’s study endpoints.
|
|
|
|
|
•
|
Treats Difficult, Fibrotic and Calcified
Lesions.
The Diamondback 360° enables
physicians to remove plaque from long, fibrotic, calcified or
bifurcated lesions in peripheral arteries both above and below
the knee. Other PAD devices have demonstrated limited
effectiveness in treating these challenging lesions.
|
|
|
|
|
•
|
Orbital Motion Improves
Device-to-Lumen
Ratio.
The orbiting action of the Diamondback
360° can create a lumen of approximately 2.0 times the
diameter of the crown. The variable
device-to-lumen
ratio allows the continuous removal of plaque as the opening of
the lumen increases during the operation of the device.
Non-orbiting rotational atherectomy catheters remove plaque by
abrading the lesion with a spinning, abrasive burr, which acts
in a manner similar to a drill and only creates a lumen the same
size or slightly smaller than the size of the burr.
|
|
|
|
|
•
|
Differential Sanding Creates Smooth
Lumens.
The differential sanding of the
Diamondback 360° creates a smooth surface inside the lumen.
We believe that the smooth lumen created by the Diamondback
360° increases the velocity of blood flow and decreases the
resistance to blood flow which may decrease potential for
restenosis, or renarrowing of the arteries.
|
Ease
of Use
|
|
|
|
|
|
•
|
Utilizes Familiar Techniques.
Physicians using
the Diamondback 360° employ techniques similar to those
used in angioplasty, which are familiar to interventional
cardiologists, vascular surgeons and interventional
|
4
|
|
|
|
|
|
|
radiologists who are trained in endovascular techniques. The
Diamondback 360°’s simple user interface requires
minimal additional training. The system’s ability to
differentiate between diseased and compliant tissue reduces the
risk of complications associated with user error and potentially
broadens the user population.
|
|
|
|
|
|
|
•
|
Single Insertion to Complete Treatment.
The
Diamondback 360°’s orbital technology and differential
sanding process in most cases allows for a single insertion to
treat lesions. Because the particles of plaque sanded away are
of such small sizes, the Diamondback 360° does not require
a collection reservoir that needs to be repeatedly emptied or
cleaned during the procedure. Rather, the Diamondback 360°
allows for multiple passes of the device over the lesion until
plaque is removed and a smooth lumen is created.
|
|
|
|
|
•
|
Limited Use of Fluoroscopy.
The relative
simplicity of our process and predictable crown location allows
physicians to significantly reduce fluoroscopy use, thus
limiting radiation exposure.
|
Cost
and Time Efficient Procedure
|
|
|
|
|
|
•
|
Short Procedure Time.
The Diamondback
360° has a short procedure time typically ranging from two
to six minutes.
|
|
|
|
|
•
|
Single Crown Can Create Various Lumen Sizes Limiting Hospital
Inventory Costs.
The Diamondback 360°’s
orbital mechanism of action allows a single-sized device to
create various diameter lumens inside the artery. Adjusting the
rotational speed of the crown changes the orbit to create the
desired lumen diameter, thereby potentially avoiding the need to
use multiple catheters of different sizes to treat multiple
lesions. The Diamondback 360° can create a lumen that is
100% larger than the actual diameter of the device, for a
device-to-lumen
ratio of approximately 1.0 to 2.0.
|
|
|
|
|
•
|
Single Insertion Reduces Procedural
Time.
Since the physician does not need to insert
and remove multiple catheters or clean a plaque collection
reservoir to complete the procedure, there is a potential for
decreased procedure time.
|
Our
Strategy
Our goal is to be the leading provider of minimally invasive
solutions for the treatment of vascular disease. The key
elements of our strategy include:
|
|
|
|
|
|
•
|
Drive Adoption Through Our Direct Sales Organization and Key
Physician Leaders.
We expect to continue to drive
adoption of the Diamondback 360° through our direct sales
force, which targets interventional cardiologists, vascular
surgeons and interventional radiologists. We commenced a limited
commercial introduction in September 2007 and broadened its
commercialization efforts to a full commercial launch in the
quarter ended March 31, 2008. As of June 30, 2009, we
had a 124 person direct sales force driving product
adoption in 556 hospitals in the United States. Over 15,000
Diamondback 360° procedures were completed as of
June 30, 2009. As a key element of our strategy, we focus
on educating and training physicians on the Diamondback
360° through our direct sales force and during seminars
where physician industry leaders discuss case studies and
treatment techniques using the Diamondback 360°.
|
|
|
|
|
•
|
Collect Additional Clinical Evidence on Benefits of the
Diamondback 360°.
We are focused on using
clinical evidence to demonstrate the advantages of our system
and drive physician acceptance. We have conducted three clinical
trials to demonstrate the safety and efficacy of the Diamondback
360° in treating PAD, involving 207 patients,
including our pivotal OASIS trial. In addition, we have
initiated two clinically rigorous, randomized post-market
feasibility trials to further differentiate the performance of
the Diamondback 360° from conventional balloon angioplasty.
In both of these studies, the CALCIUM 360° and COMPLIANCE
360°, acute procedural success and device safety will be
verified by an independent core lab, and the long-term
durability of the procedure will be evaluated.
|
|
|
|
|
•
|
Expand Product Portfolio within the Market for Treatment of
Peripheral Arteries.
In addition to the
Diamondback 360°, we are expanding our product portfolio.
We now offer multiple accessory devices
|
5
|
|
|
|
|
|
|
designed to complement the use of the Diamondback 360°.
Within the past 12 months, we have launched the following
products:
|
|
|
|
|
|
|
•
|
ViperSlide
tm
Lubricant
— an exclusive lubricant designed to
optimize the smooth operation of the Diamondback 360°
|
|
|
|
|
•
|
ViperSheath
tm
Introducer Sheath
— 5-7 French kink-resistant and
crush-resistant vascular access tools offered in 45 cm and 85 cm
lengths
|
|
|
|
|
•
|
ViperTrack
tm
Radiopaque Tape
— a radiopaque tape to assist in
measuring lesion lengths and marking lesion locations
|
|
|
|
|
•
|
ViperCaddy
tm
Guide Wire Management —
a secure guide wire holder
that is easy to use and provides a steady grip on the multiple
guide wires used during an interventional procedure.
|
We are continuing to actively pursue internal product
development to further expand our portfolio of PAD treatment
solutions.
|
|
|
|
|
|
•
|
Leverage Technology Platform into Coronary
Market.
Based on the excellent clinical
performance of the Diamondback
360
o
in
treating lower extremity PAD, we intend to leverage the
device’s capabilities to expand into the interventional
coronary market. A coronary application would address a large
market opportunity, further leveraging our core technology and
expanding its market potential. In 2008, we completed the ORBIT
I trial, a 50-patient study in India which investigated the
safety of the Diamondback
360
o
device in treating calcified coronary artery lesions. Results
successfully met both safety and efficacy endpoints. An IDE
application was recently submitted to the FDA for ORBIT II, a
pivotal trial in the United States to evaluate the safety
and effectiveness of the Diamondback
360
o
in
treating severely calcified coronary lesions.
|
|
|
|
|
•
|
Pursue Strategic Acquisitions and
Partnerships.
We have recently entered into
agreements with both Invatec, Inc. and Asahi-Intecc, Ltd. In
April 2009, we signed a sales agency agreement with Invatec,
Inc. to distribute the Invatec balloon catheter line, including
the SubMarine
Plus
tm
PTA Balloon Catheter, the Admiral
Xtreme
tm
PTA Balloon Catheter and the Amphirion
Deep
tm
PTA Balloon Catheter. These balloons are typically used at low
pressure, if needed, following the restoration of vessel
compliance with the Diamondback 360°. In August 2009, we
signed an exclusive distribution agreement with Asahi-Intecc,
Ltd. to market its peripheral guide wire line in the United
States. We offer two Asahi 0.18 wire platforms: the Astato 30
and Treasure 12. The Astato 30 is a high-penetration guide wire
specially designed to break through fibrous caps and calcium
deposits, and treat long, complex lesions. The Treasure 12 has a
one-piece core to provide control, torque performance and
tactile feedback to the physician.
|
In addition to adding to our product portfolio through internal
development efforts, we intend to continue to explore the
acquisition of other product lines, technologies or companies
that may leverage our sales force or complement our strategic
objectives. We plan to continue to evaluate distribution
agreements, licensing transactions and other strategic
partnerships.
Our
Product
Components
of the Diamondback 360°
The Diamondback 360° consists of a single-use, low-profile
catheter that travels over our proprietary
ViperWire
tm
Guide Wire. The system is used in conjunction with a reusable
external control unit.
Catheter.
The catheter consists of:
|
|
|
|
|
|
•
|
a control handle, which allows precise movement of the crown and
predictable crown location;
|
|
|
|
|
•
|
a flexible drive shaft with a diamond grit coated offset crown,
which tracks and orbits over the guidewire; and
|
|
|
|
|
•
|
a sheath, which covers the drive shaft and permits delivery of
saline or medications to the treatment area.
|
6
The crown is available in two configurations — classic
and solid. The classic crown addresses treatment needs in
arteries typically below the knee and in more tortuous anatomy,
while the solid crown addresses treatment needs in larger
arteries typically above the knee. The crown is available in
multiple sizes, including 1.25, 1.50, 1.75, 2.00 and 2.25
millimeter diameters. The catheter length is 135 centimeters
which addresses procedural approach and target lesion locations
both above and below the knee.
ViperWire Guidewire.
The ViperWire, which is
located within the catheter, maintains device position in the
vessel and is the rail on which the catheter operates. The
ViperWire is available in two levels of firmness.
Control Unit.
The control unit incorporates a
touch-screen interface on an easily maneuverable, lightweight
pole. Using an external air supply, the control unit regulates
air pressure to drive the turbine located in the catheter handle
to speeds ranging up to 200,000 revolutions per minute. Saline,
delivered by a pumping mechanism on the control unit, bathes the
device shaft and crown. The constant flow of saline reduces the
risk of heat generation.
Technology
Overview
The two technologies used in the Diamondback 360° are
plaque modification through differential sanding and plaque
removal.
Plaque Modification through Differential
Sanding.
The Diamondback 360°’s design
allows the device to differentiate between compliant and
diseased arterial tissue. This property is common with sanding
material such as the diamond grit used in the Diamondback
360°. The diamond preferentially engages and sands harder
material. The Diamondback 360° also treats soft plaque,
which is less compliant than a normal vessel wall. Arterial
lesions tend to be harder and stiffer than compliant, undiseased
tissue, and they often are fibrotic or calcified. The
Diamondback 360° sands the lesion but does not damage more
compliant parts of the artery. The mechanism is a function of
the centrifugal force generated by the Diamondback 360° as
it rotates. As the crown moves outward, the centrifugal force is
offset by the counterforce exerted by the arterial wall. If the
tissue is compliant, it flexes away, rather than generating an
opposing force that would allow the Diamondback 360° to
engage and sand the wall. Diseased tissue provides resistance
and is able to generate an opposing force that allows the
Diamondback 360° to engage and sand the plaque. The sanded
plaque is broken down into particles generally smaller than
circulating red blood cells that are washed away downstream with
the patient’s natural blood flow. Of 36 consecutive
experiments that we performed in carbon blocks, animal and
cadaver models:
|
|
|
|
|
|
•
|
93.1% of particles were smaller than a red blood cell, with a
99% confidence interval; and
|
|
|
|
|
•
|
99.3% of particles were smaller than the lumen of the
capillaries (which provide the connection between the arterial
and venous system), with a 99% confidence interval.
|
The small particle size minimizes the risk of vascular bed
overload, or a saturation of the peripheral vessels with large
particles, which may cause slow or reduced blood flow to the
foot. We believe that the small size of the particles also
allows them to be managed by the body’s natural cleansing
of the blood, whereby various types of white blood cells
eliminate worn-out cells and other debris in the bloodstream.
Plaque Removal.
The system operates on the
principles of centrifugal force. As the speed of the
crown’s rotation increases, it creates centrifugal force,
which increases the crown’s orbit and presses the diamond
grit coated offset crown against the lesion or plaque, removing
a small amount of plaque with each orbit. The characteristics of
the orbit and the resulting lumen size can be adjusted by
modifying three variables:
|
|
|
|
|
|
•
|
Speed.
An increase in speed creates a larger
lumen. Our current system allows the user to choose between
three rotational speeds. The fastest speed can result in a
device-to-lumen
ratio of 1.0 to 2.0, for a lumen that is approximately 100%
larger than the actual diameter of the device.
|
|
|
|
|
•
|
Crown Characteristics.
The crown can be
designed with various weights (as determined by different
materials and density) and coated with diamond grit of various
width, height and configurations. Our current system offers the
choice between a hollow, lightweight crown and a solid, heavier
crown, which could potentially increase the
device-to-lumen
ratio. We are developing a crown utilizing an alternative
material that potentially will enhance the device’s orbit
and more effectively modify and remove plaque from the arterial
wall.
|
7
|
|
|
|
|
|
•
|
Drive Shaft Characteristics.
The drive shaft
can be designed with various shapes and degrees of rigidity. We
are developing a new drive shaft that may enhance the ability to
advance the device more smoothly and effectively through
tortuous anatomy and challenging lesion morphologies and
potentially enhance the device’s performance.
|
We view the Diamondback 360° as a platform that can be used
to develop additional products by adjusting one or more of the
speed, crown and shaft variables.
Applications
The Diamondback 360° can be used to treat plaque in
multiple anatomic locations.
Below-the-Knee
Peripheral Artery Disease.
Arteries below the
knee have small diameters and may be diffusely diseased,
calcified or both, limiting the effectiveness of traditional
devices. The Diamondback 360° is effective in both diffuse
and calcified vessels as demonstrated in the OASIS trial, where
94.5% of lesions treated were below the knee.
Above-the-Knee
Peripheral Artery Disease.
Plaque in arteries
above the knee may also be diffuse, fibrotic and calcific;
however, these arteries are longer, straighter and wider than
below-the-knee
vessels. While effective in
difficult-to-treat
below-the-knee
vessels, and indicated for vessels up to four millimeters in
diameter, our product is also being used to treat lesions above
the knee. The Millennium Research Group estimates that there
will be approximately 258,600 procedures to treat
above-the-knee
PAD in 2010 and that there will be approximately 71,220
procedures to treat
below-the-knee
PAD in 2010.
Coronary Artery Disease.
Given the many
similarities between peripheral and coronary artery disease, we
have developed a modified version of the Diamondback 360°
to treat coronary arteries. We have conducted numerous bench
studies, four pre-clinical animal studies, and our ORBIT I
50-patient human clinical study to evaluate the Diamondback
360° in coronary artery disease. In the bench studies, we
evaluated the system for conformity to specifications and
patient safety, and, under conditions of expected clinical use,
no safety issues were observed. In three of the animal studies,
the system was used to treat a large number of stented and
non-stented arterial lesions. The system was able to safely
debulk lesions without evidence or observations of significant
distal embolization, and the treated vessels in the animal
studies showed only minimal to no damage. The fourth animal
study evaluated the safety of the system for the treatment of
coronary stenosis. There were no device-related adverse events
associated with system treatment during this study, with some
evidence of injury observed in 17% of the tissue sections
analyzed, although 75% of these injuries were minimal or mild. A
coronary application would require us to conduct a clinical
trial and receive PMA from the FDA. We participated in three
pre-IDE meetings with the FDA and completed the human
feasibility portion of a coronary trial in the summer of 2008 in
India, enrolling 50 patients. The FDA has agreed to accept
the data from the India trial to support an IDE submission and
we have submitted the IDE based on the results of this trial.
Clinical
Trials and Studies for Our Products
We have conducted three clinical trials to demonstrate the
safety and efficacy of the Diamondback 360° in treating
PAD, enrolling a total of 207 patients in our PAD I and PAD
II pilot trials and our pivotal OASIS trial. We have recently
completed a retrospective study evaluating the long-term results
of 64 patients from the OASIS Trial in order to determine
durability of procedure results. In addition, we have also
initiated two post-market, randomized feasibility studies to
further differentiate the performance of the Diamondback
360° from conventional balloon angioplasty.
8
The common metrics used to evaluate the efficacy of plaque
removal devices for PAD include:
|
|
|
|
|
Metric
|
|
Description
|
|
|
|
Absolute Plaque Reduction
|
|
Absolute plaque reduction is the difference between the
pre-treatment percent stenosis, or the narrowing of the vessel,
and the
post-treatment
percent stenosis as measured angiographically.
|
|
Target Lesion Revascularization
|
|
Target lesion revascularization rate, or TLR rate, is the
percentage of patients at
follow-up
who have another peripheral intervention precipitated by their
worsening symptoms, such as an angioplasty, stenting or surgery
to reopen the treated lesion site.
|
|
Ankle Brachial Index
|
|
The Ankle Brachial Index, or ABI, is a measurement that is
useful to evaluate the adequacy of circulation in the legs and
improvement or worsening of leg circulation over time. The ABI
is a ratio between the blood pressure in a patient’s ankle
and a patient’s arm, with a ratio above 0.9 being normal.
|
The common metrics used to evaluate the safety of atherectomy
devices for PAD include:
|
|
|
|
|
Metric
|
|
Description
|
|
|
|
Serious Adverse Events
|
|
Serious adverse events, or SAEs, include any experience that is
fatal or life-threatening, is permanently disabling, requires or
prolongs hospitalization, or requires intervention to prevent
permanent impairment or damage. SAEs may or may not be related
to the device.
|
|
Perforations
|
|
Perforations occur when the artery is punctured during
atherectomy treatment. Perforations may be nonserious or an SAE
depending on the treatment required to repair the perforation.
|
Inclusion criteria for trials often limit size of lesion and
severity of disease, as measured by the Rutherford Class, which
utilizes a scale of I to VI, with I being mild and VI being most
severe, and the Ankle Brachial Index.
PAD I
Feasibility Trial
Our first trial was a two-site, 17-patient feasibility clinical
trial in Europe, which we refer to as PAD I, that began in
March 2005. Patients enrolled in the trial had lesions that were
less than 10 cm in length in arteries between 1.5 mm and 6.0 mm
in diameter, with Rutherford Class scores of IV or lower.
Patients were evaluated at the time of the procedure and at
30 days following treatment. The purpose of PAD I was to
obtain the first human clinical experience and evaluate the
safety of the Diamondback 360°. This was determined by
estimating the cumulative incidence of patients experiencing one
or more SAEs within 30 days post-treatment.
The results of PAD I were presented at the Transcatheter
Therapeutics conference, or TCT, in 2005 and published in
American Journal of Cardiology. Results confirmed that the
Diamondback 360° was safe and established that the
Diamondback 360° could be used to treat vessels in the
range of 1.5 mm to 4.0 mm, which are found primarily below the
knee. Also, PAD I showed that removal of plaque, could be
accomplished and the resulting
device-to-lumen
ratio was approximately 1.0 to 2.0. The SAE rate in PAD I was 6%
(one of 17 patients).
PAD II
Feasibility Trial
After being granted the CE Mark in May 2005, we began a
66-patient European clinical trial at seven sites, which we
refer to as PAD II, in August 2005. All patients had stenosis in
vessels below the femoral artery of between
9
1.5 mm and 4.0 mm in diameter, with at least 50% blockage. The
primary objectives of this study were to evaluate the acute
(30 days or less) risk of experiencing an SAE post
procedure and provide evidence of device effectiveness.
Effectiveness was confirmed angiographically and based on the
percentage of absolute plaque reduction.
The PAD II results demonstrated safe and effective debulking in
vessels with diameters ranging from 1.5 mm to 4.0 mm with a mean
absolute plaque reduction of 55%. The SAE rate in PAD II was 9%
(six of 66 patients), which did not differ significantly
from existing non-invasive treatment options.
OASIS
Pivotal Trial
We received an IDE to begin our pivotal United States trial,
OASIS, in September 2005. OASIS was a
124-patient,
20-center, prospective trial that began enrollment in January
2006.
Patients included in the trial had:
|
|
|
|
|
|
•
|
an ABI of less than 0.9;
|
|
|
|
|
•
|
a Rutherford Class score of V or lower; and
|
|
|
|
|
•
|
treated arteries of between 1.5 mm and 4.0 mm or less in
diameter via angiogram measurement, with a well-defined lesion
of at least 50% diameter stenosis and lesions of no greater than
10.0 cm in length.
|
The primary efficacy study endpoint was absolute plaque
reduction of the target lesions from baseline to immediately
post procedure. The primary safety endpoint was the cumulative
incidence of SAEs at 30 days.
In the OASIS trial, 94.5% of lesions treated were below the
knee, an area where lesions have traditionally gone untreated
until they require bypass surgery or amputation. Of the lesions
treated in OASIS, 55% were comprised of calcified plaque which
presents a challenge to proper expansion and apposition of
balloons and stents, and 48% were diffuse, or greater then 3 cm
in length, which typically requires multiple balloon expansions
or stent placements. Competing plaque removal devices are often
ineffective with these difficult to treat lesions.
The average time of treatment in the OASIS trial was three
minutes per lesion, which compares favorably to the treatment
time required by other plaque removal devices. We believe
physicians using other plaque removal devices require
approximately ten to 20 minutes of treatment time to achieve
desired results, although treatment times may vary depending
upon the nature of the procedure, the condition of the patient
and other factors. The following table is a summary of the OASIS
trial results:
|
|
|
|
|
|
|
Item
|
|
FDA Target
|
|
OASIS Result
|
|
|
|
Absolute Plaque Reduction
|
|
55%
|
|
59.4%
|
|
SAEs at 30 days
|
|
8% mean, with an upper
bound of 16%
|
|
4.8% mean, device-related; 9.7%
mean, overall
|
|
TLR
|
|
20% or less
|
|
2.4%
|
|
Perforations
|
|
N/A
|
|
1 serious perforation
|
|
ABI at baseline
|
|
N/A
|
|
0.68 ± 0.2*
|
|
ABI at 30 days
|
|
N/A
|
|
0.9 ± 0.18*
|
|
ABI at 6 months
|
|
N/A
|
|
0.83 ± 0.23*
|
|
|
|
|
|
*
|
|
Mean ± Standard Deviation
|
We submitted our OASIS data and received 510(k) clearance from
the FDA for use of the Diamondback 360°, including the
initial version of the control unit, with a hollow crown as a
therapy for patients with PAD in August 2007. The
FDA’s labeling requirements reflected the inclusion
criteria for the OASIS trial listed above. We received 510(k)
clearances in October 2007 for the updated control unit used
with the Diamondback 360° and in November 2007 for the
Diamondback 360° with a solid crown. In May 2005, we
received the CE mark, allowing for the commercial use of the
Diamondback 360° within the European Union; however, our
current plans are to focus sales in the United States.
10
OASIS
Long-Term Study
A retrospective study evaluating the long-term results of
64 patients from the pivotal OASIS trial has been
completed. Outcomes were analyzed out to a mean of
29 months and include limb salvage rate, target lesion
revascularization rate (TLR) and ankle-brachial index (ABI).
TLR, or reintervention in the originally treated lesion, was
13.6%. A 100% limb salvage rate was maintained. ABI scores, a
measure of blood flow to the ankle, remained significantly
improved. This 29 month data of OASIS patients adds to our
confidence in the safety and efficacy of the Diamondback
360°.
Post-Market
Feasibility Studies
In June 2009, the first patient was enrolled in the COMPLIANCE
360° clinical trial, the first of two PAD post-market
studies scheduled to begin in calendar 2009. This prospective,
randomized, multi-center study will evaluate the clinical
benefit of modifying plaque to change large vessel compliance
above the knee with the Diamondback
360
o
. The
study compares the performance of the Diamondback
360
o
,
plus low-pressure balloon inflation, if desired, with that of
high-pressure balloon inflation alone. The study calls for
enrolling 50 patients at five U.S. medical centers.
Hospital internal review board (IRB) submissions are in progress
for the CALCIUM
360
o
study, a prospective, randomized, multi-center study, which will
compare the effectiveness of the Diamondback
360
o
to
balloon dilation in treating heavily calcified lesions below the
knee. Calcified plaque exists in about 75 percent of
lesions below the knee. This study will also enroll
50 patients at five U.S. medical centers.
Sales and
Marketing
We market and sell the Diamondback 360° through a direct
sales force in the United States. As of June 30, 2009, we
had a
124-person
direct sales force, including a Vice President of Sales, five
clinical specialists, eight associate sales managers, 93
district sales managers, 11 regional sales managers, two sales
directors, a director of customer operations, and three customer
service specialists. Upon receiving 510(k) clearance from the
FDA on August 30, 2007, we began limited commercialization
of the Diamondback 360° in September 2007. We commenced our
full commercial launch in the quarter ended March 31, 2008.
As of June 30, 2009, we were selling the Diamondback
360° in 556 accounts in the United States that had
completed an estimated 15,000 procedures.
While we sell directly to hospitals, we have targeted sales and
marketing efforts to interventional cardiologists, vascular
surgeons and interventional radiologists with experience using
similar catheter-based procedures, such as angioplasty,
stenting, and cutting or laser atherectomy. Physician referral
programs and
peer-to-peer
education are other key elements of our sales strategy. Patient
referrals come from general practitioners, podiatrists,
nephrologists and endocrinologists.
We target our marketing efforts to practitioners through
physician education, medical conferences, seminars, peer
reviewed journals and marketing materials. Our sales and
marketing program focuses on:
|
|
|
|
|
|
•
|
educating physicians regarding the proper use and application of
the Diamondback 360°;
|
|
|
|
|
•
|
developing relationships with key opinion leaders; and
|
|
|
|
|
•
|
facilitating regional referral marketing programs.
|
We are not marketing our products internationally and do not
expect to do so in the near future; however, we will continue to
evaluate international opportunities.
Research
and Development
As of June 30, 2009, we had 29 employees in our
research and development department, comprised primarily of
scientists, engineers and physicians, all of whom report to our
Executive Vice President. Our research and development efforts
are focused in the development of products to penetrate our
three key target markets:
11
below-the-knee,
above-the-knee
and coronary vessels. Research and development expenses for
fiscal 2009, fiscal 2008 and fiscal 2007 were
$14.7 million, $16.1 million and $8.4 million,
respectively.
Manufacturing
We use internally-manufactured and externally-sourced components
to manufacture the Diamondback 360°. Most of the
externally-sourced components are available from multiple
suppliers; however, a few key components, including the diamond
grit coated crown, are single sourced. We assemble the shaft,
crown and handle components
on-site,
and
test, pack, seal and label the finished assembly before sending
the packaged product to a contract sterilization facility. The
sterilization facility sends samples to an independent
laboratory to test for sterility. Upon return from the
sterilizer, product is held in inventory prior to shipping to
our customers.
The current floor plan at our manufacturing facility allows for
finished goods of approximately 8,000 units of the
Diamondback 360° and for approximately 50 control units.
The manufacturing areas, including the shaft manufacturing and
the controlled-environment assembly areas, are equipped to
accommodate approximately 30,000 units per shift annually.
We are registered with the FDA as a medical device manufacturer.
We have opted to maintain quality assurance and quality
management certifications to enable us to market our products in
the member states of the European Union, the European Free Trade
Association and countries that have entered into Mutual
Recognition Agreements with the European Union. We are ISO
13485:2003 certified, and our renewal is due by December 2009.
During the time of commercialization, we have had two minor
instances of recall, involving one single lot of Diamondback
360° devices (eight units), and two boxes of ViperWires
(ten wires), related to “Use By” date labeling issues.
While these recalls were reported to the FDA, according to
regulations, they did not provide a risk to patient safety.
Third-Party
Reimbursement and Pricing
Third-party payors, including private insurers, and government
insurance programs, such as Medicare and Medicaid, pay for a
significant portion of patient care provided in the United
States. The single largest payor in the United States is the
Medicare program, a federal governmental health insurance
program administered by the Centers for Medicare and Medicaid
Services, or CMS. Medicare covers certain medical care expenses
for eligible elderly and disabled individuals, including a large
percentage of the population with PAD who could be treated with
the Diamondback 360°. In addition, private insurers often
follow the coverage and reimbursement policies of Medicare.
Consequently, Medicare’s coverage and reimbursement
policies are important to our operations.
CMS has established Medicare reimbursement codes describing
atherectomy products and procedures using atherectomy products,
and many private insurers follow these policies. We believe that
physicians and hospitals that treat PAD with the Diamondback
360° will generally be eligible to receive reimbursement
from Medicare and private insurers for the cost of the
single-use catheter and the physician’s services.
The continued availability of insurance coverage and
reimbursement for newly approved medical devices is uncertain.
The commercial success of our products in both domestic and
international markets will be dependent on whether third-party
coverage and reimbursement is available for patients that use
our products. Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new medical devices, and, as a
result, they may not continue to provide adequate payment for
our products. To position our device for acceptance by
third-party payors, we may have to agree to a lower net sales
price than we might otherwise charge. The continuing efforts of
governmental and commercial third-party payors to contain or
reduce the costs of healthcare may limit our revenue.
In some foreign markets, pricing and profitability of medical
devices are subject to government control. In the United States,
we expect that there will continue to be federal and state
proposals for similar controls. Also, the trends toward managed
healthcare in the United States and proposed legislation
intended to reduce the cost of government insurance programs
could significantly influence the purchase of healthcare
services and products and may result in lower prices for our
products or the exclusion of our products from reimbursement
programs.
12
Competition
The medical device industry is highly competitive, subject to
rapid change and significantly affected by new product
introductions and other activities of industry participants. The
Diamondback 360° competes with a variety of other products
or devices for the treatment of vascular disease, including
stents, balloon angioplasty catheters and atherectomy catheters,
as well as products used in vascular surgery. Large competitors
in the stent and balloon angioplasty market segments include
Abbott Laboratories, Boston Scientific, Cook,
Johnson & Johnson and Medtronic. We also compete
against manufacturers of atherectomy catheters including, among
others, ev3, Spectranetics, Boston Scientific and Pathway
Medical Technologies, as well as other manufacturers that may
enter the market due to the increasing demand for treatment of
vascular disease. Several other companies provide products used
by surgeons in peripheral bypass procedures. Other competitors
include pharmaceutical companies that manufacture drugs for the
treatment of mild to moderate PAD and companies that provide
products used by surgeons in peripheral bypass procedures. We
are not aware of any competing catheter systems either currently
on the market or in development that also use an orbital motion
to create lumens larger than the catheter itself.
Because of the size of the peripheral and coronary market
opportunities, competitors and potential competitors have
historically dedicated significant resources to aggressively
promote their products. We believe that the Diamondback
360° competes primarily on the basis of:
|
|
|
|
|
|
•
|
safety and efficacy;
|
|
|
|
|
•
|
predictable clinical performance;
|
|
|
|
|
•
|
ease of use;
|
|
|
|
|
•
|
price;
|
|
|
|
|
•
|
physician relationships;
|
|
|
|
|
•
|
customer service and support; and
|
|
|
|
|
•
|
adequate third-party reimbursement.
|
Patents
and Intellectual Property
We rely on a combination of patent, copyright and other
intellectual property laws, trade secrets, nondisclosure
agreements and other measures to protect our proprietary rights.
As of August 31, 2009, we held 22 issued U.S. patents
and have 23 U.S. patent applications pending, as well as 48
issued or granted foreign patents and 24 foreign patent
applications, each of which corresponds to aspects of our
U.S. patents and applications. Our issued U.S. patents
expire between 2010 and 2027, and our most important patent,
U.S. Patent No. 6,494,890, is due to expire in 2017.
Our issued patents and patent applications relate primarily to
the design and operation of certain interventional atherectomy
devices, including the Diamondback 360°. These patents and
applications include claims covering key aspects of certain
rotational atherectomy devices including the design, manufacture
and therapeutic use of certain atherectomy abrasive heads, drive
shafts, control systems, handles and couplings. As we continue
to research and develop our atherectomy technology, we intend to
file additional U.S. and foreign patent applications
related to the design, manufacture and therapeutic uses of
atherectomy devices. In addition, we hold eight registered
U.S. trademarks and have eight U.S., three Canadian and
three European trademark applications pending.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. We
seek to protect our proprietary information and other
intellectual property by requiring our employees, consultants,
contractors, outside scientific collaborators and other advisors
to execute non-disclosure and assignment of invention agreements
on commencement of their employment or engagement. Agreements
with our employees also forbid them from bringing the
proprietary rights of third parties to us. We also require
confidentiality or material transfer agreements from third
parties that receive our confidential data or materials.
13
Government
Regulation of Medical Devices
Governmental authorities in the United States at the federal,
state and local levels and in other countries extensively
regulate, among other things, the development, testing,
manufacture, labeling, promotion, advertising, distribution,
marketing and export and import of medical devices such as the
Diamondback 360°.
Failure to obtain approval to market our products under
development and to meet the ongoing requirements of these
regulatory authorities could prevent us from marketing and
continuing to market our products.
United
States
The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
FDA’s implementing regulations govern medical device design
and development, preclinical and clinical testing, premarket
clearance or approval, registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance.
Medical devices and their manufacturers are also subject to
inspection by the FDA. The FDCA, supplemented by other federal
and state laws, also provides civil and criminal penalties for
violations of its provisions. We manufacture and market medical
devices that are regulated by the FDA, comparable state agencies
and regulatory bodies in other countries.
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require
marketing authorization from the FDA prior to distribution. The
two primary types of FDA marketing authorization are premarket
notification (also called 510(k) clearance) and premarket
approval (also called PMA approval). The type of marketing
authorization applicable to a device — 510(k)
clearance or PMA approval — is generally linked to
classification of the device. The FDA classifies medical devices
into one of three classes (Class I, II or
III) based on the degree of risk FDA determines to be
associated with a device and the extent of control deemed
necessary to ensure the device’s safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose
lower risk are placed in Class I or II. Class I
devices are deemed to pose the least risk and are subject only
to general controls applicable to all devices, such as
requirements for device labeling, premarket notification, and
adherence to the FDA’s current good manufacturing practice
requirements, as reflected in its Quality System Regulation, or
QSR. Class II devices are intermediate risk devices that
are subject to general controls and may also be subject to
special controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient
registries or postmarket surveillance. Class III devices
are those for which insufficient information exists to assure
safety and effectiveness solely through general or special
controls, and include life-sustaining, life-supporting or
implantable devices, and devices not “substantially
equivalent” to a device that is already legally marketed.
Most Class I devices and some Class II devices are
exempted by regulation from the 510(k) clearance requirement and
can be marketed without prior authorization from FDA.
Class I and Class II devices that have not been so
exempted are eligible for marketing through the 510(k) clearance
pathway. By contrast, devices placed in Class III generally
require PMA approval prior to commercial marketing. The PMA
approval process is generally more stringent, time-consuming and
expensive than the 510(k) clearance process.
510(k) Clearance.
To obtain 510(k) clearance
for a medical device, an applicant must submit a premarket
notification to the FDA demonstrating that the device is
“substantially equivalent” to a predicate device
legally marketed in the United States. A device is substantially
equivalent if, with respect to the predicate device, it has the
same intended use and has either (i) the same technological
characteristics or (ii) different technological
characteristics and the information submitted demonstrates that
the device is as safe and effective as a legally marketed device
and does not raise different questions of safety or
effectiveness. A showing of substantial equivalence sometimes,
but not always, requires clinical data. Generally, the 510(k)
clearance process can exceed 90 days and may extend to a
year or more.
After a device has received 510(k) clearance for a specific
intended use, any modification that could significantly affect
its safety or effectiveness, such as a significant change in the
design, materials, method of manufacture or intended use, will
require a new 510(k) clearance or PMA approval (if the device as
modified is not substantially equivalent to a legally marketed
predicate device). The determination as to whether new
authorization is needed is initially left to the manufacturer;
however, the FDA may review this determination to evaluate the
14
regulatory status of the modified product at any time and may
require the manufacturer to cease marketing and recall the
modified device until 510(k) clearance or PMA approval is
obtained. The manufacturer may also be subject to significant
regulatory fines or penalties.
We received 510(k) clearance for use of the Diamondback
360° as a therapy in patients with PAD in the
United States on August 22, 2007. We received
additional 510(k) clearances for the control unit used with the
Diamondback 360° on October 25, 2007 and for the solid
crown version of the Diamondback 360° on November 9,
2007.
Premarket Approval.
A PMA application requires
the payment of significant user fees and must be supported by
valid scientific evidence, which typically requires extensive
data, including technical, preclinical, clinical and
manufacturing data, to demonstrate to the FDA’s
satisfaction the safety and efficacy of the device. A PMA
application must also include a complete description of the
device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device,
and proposed labeling. After a PMA application is submitted and
found to be sufficiently complete, the FDA begins an in-depth
review of the submitted information. During this review period,
the FDA may request additional information or clarification of
information already provided. Also during the review period, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with the FDA’s Quality System Regulations, or QSR, which
requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures.
FDA review of a PMA application is required by statute to take
no longer than 180 days, although the process typically
takes significantly longer, and may require several years to
complete. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
|
|
|
|
|
|
•
|
the systems may not be safe or effective to the FDA’s
satisfaction;
|
|
|
|
|
•
|
the data from preclinical studies and clinical trials may be
insufficient to support approval;
|
|
|
|
|
•
|
the manufacturing process or facilities used may not meet
applicable requirements; and
|
|
|
|
|
•
|
changes in FDA approval policies or adoption of new regulations
may require additional data.
|
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter or an approvable letter, which usually
contains a number of conditions that must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDA’s evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the
trials are conducted and then the data submitted in an amendment
to the PMA. Even if a PMA application is approved, the FDA may
approve the device with an indication that is narrower or more
limited than originally sought. The agency can also impose
restrictions on the sale, distribution or use of the device as a
condition of approval, or impose post approval requirements such
as continuing evaluation and periodic reporting on the safety,
efficacy and reliability of the device for its intended use.
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling, device
specifications, materials or design of a device that is approved
through the PMA process. PMA approval supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application and may not require as
extensive clinical data or the convening of an advisory panel.
We are currently seeking PMA to use the Diamondback 360° as
a therapy in treating patients with coronary artery disease and
have submitted an IDE to the FDA.
Clinical Trials.
Clinical trials are almost
always required to support a PMA application and are sometimes
required for a 510(k) clearance. These trials generally require
submission of an application for an IDE to the FDA.
15
The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is
safe to test the device in humans and that the testing protocol
is scientifically sound. The IDE application must be approved in
advance by the FDA for a specified number of patients, unless
the product is deemed a non- significant risk device and
eligible for more abbreviated IDE requirements. Generally,
clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the study protocol
and informed consent are approved by appropriate institutional
review boards at the clinical trial sites.
FDA approval of an IDE allows clinical testing to go forward but
does not bind the FDA to accept the results of the trial as
sufficient to prove the product’s safety and efficacy, even
if the trial meets its intended success criteria. With certain
exceptions, changes made to an investigational plan after an IDE
is approved must be submitted in an IDE supplement and approved
by FDA (and by governing institutional review boards when
appropriate) prior to implementation.
All clinical trials must be conducted in accordance with
regulations and requirements collectively known as good clinical
practice. Good clinical practices include the FDA’s IDE
regulations, which describe the conduct of clinical trials with
medical devices, including the recordkeeping, reporting and
monitoring responsibilities of sponsors and investigators, and
labeling of investigation devices. They also prohibit promotion,
test marketing or commercialization of an investigational device
and any representation that such a device is safe or effective
for the purposes being investigated. Good clinical practices
also include the FDA’s regulations for institutional review
board approval and for protection of human subjects (such as
informed consent), as well as disclosure of financial interests
by clinical investigators.
Required records and reports are subject to inspection by the
FDA. The results of clinical testing may be unfavorable or, even
if the intended safety and efficacy success criteria are
achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or
completion of any clinical trials may be delayed or halted, or
be inadequate to support approval of a PMA application or
clearance of a premarket notification for numerous reasons,
including, but not limited to, the following:
|
|
|
|
|
|
•
|
the FDA or other regulatory authorities do not approve a
clinical trial protocol or a clinical trial (or a change to a
previously approved protocol or trial that requires approval),
or place a clinical trial on hold;
|
|
|
|
|
•
|
patients do not enroll in clinical trials or follow up at the
rate expected;
|
|
|
|
|
•
|
patients do not comply with trial protocols or experience
greater than expected adverse side effects;
|
|
|
|
|
•
|
institutional review boards and third-party clinical
investigators may delay or reject the trial protocol or changes
to the trial protocol;
|
|
|
|
|
•
|
third-party clinical investigators decline to participate in a
trial or do not perform a trial on the anticipated schedule or
consistent with the clinical trial protocol, investigator
agreements, good clinical practices or other FDA requirements;
|
|
|
|
|
•
|
third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
|
|
|
|
|
•
|
regulatory inspections of the clinical trials or manufacturing
facilities, which may, among other things, require corrective
action or suspension or termination of the clinical trials;
|
|
|
|
|
•
|
changes in governmental regulations or administrative actions;
|
|
|
|
|
•
|
the interim or final results of the clinical trial are
inconclusive or unfavorable as to safety or efficacy; and
|
|
|
|
|
•
|
the FDA concludes that the trial design is inadequate to
demonstrate safety and efficacy.
|
Continuing Regulation.
After a device is
approved and placed in commercial distribution, numerous
regulatory requirements continue to apply. These include:
|
|
|
|
|
|
•
|
establishment registration and device listing upon the
commencement of manufacturing;
|
|
|
|
|
•
|
the QSR, which requires manufacturers, including third-party
manufacturers, to follow design, testing, control, documentation
and other quality assurance procedures during medical device
design and manufacturing processes;
|
16
|
|
|
|
|
|
•
|
labeling regulations, which prohibit the promotion of products
for unapproved or “off-label” uses and impose other
restrictions on labeling and promotional activities;
|
|
|
|
|
•
|
medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused or
contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious
injury if malfunctions were to recur;
|
|
|
|
|
•
|
corrections and removal reporting regulations, which require
that manufacturers report to the FDA field corrections; and
|
|
|
|
|
•
|
product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FDCA
caused by the device that may present a risk to health.
|
In addition, the FDA may require a company to conduct postmarket
surveillance studies or order it to establish and maintain a
system for tracking its products through the chain of
distribution to the patient level.
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of clinical trials,
can result in enforcement action by the FDA, which may lead to
any of the following sanctions:
|
|
|
|
|
|
•
|
warning letters or untitled letters;
|
|
|
|
|
•
|
fines, injunctions and civil penalties;
|
|
|
|
|
•
|
product recall or seizure;
|
|
|
|
|
•
|
unanticipated expenditures;
|
|
|
|
|
•
|
delays in clearing or approving or refusal to clear or approve
products;
|
|
|
|
|
•
|
withdrawal or suspension of FDA approval;
|
|
|
|
|
•
|
orders for physician notification or device repair, replacement
or refund;
|
|
|
|
|
•
|
operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
|
|
|
|
|
•
|
criminal prosecution.
|
We and our contract manufacturers, specification developers and
suppliers are also required to manufacture our products in
compliance with current Good Manufacturing Practice, or GMP,
requirements set forth in the QSR.
The QSR requires a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of
marketed devices, and includes extensive requirements with
respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components,
production and process controls, packaging and labeling
controls, device evaluation, distribution, installation,
complaint handling, servicing and record keeping. The FDA
enforces the QSR through periodic announced and unannounced
inspections that may include the manufacturing facilities of
subcontractors. If the FDA believes that we or any of our
contract manufacturers or regulated suppliers is not in
compliance with these requirements, it can shut down our
manufacturing operations, require recall of our products, refuse
to clear or approve new marketing applications, institute legal
proceedings to detain or seize products, enjoin future
violations or assess civil and criminal penalties against us or
our officers or other employees. Any such action by the FDA
would have a material adverse effect on our business.
Fraud
and Abuse
Our operations will be directly, or indirectly through our
customers, subject to various state and federal fraud and abuse
laws, including, without limitation, the FDCA, federal
Anti-Kickback Statute and False Claims Act. These laws may
impact, among other things, our proposed sales, marketing and
education programs. In addition, these laws require us to screen
individuals and other companies, suppliers and vendors in order
to ensure that they are not “debarred” by the federal
government and therefore prohibited from doing business in the
healthcare industry.
17
The federal Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for
or to induce either the referral of an individual, or the
furnishing or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the
Medicare and Medicaid programs. Several courts have interpreted
the statute’s intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute
has been violated. The Anti-Kickback Statute is broad and
prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Many states have
also adopted laws similar to the federal Anti-Kickback Statute,
some of which apply to the referral of patients for healthcare
items or services reimbursed by any source, not only the
Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly
filing or causing to be filed a false claim to, or the knowing
use of false statements to obtain payment from, the federal
government. Various states have also enacted laws modeled after
the federal False Claims Act.
In addition to the laws described above, the Health Insurance
Portability and Accountability Act of 1996 created two new
federal crimes: healthcare fraud and false statements relating
to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. The false
statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare
benefits, items or services.
Voluntary industry codes, federal guidance documents and a
variety of state laws address the tracking and reporting of
marketing practices relative to gifts given and other
expenditures made to doctors and other healthcare professionals.
In addition to impacting our marketing and educational programs,
internal business processes will be affected by the numerous
legal requirements and regulatory guidance at the state, federal
and industry levels.
International
Regulation
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country. The time required to obtain approval in a
foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. For example, the
primary regulatory environment in Europe with respect to medical
devices is that of the European Union, which includes most of
the major countries in Europe. Other countries, such as
Switzerland, have voluntarily adopted laws and regulations that
mirror those of the European Union with respect to medical
devices. The European Union has adopted numerous directives and
standards regulating the design, manufacture, clinical trials,
labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking,
indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can
be commercially distributed throughout European Union, although
actual implementation of the these directives may vary on a
country-by-country
basis. The method of assessing conformity varies depending on
the class of the product, but normally involves a combination of
submission of a design dossier, self-assessment by the
manufacturer, a third-party assessment and, review of the design
dossier by a “Notified Body.” This third-party
assessment generally consists of an audit of the
manufacturer’s quality system and manufacturing site, as
well as review of the technical documentation used to support
application of the CE mark to one’s product and possibly
specific testing of the manufacturer’s product. An
assessment by a Notified Body of one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. We
obtained CE marking approval for sale of the Diamondback
360° in May 2005.
Environmental
Regulation
Our operations are subject to regulatory requirements relating
to the environment, waste management and health and safety
matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. We are currently classified
and licensed as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota.
18
Employees
As of June 30, 2009, we had 239 employees, including
49 employees in manufacturing, 124 employees in sales,
12 employees in marketing, four employees in clinicals,
20 employees in general and administrative, and
30 employees in research and development, all of which are
full-time employees. None of our employees are represented by a
labor union or parties to a collective bargaining agreement, and
we believe that our employee relations are good.
Risks
Relating to Our Business and Operations
We
have a history of net losses and anticipate that we will
continue to incur losses.
We are not profitable and have incurred net losses in each
fiscal year since our formation in 1989. In particular, we had
net losses of $31.9 million in fiscal 2009,
$39.2 million in fiscal 2008, and $15.6 million in
fiscal 2007. As of June 30, 2009, we had an accumulated
deficit of approximately $127.4 million. We commenced
commercial sales of the Diamondback 360° PAD System in
September 2007, and our short commercialization experience makes
it difficult for us to predict future performance. We also
expect to incur significant additional expenses for sales and
marketing and manufacturing as we continue to commercialize the
Diamondback 360° and additional expenses as we seek to
develop and commercialize future versions of the Diamondback
360° and other products. Additionally, we expect that our
general and administrative expenses will increase as our
business grows and we incur the legal and regulatory costs
associated with being a public company. As a result, we expect
our operating losses to continue but generally decline as we
continue our commercialization activities, develop additional
product enhancements, increase manufacturing capacity, and make
further regulatory submissions.
We
have a limited history selling the Diamondback 360°, which
is currently our primary product, and our inability to market
this product successfully would have a material adverse effect
on our business and financial condition.
Although we also sell a variety of ancillary products, the
Diamondback 360° is our primary product and we are largely
dependent on it. The Diamondback 360° received 510(k)
clearance from the FDA in the United States for use as a therapy
in patients with PAD in August 2007. We initiated a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007 and we therefore have limited
experience in the commercial manufacture and marketing of this
product. Our ability to generate revenue will depend upon our
ability to further successfully commercialize the Diamondback
360° and to develop, manufacture and receive required
regulatory clearances and approvals and patient reimbursement
for treatment with future versions of the Diamondback 360°.
As we continue to commercialize the Diamondback 360°, we
will need to expand our sales force to reach our target market.
Developing a sales force is expensive and time consuming and
could delay or limit the success of any product launch. Thus, we
may not be able to expand our sales and marketing capabilities
on a timely basis or at all. If we are unable to adequately
increase these capabilities, we will need to contract with third
parties to market and sell the Diamondback 360° and any
other products that we may develop. To the extent that we enter
into arrangements with third parties to perform sales, marketing
and distribution services on our behalf, our product revenues
could be lower than if we marketed and sold our products on a
direct basis. Furthermore, any revenues resulting from
co-promotion or other marketing and sales arrangements with
other companies will depend on the skills and efforts of others,
and we do not know whether these efforts will be successful.
Some of these companies may have current products or products
under development that compete with ours, and they may have an
incentive not to devote sufficient efforts to marketing our
products. If we fail to successfully develop, commercialize and
market the Diamondback 360° or any future versions of this
product that we develop, our business will be materially
adversely affected.
19
The
Diamondback 360° and future products may never achieve
broad market acceptance.
The Diamondback 360° and future products we may develop may
never gain broad market acceptance among physicians, patients
and the medical community. The degree of market acceptance of
any of our products will depend on a number of factors,
including:
|
|
|
|
|
|
•
|
the actual and perceived effectiveness and reliability of our
products;
|
|
|
|
|
•
|
the prevalence and severity of any adverse patient events
involving our products, including infection, perforation or
dissection of the artery wall, internal bleeding, limb loss and
death;
|
|
|
|
|
•
|
the results of any long-term clinical trials relating to use of
our products;
|
|
|
|
|
•
|
the availability, relative cost and perceived advantages and
disadvantages of alternative technologies or treatment methods
for conditions treated by our systems;
|
|
|
|
|
•
|
the degree to which treatments using our products are approved
for reimbursement by public and private insurers;
|
|
|
|
|
•
|
the strength of our marketing and distribution
infrastructure; and
|
|
|
|
|
•
|
the level of education and awareness among physicians and
hospitals concerning our products.
|
Failure of the Diamondback 360° to significantly penetrate
current or new markets would negatively impact our business,
financial condition and results of operations.
If longer-term or more extensive clinical trials performed by us
or others indicate that procedures using the Diamondback
360° or any future products are not safe, effective and
long lasting, physicians may choose not to use our products.
Furthermore, unsatisfactory patient outcomes or injuries could
cause negative publicity for our products. Physicians may be
slow to adopt our products if they perceive liability risks
arising from the use of these products. It is also possible that
as our products become more widely used, latent defects could be
identified, creating negative publicity and liability problems
for us, thereby adversely affecting demand for our products. If
the Diamondback 360° and our future products do not achieve
an adequate level of acceptance by physicians, patients and the
medical community, our overall business and profitability would
be harmed.
Our
future growth depends on physician adoption of the Diamondback
360°, which requires physicians to change their screening
and referral practices.
We believe that we must educate physicians to change their
screening and referral practices. For example, although there is
a significant correlation between PAD and coronary artery
disease, many physicians do not routinely screen for PAD while
screening for coronary artery disease. We target our sales
efforts to interventional cardiologists, vascular surgeons and
interventional radiologists because they are often the primary
care physicians diagnosing and treating both coronary artery
disease and PAD. However, the initial point of contact for many
patients may be general practitioners, podiatrists,
nephrologists and endocrinologists, each of whom commonly treats
patients experiencing complications resulting from PAD. If we do
not educate referring physicians about PAD in general and the
existence of the Diamondback 360° in particular, they may
not refer patients to interventional cardiologists, vascular
surgeons or interventional radiologists for the procedure using
the Diamondback 360°, and those patients may instead be
surgically treated or treated with an alternative interventional
procedure. If we are not successful in educating physicians
about screening for PAD or referral opportunities, our ability
to increase our revenue may be impaired.
Our
customers may not be able to achieve adequate reimbursement for
using the Diamondback 360°, which could affect the
acceptance of our product and cause our business to
suffer.
The availability of insurance coverage and reimbursement for
newly approved medical devices and procedures is uncertain. The
commercial success of our products is substantially dependent on
whether third-party insurance coverage and reimbursement for the
use of such products and related services are available. We
expect the Diamondback 360° to generally be purchased by
hospitals and other providers who will then seek reimbursement
from various public and private third-party payors, such as
Medicare, Medicaid and private insurers, for the services
20
provided to patients. We can give no assurance that these
third-party payors will provide adequate reimbursement for use
of the Diamondback 360° to permit hospitals and doctors to
consider the product cost-effective for patients requiring PAD
treatment, or that current reimbursement levels for the
Diamondback 360° will continue. In addition, the overall
amount of reimbursement available for PAD treatment could
decrease in the future. Failure by hospitals and other users of
our product to obtain sufficient reimbursement could cause our
business to suffer.
Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of
reimbursement, and, as a result, they may not cover or provide
adequate payment for use of the Diamondback 360°. In order
to position the Diamondback 360° for acceptance by
third-party payors, we may have to agree to lower prices than we
might otherwise charge. The continuing efforts of governmental
and commercial third-party payors to contain or reduce the costs
of healthcare may limit our revenue.
We expect that there will continue to be federal and state
proposals for governmental controls over healthcare in the
United States. Governmental and private sector payors have
instituted initiatives to limit the growth of healthcare costs
using, for example, price regulation or controls and competitive
pricing programs. Some
third-party
payors also require demonstrated superiority, on the basis of
randomized clinical trials, or pre-approval of coverage, for new
or innovative devices or procedures before they will reimburse
healthcare providers who use such devices or procedures. Also,
the trend toward managed healthcare in the United States and
proposed legislation intended to reduce the cost of government
insurance programs could significantly influence the purchase of
healthcare services and products and may result in necessary
price reductions for our products or the exclusion of our
products from reimbursement programs. It is uncertain whether
the Diamondback 360° or any future products we may develop
will be viewed as sufficiently cost-effective to warrant
adequate coverage and reimbursement levels.
If third-party coverage and reimbursement for the Diamondback
360° is limited or not available, the acceptance of the
Diamondback 360° and, consequently, our business will be
substantially harmed.
Healthcare
reform legislation could adversely affect our revenue and
financial condition.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives have
ranged from proposals to fundamentally change federal and state
healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under
governmental funded programs, to minor modifications to existing
programs. Recently, President Obama and members of Congress have
proposed significant reforms to the U.S. healthcare system.
Both the U.S. Senate and House of Representatives have
conducted hearings about U.S. healthcare reform. The Obama
administration’s fiscal year 2010 budget included proposals
to limit Medicare payments and increase taxes. In addition,
members of Congress have proposed a single-payer healthcare
system, a government health insurance option to compete with
private plans and other expanded public healthcare measures. The
ultimate content or timing of any future healthcare reform
legislation, and its impact on us, is impossible to predict. If
significant reforms are made to the healthcare system in the
United States, or in other jurisdictions, those reforms may have
an adverse effect on our financial condition and results of
operations.
We
have limited data and experience regarding the safety and
efficacy of the Diamondback 360°. Any long-term data that
is generated may not be positive or consistent with our limited
short-term data, which would affect market acceptance of this
product.
Our success depends on the acceptance of the Diamondback
360° by the medical community as safe and effective.
Because our technology is relatively new in the treatment of
PAD, we have performed clinical trials only with limited patient
populations. The long-term effects of using the Diamondback
360° in a large number of patients are not known and the
results of short-term clinical use of the Diamondback 360°
do not necessarily predict long-term clinical benefit or reveal
long-term adverse effects. For example, we do not have
sufficient experience with the Diamondback 360° to evaluate
its relative effectiveness in different plaque morphologies,
including hard, calcified lesions and soft, non-calcified
lesions. If the results obtained from any future clinical trials
or clinical or
21
commercial experience indicate that the Diamondback 360° is
not as safe or effective as other treatment options or as
current short-term data would suggest, adoption of this product
may suffer and our business would be harmed.
Even if we believe that the data collected from clinical trials
or clinical experience indicate positive results, each
physician’s actual experience with our device will vary.
Clinical trials conducted with the Diamondback 360° have
involved procedures performed by physicians who are very
technically proficient. Consequently, both short and long-term
results reported in these studies may be significantly more
favorable than typical results achieved by physicians, which
could negatively impact market acceptance of the Diamondback
360°.
We
face significant competition and may be unable to sell the
Diamondback 360° at profitable levels.
We compete against very large and well-known stent and balloon
angioplasty device manufacturers, including Abbott Laboratories,
Boston Scientific, Cook, Johnson & Johnson and
Medtronic. We may have difficulty competing effectively with
these competitors because of their well-established positions in
the marketplace, significant financial and human capital
resources, established reputations and worldwide distribution
channels. We also compete against manufacturers of atherectomy
catheters including, among others, ev3, Spectranetics, Boston
Scientific and Pathway Medical Technologies, as well as other
manufacturers that may enter the market due to the increasing
demand for treatment of vascular disease. Several other
companies provide products used by surgeons in peripheral bypass
procedures. Other competitors include pharmaceutical companies
that manufacture drugs for the treatment of mild to moderate PAD
and companies that provide products used by surgeons in
peripheral bypass procedures.
Our competitors may:
|
|
|
|
|
|
•
|
develop and patent processes or products earlier than we will;
|
|
|
|
|
•
|
obtain regulatory clearances or approvals for competing medical
device products more rapidly than we will;
|
|
|
|
|
•
|
market their products more effectively than we will; or
|
|
|
|
|
•
|
develop more effective or less expensive products or
technologies that render our technology or products obsolete or
non-competitive.
|
We have encountered and expect to continue to encounter
potential customers who, due to existing relationships with our
competitors, are committed to or prefer the products offered by
these competitors. If we are unable to compete successfully, our
revenue will suffer. Increased competition might lead to price
reductions and other concessions that might adversely affect our
operating results. Competitive pressures may decrease the demand
for our products and could adversely affect our financial
results.
Our
ability to compete depends on our ability to innovate
successfully. If our competitors demonstrate the increased
safety or efficacy of their products as compared to ours, our
revenue may decline.
The market for medical devices is highly competitive, dynamic
and marked by rapid and substantial technological development
and product innovations. Our ability to compete depends on our
ability to innovate successfully, and there are few barriers
that would prevent new entrants or existing competitors from
developing products that compete directly with our products.
Demand for the Diamondback 360° could be diminished by
equivalent or superior products and technologies offered by
competitors. Our competitors may produce more advanced products
than ours or demonstrate superior safety and efficacy of their
products. If we are unable to innovate successfully, the
Diamondback 360° could become obsolete and our revenue
would decline as our customers purchase competitor products.
We
have limited commercial manufacturing experience and could
experience difficulty in producing the Diamondback 360° or
will need to depend on third parties to manufacture the
product.
We have limited experience in commercially manufacturing the
Diamondback 360° and have no experience manufacturing this
product in the volume that we anticipate will be required if we
achieve planned levels of commercial sales. As a result, we may
not be able to develop and implement efficient, low-cost
manufacturing capabilities and processes that will enable us to
manufacture the Diamondback 360° or future products in
22
significant volumes, while meeting the legal, regulatory,
quality, price, durability, engineering, design and production
standards required to market our products successfully. If we
fail to develop and implement these manufacturing capabilities
and processes, we may be unable to profitably commercialize the
Diamondback 360° and any future products we may develop
because the per unit cost of our products is highly dependent
upon production volumes and the level of automation in our
manufacturing processes. There are technical challenges to
increasing manufacturing capacity, including equipment design
and automation capabilities, material procurement, problems with
production yields and quality control and assurance. Increasing
our manufacturing capacity will require that we invest
substantial additional funds and hire and retain additional
management and technical personnel who have the necessary
manufacturing experience. We may not successfully complete any
required increase in manufacturing capacity in a timely manner
or at all. If we are unable to manufacture a sufficient supply
of our products, maintain control over expenses or otherwise
adapt to anticipated growth, or if we underestimate growth, we
may not have the capability to satisfy market demand and our
business will suffer.
The forecasts of demand we use to determine order quantities and
lead times for components purchased from outside suppliers may
be incorrect. Lead times for components may vary significantly
depending on the type of component, the size of the order, time
required to fabricate and test the components, specific supplier
requirements and current market demand for the components and
subassemblies. Failure to obtain required components or
subassemblies when needed and at a reasonable cost would
adversely affect our business.
In addition, we may in the future need to depend upon third
parties to manufacture the Diamondback 360° and future
products. We also cannot assure you that any third-party
contract manufacturers will have the ability to produce the
quantities of our products needed for development or commercial
sales or will be willing to do so at prices that allow the
products to compete successfully in the market. Additionally, we
can give no assurance that even if we do contract with
third-party manufacturers for production that these
manufacturers will not experience manufacturing difficulties or
experience quality or regulatory issues. Any difficulties in
locating and hiring third-party manufacturers, or in the ability
of third-party manufacturers to supply quantities of our
products at the times and in the quantities we need, could have
a material adverse effect on our business.
We
depend upon third-party suppliers, including single source
suppliers to us and our customers, making us vulnerable to
supply problems and price fluctuations.
We rely on third-party suppliers to provide us with certain
components of our products and to provide key components or
supplies to our customers for use with our products. We rely on
single source suppliers for the components of the Diamondback
360°. We purchase components from these suppliers on a
purchase order basis and carry only limited levels of inventory
for these components. If we underestimate our requirements, we
may not have an adequate supply, which could interrupt
manufacturing of our products and result in delays in shipments
and loss of revenue. We depend on these suppliers to provide us
and our customers with materials in a timely manner that meet
ours and their quality, quantity and cost requirements. These
suppliers may encounter problems during manufacturing for a
variety of reasons, including unanticipated demand from larger
customers, failure to follow specific protocols and procedures,
failure to comply with applicable regulations, equipment
malfunction, quality or yield problems, and environmental
factors, any of which could delay or impede their ability to
meet our demand and our customers’ demand. Our reliance on
these outside suppliers also subjects us to other risks that
could harm our business, including:
|
|
|
|
|
|
•
|
interruption of supply resulting from modifications to, or
discontinuation of, a supplier’s operations;
|
|
|
|
|
•
|
delays in product shipments resulting from defects, reliability
issues or changes in components from suppliers;
|
|
|
|
|
•
|
price fluctuations due to a lack of long-term supply
arrangements for key components with our suppliers;
|
|
|
|
|
•
|
our suppliers may make errors in manufacturing components, which
could negatively affect the efficacy or safety of our products
or cause delays in shipment of our products;
|
|
|
|
|
•
|
our suppliers may discontinue production of components, which
could significantly delay our production and sales and impair
operating margins;
|
23
|
|
|
|
|
|
•
|
we and our customers may not be able to obtain adequate supplies
in a timely manner or on commercially acceptable terms;
|
|
|
|
|
•
|
we and our customers may have difficulty locating and qualifying
alternative suppliers for ours and their sole-source supplies;
|
|
|
|
|
•
|
switching components may require product redesign and new
regulatory submissions, either of which could significantly
delay production and sales;
|
|
|
|
|
•
|
we may experience production delays related to the evaluation
and testing of products from alternative suppliers and
corresponding regulatory qualifications;
|
|
|
|
|
•
|
our suppliers manufacture products for a range of customers, and
fluctuations in demand for the products these suppliers
manufacture for others may affect their ability to deliver
components to us or our customers in a timely manner; and
|
|
|
|
|
•
|
our suppliers may encounter financial hardships unrelated to us
or our customers’ demand for components or other products,
which could inhibit their ability to fulfill orders and meet
requirements.
|
Other than existing, unfulfilled purchase obligations, our
suppliers have no contractual obligations to supply us with, and
we are not contractually obligated to purchase from them, any of
our supplies. Any supply interruption from our suppliers or
failure to obtain additional suppliers for any of the components
used in our products would limit our ability to manufacture our
products and could have a material adverse effect on our
business, financial condition and results of operations. We have
no reason to believe that any of our current suppliers could not
be replaced if they were unable to deliver components to us in a
timely manner or at an acceptable price and level of quality.
However, if we lost one of these suppliers and were unable to
obtain an alternate source on a timely basis or on terms
acceptable to us, our production schedules could be delayed, our
margins could be negatively impacted, and we could fail to meet
our customers’ demand. Our customers rely upon our ability
to meet committed delivery dates and any disruption in the
supply of key components would adversely affect our ability to
meet these dates and could result in legal action by our
customers, cause us to lose customers or harm our ability to
attract new customers, any of which could decrease our revenue
and negatively impact our growth. In addition, to the extent
that our suppliers use technology or manufacturing processes
that are proprietary, we may be unable to obtain comparable
materials or components from alternative sources.
Manufacturing operations are often faced with a supplier’s
decision to discontinue manufacturing a component, which may
force us or our customers to make last time purchases, qualify a
substitute part, or make a design change which may divert
engineering time away from the development of new products.
We
will need to increase the size of our organization and we may
experience difficulties managing growth. If we are unable to
manage the anticipated growth of our business, our future
revenue and operating results may be adversely
affected.
The growth we may experience in the future will provide
challenges to our organization, requiring us to rapidly expand
our sales and marketing personnel and manufacturing operations.
Our sales and marketing force has increased from six employees
on January 1, 2007 to 136 employees on June 30,
2009, and we expect to continue to grow our sales and marketing
force. We also expect to significantly expand our manufacturing
operations to meet anticipated growth in demand for our
products. Rapid expansion in personnel means that less
experienced people may be producing and selling our product,
which could result in unanticipated costs and disruptions to our
operations. If we cannot scale and manage our business
appropriately, our anticipated growth may be impaired and our
financial results will suffer.
We
anticipate future losses and may require additional financing,
and our failure to obtain additional financing when needed could
force us to delay, reduce or eliminate our product development
programs or commercialization efforts.
We anticipate future losses and therefore may be dependent on
additional financing to execute our business plan. Although we
expect to achieve our first profitable quarter during fiscal
year 2011, our plans for expansion may
24
still require additional financing. In particular, we may
require additional capital in order to continue to conduct the
research and development and obtain regulatory clearances and
approvals necessary to bring any future products to market and
to establish effective marketing and sales capabilities for
existing and future products. Our operating plan may change, and
we may need additional funds sooner than anticipated to meet our
operational needs and capital requirements for product
development, clinical trials and commercialization. Additional
funds may not be available when we need them on terms that are
acceptable to us, or at all. If adequate funds are not available
on a timely basis, we may terminate or delay the development of
one or more of our products, or delay establishment of sales and
marketing capabilities or other activities necessary to
commercialize our products.
Our future capital requirements will depend on many factors,
including:
|
|
|
|
|
|
•
|
the costs of expanding our sales and marketing infrastructure
and our manufacturing operations;
|
|
|
|
|
•
|
the degree of success we experience in commercializing the
Diamondback 360°;
|
|
|
|
|
•
|
the number and types of future products we develop and
commercialize;
|
|
|
|
|
•
|
the costs, timing and outcomes of regulatory reviews associated
with our future product candidates;
|
|
|
|
|
•
|
the costs of preparing, filing and prosecuting patent
applications and maintaining, enforcing and defending
intellectual property-related claims; and
|
|
|
|
|
•
|
the extent and scope of our general and administrative expenses.
|
Raising
additional capital through debt financing may restrict our
operations.
To the extent that we raise additional capital through debt
financing, the terms may include provisions that adversely
affect your rights as a stockholder. Debt financing, if
available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions
such as incurring additional debt, making capital expenditures
or declaring dividends. Any of these events could adversely
affect our ability to achieve our product development and
commercialization goals and have a material adverse effect on
our business, financial condition and results of operations.
We do
not intend to market the Diamondback 360° internationally
in the near future, which will limit our potential revenue from
this product.
As a part of our product development and regulatory strategy, we
do not intend to market the Diamondback 360°
internationally in the near future in order to focus our
resources and efforts on the U.S. market, as international
efforts would require substantial additional sales and
marketing, regulatory and personnel expenses. Our decision to
market this product only in the United States will limit our
ability to reach all of our potential markets and will limit our
potential sources of revenue. In addition, our competitors will
have an opportunity to further penetrate and achieve market
share abroad until such time, if ever, that we market the
Diamondback 360° or other products internationally.
We are
dependent on our senior management team and scientific
personnel, and our business could be harmed if we are unable to
attract and retain personnel necessary for our
success.
We are highly dependent on our senior management, especially
David L. Martin, our President and Chief Executive Officer. Our
success will depend on our ability to retain senior management
and to attract and retain qualified personnel in the future,
including scientists, clinicians, engineers and other highly
skilled personnel and to integrate current and additional
personnel in all departments. Competition for senior management
personnel, as well as scientists, clinical and regulatory
specialists, engineers and sales personnel, is intense and we
may not be able to retain our personnel. The loss of members of
our senior management, scientists, clinical and regulatory
specialists, engineers and sales personnel could prevent us from
achieving our objectives of continuing to grow the company. The
loss of a member of our senior management or professional staff
would require the remaining senior executive officers to divert
immediate and substantial attention to seeking a replacement. In
particular, we expect to substantially increase the size of our
sales force, which will require management’s attention. In
that regard, ev3 Inc., ev3 Endovascular, Inc., and FoxHollow
Technologies, Inc. have brought an action against us that, if
successful,
25
could limit our ability to retain the services of certain sales
personnel that were formerly employed by those companies and
make it more difficult to recruit and hire such sales and other
personnel in the future. We do not carry key person life
insurance on any of our employees.
We may
incur significant costs due to the application of
Section 409A of the Internal Revenue Code.
The estimated fair value of the common stock underlying our
stock options was originally estimated in good faith by our
board of directors based upon the best information available
regarding the company on the dates of grant, including financing
activity, development of our business, the FDA process and
launch of our product, the initial public offering process and
our financial results. During the fiscal years ended
June 30, 2007 and June 30, 2008, we did not obtain
valuations from an independent valuation firm contemporaneously
with each option grant date. As further discussed under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies and Significant Judgments and
Estimates,” we hired an independent valuation firm to
determine the estimated fair value of our common stock for
financial reporting purposes as of various dates, including
June 29, 2007, September 30, 2007, December 31,
2007, March 31, 2008 and June 30, 2008. Our board
considered these estimates when estimating the fair market value
of our common stock on each option grant date that followed the
board’s receipt of an estimate from the valuation firm, but
certain grants were later deemed to have been made at less than
fair market value when such valuation estimates were
retrospectively applied. With respect to options granted from
June 12, 2007 through February 14, 2008, the estimated
fair value of the common stock determined by the independent
valuation firm was higher than the exercise price of stock
options we had previously granted at or near such dates by a
weighted average per share amount of approximately $0.79.
If the Internal Revenue Service were to determine that the fair
market value of our common stock was higher than the exercise
price of any of our stock options as of the grant date of such
options, either in accordance with our financial reporting
valuations or under a different methodology, then we and our
optionholders may experience adverse tax consequences under
Section 409A of the Internal Revenue Code and related
provisions, including the imposition of future tax liabilities
and penalties based on the spread between the fair market value
and the exercise price at the time of option vesting and on
future increases (if any) in the value of our stock or the
company after the vesting date. These liabilities may be
significant. The imposition of such liabilities may affect a
significant portion of our employees and could adversely affect
employee morale and our business operations.
We may
be subject to damages or other remedies as a result of pending
litigation.
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc. filed a complaint against us and
certain of our employees alleging, among other things,
misappropriation and use of their confidential information by us
and certain of our employees who were formerly employees of
FoxHollow. The complaint also alleges that certain of our
employees violated their employment agreements with FoxHollow
requiring them to refrain from soliciting FoxHollow employees.
There can be no assurance as to the outcome of this litigation.
We are defending this litigation vigorously. If we are not
successful in defending it, we could be required to pay
substantial damages and be subject to equitable relief that
could include a requirement that we terminate the employment of
certain employees, including certain key sales personnel who
were formerly employed by FoxHollow. In any event, the defense
of this litigation, regardless of the outcome, could result in
substantial legal costs and diversion of our management’s
time and efforts from the operation of our business. If the
plaintiffs in this litigation are successful, it could have a
material adverse effect on our business, operations and
financial condition.
Risks
Related to Government Regulation
Our
ability to market the Diamondback 360° in the United States
is limited to use as a therapy in patients with PAD, and if we
want to expand our marketing claims, we will need to file for
additional FDA clearances or approvals and conduct further
clinical trials, which would be expensive and time-consuming and
may not be successful.
The Diamondback 360° received FDA 510(k) clearance in the
United States for use as a therapy in patients with PAD. This
general clearance restricts our ability to market or advertise
the Diamondback 360° beyond this use and could affect our
growth. While off-label uses of medical devices are common and
the FDA does not regulate
26
physicians’ choice of treatments, the FDA does restrict a
manufacturer’s communications regarding such off-label use.
We will not actively promote or advertise the Diamondback
360° for off-label uses. In addition, we cannot make
comparative claims regarding the use of the Diamondback
360° against any alternative treatments without conducting
head-to-head
comparative clinical trials, which would be expensive and time
consuming. If our promotional activities fail to comply with the
FDA’s regulations or guidelines, we may be subject to FDA
warnings or enforcement action.
If we determine to market the Diamondback 360° in the
United States for other uses, for instance, use in the coronary
arteries, we would need to conduct further clinical trials and
obtain premarket approval from the FDA. In 2008, we completed
the ORBIT I trial, a 50-patient study in India which
investigated the safety of the Diamondback
360
o
in
treating calcified coronary artery lesions, and results
successfully met both safety and efficacy endpoints. An
investigational device exemption, or IDE application was
recently submitted to the FDA for ORBIT II, a pivotal trial in
the United States to evaluate the safety and effectiveness of
the Diamondback
360
o
in
treating severely calcified coronary lesions. Clinical trials
are complex, expensive, time consuming, uncertain and subject to
substantial and unanticipated delays. Before we may begin
clinical trials, we must submit and obtain approval for an IDE,
that describes, among other things, the manufacture of, and
controls for, the device and a complete investigational plan.
Clinical trials generally involve a substantial number of
patients in a multi-year study. We may encounter problems with
our clinical trials, and any of those problems could cause us or
the FDA to suspend those trials, or delay the analysis of the
data derived from them.
A number of events or factors, including any of the following,
could delay the completion of our clinical trials in the future
and negatively impact our ability to obtain FDA clearance or
approval for, and to introduce, a particular future product:
|
|
|
|
|
|
•
|
failure to obtain approval from the FDA or any foreign
regulatory authority to commence an investigational study;
|
|
|
|
|
•
|
conditions imposed on us by the FDA or any foreign regulatory
authority regarding the scope or design of our clinical trials;
|
|
|
|
|
•
|
delays in obtaining or maintaining required approvals from
institutional review boards or other reviewing entities at
clinical sites selected for participation in our clinical trials;
|
|
|
|
|
•
|
insufficient supply of our future product candidates or other
materials necessary to conduct our clinical trials;
|
|
|
|
|
•
|
difficulties in enrolling patients in our clinical trials;
|
|
|
|
|
•
|
negative or inconclusive results from clinical trials, results
that are inconsistent with earlier results, or the likelihood
that the part of the human anatomy involved is more prone to
serious adverse events, necessitating additional clinical trials;
|
|
|
|
|
•
|
serious or unexpected side effects experienced by patients who
use our future product candidates; or
|
|
|
|
|
•
|
failure by any of our third-party contractors or investigators
to comply with regulatory requirements or meet other contractual
obligations in a timely manner.
|
Our clinical trials may not begin as planned, may need to be
redesigned, and may not be completed on schedule, if at all.
Delays in our clinical trials may result in increased
development costs for our future product candidates, which could
cause our stock price to decline and limit our ability to obtain
additional financing. In addition, if one or more of our
clinical trials is delayed, competitors may be able to bring
products to market before we do, and the commercial viability of
our future product candidates could be significantly reduced.
Even if we believe that a clinical trial demonstrates promising
safety and efficacy data, such results may not be sufficient to
obtain FDA clearance or approval. Without conducting and
successfully completing further clinical trials, our ability to
market the Diamondback 360° will be limited and our revenue
expectations may not be realized.
27
We may
become subject to regulatory actions if we are found to have
promoted the Diamondback 360° for unapproved
uses.
If the FDA determines that our promotional materials, training
or other activities constitute promotion of our product for an
unapproved use, it could request that we cease use of or modify
our training or promotional materials or subject us to
regulatory enforcement actions, including the issuance of an
untitled or warning letter, injunction, seizure, civil fine and
criminal penalties. It is also possible that other federal,
state or foreign enforcement authorities might take action if
they consider promotional, training or other materials to
constitute promotion of our product for an unapproved or
uncleared use, which could result in significant fines or
penalties under other statutory authorities, such as laws
prohibiting false claims for reimbursement.
The
Diamondback 360° may in the future be subject to product
recalls that could harm our reputation.
The FDA and similar governmental authorities in other countries
have the authority to require the recall of commercialized
products in the event of material regulatory deficiencies or
defects in design or manufacture. A government mandated or
voluntary recall by us could occur as a result of component
failures, manufacturing errors or design or labeling defects.
During the time of commercialization, we have had two minor
instances of recall, involving one single lot of Diamondback
360° devices (eight units), and two boxes of ViperWires
(ten wires), related to “Use By” date labeling issues.
Any additional recalls of our product would divert managerial
and financial resources, harm our reputation with customers and
have an adverse effect on our financial condition and results of
operations.
If we
or our suppliers fail to comply with ongoing regulatory
requirements, or if we experience unanticipated problems, our
products could be subject to restrictions or withdrawal from the
market.
The Diamondback 360° and related manufacturing processes,
clinical data, adverse events, recalls or corrections and
promotional activities, are subject to extensive regulation by
the FDA and other regulatory bodies. In particular, we and our
component suppliers are required to comply with the FDA’s
Quality System Regulation, or QSR, and other regulations, which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage and shipping of any product for which we obtain
marketing clearance or approval. The FDA enforces the QSR
through announced and unannounced inspections. We and certain of
our third-party manufacturers have not yet been inspected by the
FDA. Failure by us or one of our component suppliers to comply
with the QSR requirements or other statutes and regulations
administered by the FDA and other regulatory bodies, or failure
to adequately respond to any observations, could result in,
among other things:
|
|
|
|
|
|
•
|
warning or other letters from the FDA;
|
|
|
|
|
•
|
fines, injunctions and civil penalties;
|
|
|
|
|
•
|
product recall or seizure;
|
|
|
|
|
•
|
unanticipated expenditures;
|
|
|
|
|
•
|
delays in clearing or approving or refusal to clear or approve
products;
|
|
|
|
|
•
|
withdrawal or suspension of approval or clearance by the FDA or
other regulatory bodies;
|
|
|
|
|
•
|
orders for physician notification or device repair, replacement
or refund;
|
|
|
|
|
•
|
operating restrictions, partial suspension or total shutdown of
production or clinical trials; and
|
|
|
|
|
•
|
criminal prosecution.
|
If any of these actions were to occur, it would harm our
reputation and cause our product sales to suffer.
Furthermore, any modification to a device that has received FDA
clearance or approval that could significantly affect its safety
or efficacy, or that would constitute a major change in its
intended use, design or manufacture, requires a new clearance or
approval from the FDA. If the FDA disagrees with any
determination by us that new
28
clearance or approval is not required, we may be required to
cease marketing or to recall the modified product until we
obtain clearance or approval. In addition, we could be subject
to significant regulatory fines or penalties.
Regulatory clearance or approval of a product may also require
costly post-marketing testing or surveillance to monitor the
safety or efficacy of the product. Later discovery of previously
unknown problems with our products, including unanticipated
adverse events or adverse events of unanticipated severity or
frequency, manufacturing problems, or failure to comply with
regulatory requirements such as the QSR, may result in
restrictions on such products or manufacturing processes,
withdrawal of the products from the market, voluntary or
mandatory recalls, fines, suspension of regulatory approvals,
product seizures, injunctions or the imposition of civil or
criminal penalties.
The
use, misuse or off-label use of the Diamondback 360° may
increase the risk of injury, which could result in product
liability claims and damage to our business.
The use, misuse or off-label use of the Diamondback 360°
may result in injuries that lead to product liability suits,
which could be costly to our business. The Diamondback 360°
is not FDA-cleared or approved for treatment of the carotid
arteries, the coronary arteries, within bypass grafts or stents,
of thrombus or where the lesion cannot be crossed with a
guidewire or a significant dissection is present at the lesion
site. We cannot prevent a physician from using the Diamondback
360° for off-label applications. The application of the
Diamondback 360° to coronary or carotid arteries, as
opposed to peripheral arteries, is more likely to result in
complications that have serious consequences, including heart
attacks or strokes which could result, in certain circumstances,
in death.
We
will face risks related to product liability claims, which could
exceed the limits of available insurance coverage.
If the Diamondback 360° is defectively designed,
manufactured or labeled, contains defective components or is
misused, we may become subject to costly litigation by our
customers or their patients. The medical device industry is
subject to substantial litigation, and we face an inherent risk
of exposure to product liability claims in the event that the
use of our product results or is alleged to have resulted in
adverse effects to a patient. In most jurisdictions, producers
of medical products are strictly liable for personal injuries
caused by medical devices. We may be subject in the future to
claims for personal injuries arising out of the use of our
products. Product liability claims could divert
management’s attention from our core business, be expensive
to defend and result in sizable damage awards against us. A
product liability claim against us, even if ultimately
unsuccessful, could have a material adverse effect on our
financial condition, results of operations and reputation. While
we have product liability insurance coverage for our products
and intend to maintain such insurance coverage in the future,
there can be no assurance that we will be adequately protected
from the claims that will be brought against us.
Compliance
with environmental laws and regulations could be expensive.
Failure to comply with environmental laws and regulations could
subject us to significant liability.
Our operations are subject to regulatory requirements relating
to the environment, waste management and health and safety
matters, including measures relating to the release, use,
storage, treatment, transportation, discharge, disposal and
remediation of hazardous substances. Although we are currently
classified as a Very Small Quantity Hazardous Waste Generator
within Ramsey County, Minnesota, we cannot ensure that we will
maintain our licensed status as such, nor can we ensure that we
will not incur material costs or liability in connection with
our operations, or that our past or future operations will not
result in claims or injury by employees or the public.
Environmental laws and regulations could also become more
stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with violations.
29
We and
our distributors must comply with various federal and state
anti-kickback, self-referral, false claims and similar laws, any
breach of which could cause a material adverse effect on our
business, financial condition and results of
operations.
Our relationships with physicians, hospitals and the marketers
of our products are subject to scrutiny under various federal
anti-kickback, self-referral, false claims and similar laws,
often referred to collectively as healthcare fraud and abuse
laws.
Healthcare fraud and abuse laws are complex, and even minor,
inadvertent violations can give rise to claims that the relevant
law has been violated. If our operations are found to be in
violation of these laws, we, as well as our employees, may be
subject to penalties, including monetary fines, civil and
criminal penalties, exclusion from federal and state healthcare
programs, including Medicare, Medicaid, Veterans Administration
health programs, workers’ compensation programs and TRICARE
(the healthcare system administered by or on behalf of the
U.S. Department of Defense for uniformed services
beneficiaries, including active duty and their dependents,
retirees and their dependents), and forfeiture of amounts
collected in violation of such prohibitions. Individual
employees may need to defend such suits on behalf of us or
themselves, which could lead to significant disruption in our
present and future operations. Certain states in which we intend
to market our products have similar fraud and abuse laws,
imposing substantial penalties for violations. Any government
investigation or a finding of a violation of these laws would
likely have a material adverse effect on our business, financial
condition and results of operations.
Anti-kickback laws and regulations prohibit any knowing and
willful offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of an individual or the
ordering or recommending of the use of a product or service for
which payment may be made by Medicare, Medicaid or other
government-sponsored healthcare programs. In addition, the cost
of non-compliance with these laws could be substantial, since we
could be subject to monetary fines and civil or criminal
penalties, and we could also be excluded from federally funded
healthcare programs, including Medicare and Medicaid, for
non-compliance.
We have entered into consulting agreements with physicians,
including some who may make referrals to us or order our
product. One of these physicians was one of 20 principal
investigators in our OASIS clinical trial at the same time he
was acting as a paid consultant for us. In addition, some of
these physicians own our stock, which they purchased in
arm’s-length transactions on terms identical to those
offered to non-physicians, or received stock options from us as
consideration for consulting services performed by them. We
believe that these consulting agreements and equity investments
by physicians are common practice in our industry, and while
these transactions were structured with the intention of
complying with all applicable laws, including the federal ban on
physician self-referrals, commonly known as the “Stark
Law,” state anti-referral laws and other applicable
anti-kickback laws, it is possible that regulatory or
enforcement agencies or courts may in the future view these
transactions as prohibited arrangements that must be
restructured or for which we would be subject to other
significant civil or criminal penalties, or prohibit us from
accepting referrals from these physicians. Because our strategy
relies on the involvement of physicians who consult with us on
the design of our product, we could be materially impacted if
regulatory or enforcement agencies or courts interpret our
financial relationships with our physician advisors who refer or
order our product to be in violation of applicable laws and
determine that we would be unable to achieve compliance with
such applicable laws. This could harm our reputation and the
reputations of our clinical advisors.
The scope and enforcement of all of these laws is uncertain and
subject to rapid change, especially in light of the lack of
applicable precedent and regulations. There can be no assurance
that federal or state regulatory or enforcement authorities will
not investigate or challenge our current or future activities
under these laws. Any investigation or challenge could have a
material adverse effect on our business, financial condition and
results of operations. Any state or federal regulatory or
enforcement review of us, regardless of the outcome, would be
costly and time consuming. Additionally, we cannot predict the
impact of any changes in these laws, whether these changes are
retroactive or will have effect on a going-forward basis only.
30
We
incur significant costs as a result of operating as a public
company, and our management is required to devote substantial
time to compliance initiatives.
As a public company, we incur significant legal, accounting and
other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act, as well as rules subsequently
implemented by the Securities and Exchange Commission and the
Nasdaq Global Market, have imposed various requirements on
public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and
changes in corporate governance practices. Our management and
other personnel devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations
have increased our legal and financial compliance costs and made
some activities more time consuming and costly. While we have
developed and instituted a corporate compliance program based on
what we believe are the current appropriate best practices and
continue to update the program in response to newly implemented
or changing regulatory requirements, we cannot ensure that it is
or will be in compliance with all potentially applicable
regulations.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must
perform system and process evaluation and testing of our
internal controls over financial reporting to allow management
and, at certain times, our independent registered public
accounting firm to report on the effectiveness of our internal
controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, when required, may reveal deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses. Moreover, if we are not able to comply with
the requirements of Section 404 in a timely manner, or if
we or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities, which would require additional financial
and management resources.
These obligations divert management’s time and attention
away from our business. Our management may not be able to
effectively and timely implement controls and procedures that
adequately respond to the increased regulatory compliance and
reporting requirements that are applicable. If we fail to staff
our accounting and finance function adequately or maintain
internal controls adequate to meet the demands that are placed
upon us a public company, including the requirements of the
Sarbanes-Oxley Act, we may be unable to report our financial
results accurately or in a timely manner, and our business and
stock price may suffer. The costs of being a public company, as
well as diversion of management’s time and attention, may
have a material adverse effect on our business, financial
condition and results of operations.
Additionally, these laws and regulations could make it more
difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same
or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons
to serve on our board of directors, board committees or as
executive officers.
Risks
Relating to Our Intellectual Property
Our
inability to adequately protect our intellectual property could
allow our competitors and others to produce products based on
our technology, which could substantially impair our ability to
compete.
Our success and ability to compete depends, in part, upon our
ability to maintain the proprietary nature of our technologies.
We rely on a combination of patents, copyrights and trademarks,
as well as trade secrets and nondisclosure agreements, to
protect our intellectual property. As of August 31, 2009,
we had a portfolio of 22 issued U.S. patents and 48 issued
or granted
non-U.S. patents
covering aspects of our core technology, which expire between
2010 and 2027. However, our issued patents and related
intellectual property may not be adequate to protect us or
permit us to gain or maintain a competitive advantage. The
issuance of a patent is not conclusive as to its scope, validity
or enforceability. The scope, validity or enforceability of our
issued patents can be challenged in litigation or proceedings
before the U.S. Patent and Trademark Office, or the USPTO.
In addition, our pending patent applications include claims to
numerous important aspects of our products under development
that are not currently protected by any of our issued patents.
We cannot assure you that any of our pending patent applications
31
will result in the issuance of patents to us. The USPTO may deny
or require significant narrowing of claims in our pending patent
applications. Even if any patents are issued as a result of
pending patent applications, they may not provide us with
significant commercial protection or be issued in a form that is
advantageous to us. Proceedings before the USPTO could result in
adverse decisions as to the priority of our inventions and the
narrowing or invalidation of claims in issued patents. Further,
if any patents we obtain or license are deemed invalid and
unenforceable, or have their scope narrowed, it could impact our
ability to commercialize or license our technology.
Changes in either the patent laws or in interpretations of
patent laws in the United States and other countries may
diminish the value of our intellectual property. For instance,
the U.S. Supreme Court has recently modified some tests
used by the USPTO in granting patents during the past
20 years, which may decrease the likelihood that we will be
able to obtain patents and increase the likelihood of challenge
of any patents we obtain or license. In addition, the USPTO has
adopted new rules of practice (the application of which has been
enjoined as a result of litigation) that limit the number of
claims that may be filed in a patent application and the number
of continuation or
continuation-in-part
applications that may be filed. These new rules may result in
patent applicants being unable to secure all of the rights that
they would otherwise have been entitled to in the absence of the
new rules and, therefore, may negatively affect our ability to
obtain comprehensive patent coverage. The laws of some foreign
countries may not protect our intellectual property rights to
the same extent as the laws of the United States, if at all.
To protect our proprietary rights, we may, in the future, need
to assert claims of infringement against third parties to
protect our intellectual property. The outcome of litigation to
enforce our intellectual property rights in patents, copyrights,
trade secrets or trademarks is highly unpredictable, could
result in substantial costs and diversion of resources, and
could have a material adverse effect on our financial condition,
reputation and results of operations regardless of the final
outcome of such litigation. In the event of an adverse judgment,
a court could hold that some or all of our asserted intellectual
property rights are not infringed, invalid or unenforceable, and
could order us to pay third-party attorneys’ fees. Despite
our efforts to safeguard our unpatented and unregistered
intellectual property rights, we may not be successful in doing
so or the steps taken by us in this regard may not be adequate
to detect or deter misappropriation of our technology or to
prevent an unauthorized third party from copying or otherwise
obtaining and using our products, technology or other
information that we regard as proprietary. In addition, we may
not have sufficient resources to litigate, enforce or defend our
intellectual property rights. Additionally, third parties may be
able to design around our patents.
We also rely on trade secrets, technical know-how and continuing
innovation to develop and maintain our competitive position. In
this regard, we seek to protect our proprietary information and
other intellectual property by requiring our employees,
consultants, contractors, outside scientific collaborators and
other advisors to execute non-disclosure and assignment of
invention agreements on commencement of their employment or
engagement. Agreements with our employees also forbid them from
bringing the proprietary rights of third parties to us. We also
require confidentiality or material transfer agreements from
third parties that receive our confidential data or materials.
However, trade secrets are difficult to protect. We cannot
provide any assurance that employees and third parties will
abide by the confidentiality or assignment terms of these
agreements, or that we will be effective securing necessary
assignments from these third parties. Despite measures taken to
protect our intellectual property, unauthorized parties might
copy aspects of our products or obtain and use information that
we regard as proprietary. Enforcing a claim that a third party
illegally obtained and is using any of our trade secrets is
expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the United States are sometimes less
willing to protect trade secrets. Finally, others may
independently discover trade secrets and proprietary
information, and this would prevent us from asserting any such
trade secret rights against these parties.
Our inability to adequately protect our intellectual property
could allow our competitors and others to produce products based
on our technology, which could substantially impair our ability
to compete.
Claims
of infringement or misappropriation of the intellectual property
rights of others could prohibit us from commercializing
products, require us to obtain licenses from third parties or
require us to develop non-infringing alternatives, and subject
us to substantial monetary damages and injunctive
relief.
The medical technology industry is characterized by extensive
litigation and administrative proceedings over patent and other
intellectual property rights. The likelihood that patent
infringement or misappropriation claims
32
may be brought against us increases as we achieve more
visibility in the marketplace and introduce products to market.
All issued patents are entitled to a presumption of validity
under the laws of the United States. Whether a product infringes
a patent involves complex legal and factual issues, the
determination of which is often uncertain. Therefore, we cannot
be certain that we have not infringed the intellectual property
rights of such third parties or others. Our competitors may
assert that our products are covered by U.S. or foreign
patents held by them. We are aware of numerous patents issued to
third parties that relate to the manufacture and use of medical
devices for interventional cardiology. The owners of each of
these patents could assert that the manufacture, use or sale of
our products infringes one or more claims of their patents.
Because patent applications may take years to issue, there may
be applications now pending of which we are unaware that may
later result in issued patents that we infringe. If another
party has filed a U.S. patent application on inventions
similar to ours, we may have to participate in an interference
proceeding declared by the USPTO to determine priority of
invention in the United States. The costs of these proceedings
can be substantial, and it is possible that such efforts would
be unsuccessful if unbeknownst to us, the other party had
independently arrived at the same or similar invention prior to
our own invention, resulting in a loss of our U.S. patent
position with respect to such inventions. There could also be
existing patents of which we are unaware that one or more
aspects of its technology may inadvertently infringe. In some
cases, litigation may be threatened or brought by a
patent-holding company or other adverse patent owner who has no
relevant product revenues and against whom our patents may
provide little or no deterrence.
Any infringement or misappropriation claim could cause us to
incur significant costs, place significant strain on our
financial resources, divert management’s attention from our
business and harm our reputation. Some of our competitors may be
able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a
material adverse effect on our ability to raise the funds
necessary to continue our operations. Although patent and
intellectual property disputes in the medical device area have
often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and
could include ongoing royalties. If the relevant patents were
upheld in litigation as valid and enforceable and we were found
to infringe, we could be prohibited from commercializing any
infringing products unless we could obtain licenses to use the
technology covered by the patent or are able to design around
the patent. We may be unable to obtain a license on terms
acceptable to us, if at all, and we may not be able to redesign
any infringing products to avoid infringement. Further, any
redesign may not receive FDA clearance or approval or may not
receive such clearance or approval in a timely manner. Any such
license could impair operating margins on future product
revenue. A court could also order us to pay compensatory damages
for such infringement, and potentially treble damages, plus
prejudgment interest and third-party attorneys’ fees. These
damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court
also could enter orders that temporarily, preliminarily or
permanently enjoin us and our customers from making, using,
selling, offering to sell or importing infringing products, or
could enter an order mandating that we undertake certain
remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional
damages to third parties. Adverse determinations in a judicial
or administrative proceeding or failure to obtain necessary
licenses could prevent us from manufacturing and selling our
products, which would have a significant adverse impact on our
business.
Risks
Relating to Ownership of Our Common Stock
Until
recently there has not been a public market for our common stock
and our stock price is expected to be volatile and you may not
be able to resell your shares.
The market price of our common stock could be subject to
significant fluctuations. Market prices for securities of
early-stage pharmaceutical, medical device, biotechnology and
other life sciences companies have historically been
particularly volatile. Some of the factors that may cause the
market price of our common stock to fluctuate include:
|
|
|
|
|
|
•
|
our ability to develop, obtain regulatory clearances or
approvals for and market new and enhanced products on a timely
basis;
|
33
|
|
|
|
|
|
•
|
changes in governmental regulations or in the status of our
regulatory approvals, clearances or future applications;
|
|
|
|
|
•
|
our announcements or our competitors’ announcements
regarding new products, product enhancements, significant
contracts, number of hospitals and physicians using our
products, acquisitions or strategic investments;
|
|
|
|
|
•
|
announcements of technological or medical innovations for the
treatment of vascular disease;
|
|
|
|
|
•
|
delays or other problems with the manufacturing of the
Diamondback 360°;
|
|
|
|
|
•
|
volume and timing of orders for the Diamondback 360° and
any future products, if and when commercialized;
|
|
|
|
|
•
|
changes in the availability of third-party reimbursement in the
United States and other countries;
|
|
|
|
|
•
|
quarterly variations in our or our competitors’ results of
operations;
|
|
|
|
|
•
|
changes in earnings estimates or recommendations by securities
analysts who cover our common stock;
|
|
|
|
|
•
|
failure to meet estimates or recommendations by securities
analysts who cover our stock;
|
|
|
|
|
•
|
changes in healthcare policy;
|
|
|
|
|
•
|
product liability claims or other litigation;
|
|
|
|
|
•
|
product recalls;
|
|
|
|
|
•
|
accusations that we have violated a law or regulation;
|
|
|
|
|
•
|
sales of large blocks of our common stock, including sales by
our executive officers, directors and significant stockholders;
|
|
|
|
|
•
|
disputes or other developments with respect to intellectual
property rights;
|
|
|
|
|
•
|
changes in accounting principles; and
|
|
|
|
|
•
|
general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
|
In addition, if securities class action litigation is initiated
against us, we would incur substantial costs and our
management’s attention would be diverted from operations.
All of these factors could cause the price of our stock to
decline, and you may lose some or all of your investment.
Moreover, the stock markets in general have experienced
substantial volatility that has often been unrelated to the
operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price
of our common stock.
In the past, following periods of volatility in the market price
of a company’s securities, stockholders have often
instituted class action securities litigation against such
company. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm our profitability and
reputation.
We do
not expect to pay cash dividends, and accordingly, stockholders
must rely on stock appreciation for any return on their
investment in the company.
We anticipate that we will retain our earnings, if any, for
future growth and therefore do not anticipate that we will pay
cash dividends in the future. As a result, appreciation of the
price of our common stock is the only potential source of return
to stockholders. Investors seeking cash dividends should not
invest in our common stock.
34
If
equity research analysts do not publish research or reports
about our business or if they issue unfavorable research or
downgrade the company’s common stock, the price of our
common stock could decline.
Investors may look to reports of equity research analysts for
additional information regarding our industry and operations.
Therefore, any trading market for our common stock will rely in
part on the research and reports that equity research analysts
publish about us and our business. We do not control these
analysts. Equity research analysts may elect not to provide
research coverage of our common stock, which may adversely
affect the market price of our common stock. If equity research
analysts do provide research coverage of our common stock, the
price of our common stock could decline if one or more of these
analysts downgrade the common stock or if they issue other
unfavorable commentary about us or our business. If one or more
of these analysts ceases coverage of the company, we could lose
visibility in the market, which in turn could cause our stock
price to decline.
Some
provisions of our charter documents and Delaware law may have
anti-takeover effects that could discourage an acquisition of us
by others, even if an acquisition would be beneficial to our
stockholders.
Provisions in our restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so
would benefit our stockholders. These provisions include:
|
|
|
|
|
|
•
|
authorizing the issuance of “blank check” preferred
stock, the terms of which may be established and shares of which
may be issued without stockholder approval;
|
|
|
|
|
•
|
limiting the removal of directors by the stockholders;
|
|
|
|
|
•
|
prohibiting stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
stockholders;
|
|
|
|
|
•
|
eliminating the ability of stockholders to call a special
meeting of stockholders; and
|
|
|
|
|
•
|
establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings.
|
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with an interested stockholder for a period of
three years following the date on which the stockholder became
an interested stockholder, unless such transactions are approved
by such corporation’s board of directors. This provision
could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to the
combined company’s stockholders.
Future
sales and issuances of our common stock or rights to purchase
common stock, including pursuant to equity incentive plans,
could result in additional dilution of the percentage ownership
of our stockholders and could cause our stock price to
fall.
Sales of a substantial number of shares of the combined
company’s common stock in the public market or the
perception that these sales might occur, could depress the
market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities.
We are unable to predict the effect that sales may have on the
prevailing market price of the common stock.
To the extent we raise additional capital by issuing equity
securities, including in a debt financing where we issue
convertible notes or notes with warrants, our stockholders may
experience substantial dilution. We may sell common stock in one
or more transactions at prices and in a manner we determine from
time to time. If we sell common stock in more than one
transaction, existing stockholders may be materially diluted. In
addition, new investors could gain rights superior to existing
stockholders, such as liquidation and other preferences. We have
stock options and warrants outstanding to purchase shares of our
capital stock. Our stockholders will incur dilution upon
exercise of any outstanding stock options or warrants.
35
|
|
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
Not applicable.
Our principal executive offices are located in a
47,000 square foot facility located in St. Paul, Minnesota.
We have leased this facility through November 2012 with an
option to renew through November 2017. This facility
accommodates our research and development, sales, marketing,
manufacturing, finance and administrative activities.
In September 2009, we entered into an agreement to lease a
46,000 square foot production facility in Pearland, Texas
beginning April 1, 2010. We have leased this facility
through March 2020. This facility will primarily accommodate
additional manufacturing activities.
We believe that our current premises, combined with the
Pearland, Texas production facility, are substantially adequate
for our current and anticipated future needs for the foreseeable
future.
|
|
|
|
Item 3.
|
Legal
Proceedings.
|
On December 28, 2007, ev3 Inc., ev3 Endovascular, Inc. and
FoxHollow Technologies, Inc., together referred to as the
Plaintiffs, filed a complaint in the Ramsey County District
Court for the State of Minnesota against us and Sean Collins and
Aaron Lew, who are former employees of FoxHollow currently
employed by us, as well as against unknown former employees of
Plaintiffs currently employed by us, referred to in the
complaint as John Does 1-10. On July 2, 2008, Plaintiffs
served and filed with the court a second amended complaint. In
this amended pleading, Plaintiffs asserted claims against us as
well as ten of our employees, all of whom were formerly employed
by one or more of the Plaintiffs. The second amended complaint
also continues to refer to “John Doe 1-10” defendants,
who are not identified by name.
The second amended complaint alleges the following:
|
|
|
|
|
|
•
|
That certain of our employees (i) violated provisions in
their employment agreements with their former employer
FoxHollow, barring them from misusing FoxHollow confidential
information and from soliciting or encouraging employees of
FoxHollow to join us, and (ii) breached a duty of loyalty
owed to FoxHollow.
|
|
|
|
|
•
|
That we and certain of our employees misappropriated trade
secrets of one or more of the Plaintiffs.
|
|
|
|
|
•
|
That all defendants engaged in unfair competition and conspired
to gain an unfair competitive and economic advantage for us to
the detriment of the Plaintiffs.
|
|
|
|
|
•
|
That (i) we tortiously interfered with the contracts
between FoxHollow and certain of our employees by allegedly
procuring breaches of the non-solicitation —
encouragement provision in those agreements, and (ii) one
of our employees tortiously interfered with the contracts
between certain of our employees and FoxHollow by allegedly
procuring breaches of the confidential information provision in
those agreements.
|
In the second amended complaint, the Plaintiffs seek, among
other forms of relief, an award of damages in an amount greater
than $50,000, a variety of forms of injunctive relief, exemplary
damages under the Minnesota Trade Secrets Act, and recovery of
their attorney fees and litigation costs. Although we have
requested the information, the Plaintiffs have not yet disclosed
what specific amount of damages they claim.
On December 28, 2007, the Plaintiffs filed with the court a
motion for a temporary restraining order, which the court
granted in part and denied in part in an order dated
January 10, 2008. With regard to former employees of ev3 or
FoxHollow who are now employed with us, the court
|
|
|
|
|
|
•
|
enjoined those employees from disclosing trade secrets of ev3 or
FoxHollow;
|
|
|
|
|
•
|
directed that any of such employees who signed a FoxHollow
employment agreement must not disclose the identity of FoxHollow
Key Opinion Leaders or Thought Leaders or use this information
to aid us;
|
36
|
|
|
|
|
|
•
|
ordered that these persons must not maintain, use or disclose
any confidential information about the FoxHollow Key Opinion
Leaders or Thought Leaders that was received while they were
employed with FoxHollow, and that if such information had
already been disclosed or used, they were required to advise the
recipients of such information in writing that this information
is confidential and may not be used by them or disclosed to
anyone;
|
|
|
|
|
•
|
ordered that if any of these employees contact any physician who
is a FoxHollow Key Opinion Leader or Thought Leader,
he/she
must
be able to trace, document and account, with specificity, how
he/she
was
able to identify such prospect through information, records or
documents obtained outside
his/her
employment with Plaintiffs; and
|
|
|
|
|
•
|
directed that those employees who are subject to a FoxHollow
employee nonsolicitation agreement must not, for one year after
leaving FoxHollow, be involved in soliciting or recruiting any
current employee of the Plaintiffs to leave that employment or
to accept employment with us.
|
In the memorandum accompanying the January 10, 2008 order,
the court noted that Mr. Collins admitted he took certain
FoxHollow sales information just prior to the conclusion of his
employment with FoxHollow, and noted that Mr. Collins had
indicated a willingness to return that information to FoxHollow.
Mr. Collins has returned the information.
We believe the January 10, 2008 court order and the
continuing confidentiality obligations of our officers and
employees who were subject to employment agreements with
FoxHollow will have no material impact on our sales efforts and
the efforts of our management. In accordance with the
court’s order, we have undertaken an effort to document and
account, with specificity, how our employees identified our
existing physician customers through information, records or
documents that did not originate with FoxHollow, and we have
implemented procedures to document how we identify new physician
customers. We believe all of our existing physician customers
were identified through appropriate sources, such as
publicly-available information, employees’ preexisting
physician relationships and referrals from existing physician
customers. In addition, we do not believe the court order
imposes any materially adverse restriction on identifying and
contacting new physician prospects since these physicians are
typically well-known in their industry and are easily identified
through appropriate sources. Accordingly, we do not anticipate
that the court order will materially impact our sales efforts.
In July 2008, all defendants in the case filed motions with the
district court asking the court to dismiss all claims on the
grounds that the claims should be decided exclusively in
arbitration in accordance with provisions found in the
employment agreements between FoxHollow and eight of the 10
individual defendants. In October 2008, the district court
granted this motion with respect to the eight individual
defendants who had arbitration provisions in their FoxHollow
employment agreements and stayed proceedings in the action
against these parties pending the outcome of any subsequent
arbitration proceedings. At the same time, the court denied the
motions to compel arbitration brought by us and by the two other
individual defendants. In late October 2008, both we and the two
individual defendants filed appeals from the district
court’s order denying the motions to compel arbitration. In
January 2009, the district court stayed all proceedings in the
action pending resolution of the appeals. During the oral
argument before the Court of Appeals that occurred in May 2009,
counsel for the Plaintiffs informed the court that the
Plaintiffs do not intend to commence arbitration proceedings
against the eight co-Defendants who prevailed in the district
court on motions to compel arbitration. On August 11, 2009,
the Court of Appeals issued a decision affirming the district
court’s order denying the motions by us and the two
individual defendants to compel arbitration. In late August
2009, both we and the two individual defendants filed petitions
with the Minnesota Supreme Court, asking that court to review
the August 11, 2009, decision by the Minnesota Court of
Appeals. We anticipate learning by the end of October 2009
whether the Supreme Court will accept review.
The Diamondback 360° is, at least in some applications,
considered to be a direct competitor with one of
Plaintiffs’ products. Our current Chief Executive Officer,
Vice President of Business Operations and Vice President of
Business Development were formerly employed by FoxHollow. These
officers remain subject to confidentiality provisions in their
employment agreements with FoxHollow, but the employee
nonsolicitation provisions in their agreements with FoxHollow
have expired. As of August 31, 2009, 35 of the 126 members
of our sales department, or 27.8%, were formerly employed by one
or more of the Plaintiffs.
37
We are defending this litigation vigorously. However, if we are
not successful in this litigation, we could be required to pay
substantial damages and could be subject to equitable relief
that could include a requirement that we terminate or otherwise
alter the terms or conditions of employment of certain
employees, including certain key sales personnel who were
formerly employed by FoxHollow. In any event, the defense of
this litigation, regardless of the outcome, could result in
substantial legal costs and diversion of our management’s
time and efforts from the operation of our business.
|
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
Executive
Officers of the Registrant.
The information required by Item 10 relating to directors,
our code of ethics, procedures for stockholder recommendations
of director nominees, the audit committee and compliance with
Section 16 of the Exchange Act is incorporated herein by
reference to the sections entitled “Election of
Directors”, “Corporate Governance” and
“Section 16(a) Beneficial Ownership Reporting
Compliance,” which appear in our definitive proxy statement
for our 2009 Annual Meeting.
The names, ages and positions of our executive officers are as
follows:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
David L. Martin
|
|
|
45
|
|
|
President and Chief Executive Officer
|
|
Laurence L. Betterley
|
|
|
55
|
|
|
Chief Financial Officer
|
|
James E. Flaherty
|
|
|
55
|
|
|
Chief Administrative Officer and Secretary
|
|
Brian Doughty
|
|
|
46
|
|
|
Vice President of Commercial Operations
|
|
Scott Kraus
|
|
|
39
|
|
|
Vice President of Sales
|
|
Paul Koehn
|
|
|
46
|
|
|
Vice President of Manufacturing
|
|
Robert J. Thatcher
|
|
|
55
|
|
|
Executive Vice President
|
|
Paul Tyska
|
|
|
51
|
|
|
Vice President of Business Development
|
David L. Martin, President and Chief Executive
Officer.
Mr. Martin has been our President
and Chief Executive Officer since February 2007, and a director
since August 2006. Mr. Martin also served as our Interim
Chief Financial Officer from January 2008 to April 2008. Prior
to joining us, Mr. Martin was Chief Operating Officer of
FoxHollow Technologies, Inc. from January 2004 to February 2006,
Executive Vice President of Sales and Marketing of FoxHollow
Technologies, Inc. from January 2003 to January 2004, Vice
President of Global Sales and International Operations at
CardioVention Inc. from October 2001 to May 2002, Vice President
of Global Sales for RITA Medical Systems, Inc. from March 2000
to October 2001 and Director of U.S. Sales, Cardiac Surgery
for Guidant Corporation from September 1999 to March 2000.
Mr. Martin has also held sales and sales management
positions for The Procter & Gamble Company and Boston
Scientific Corporation.
Laurence L. Betterley, Chief Financial
Officer.
Mr. Betterley joined us in April
2008 as our Chief Financial Officer. Previously,
Mr. Betterley was Chief Financial Officer at Cima NanoTech,
Inc. from May 2007 to April 2008, Senior Vice President and
Chief Financial Officer of PLATO Learning, Inc. from June 2004
to January 2007, Senior Vice President and Chief Financial
Officer of Diametrics Medical, Inc. from 1996 to 2003, and Chief
Financial Officer of Cray Research Inc. from 1994 to 1996.
James E. Flaherty, Chief Administrative Officer and
Secretary.
Mr. Flaherty has been our Chief
Administrative Officer since January 14, 2008.
Mr. Flaherty was our Chief Financial Officer from March
2003 to January 14, 2008. As Chief Administrative Officer,
Mr. Flaherty reports directly to our Chief Executive
Officer and has responsibility for information technology,
facilities, legal matters, financial analysis of business
development opportunities and business operations. Prior to
joining us, Mr. Flaherty served as an independent financial
consultant from 2001 to 2003 and Chief Financial Officer of
Zomax Incorporated from 1997 to 2001 and Racotek, Inc. from 1990
to 1996. On June 9, 2005, the Securities and Exchange
Commission filed a civil injunctive action charging Zomax
Incorporated with violations of federal securities law by filing
a materially misstated
Form 10-Q
38
for the period ended June 30, 2000. The SEC further charged
that in a conference call with analysts, certain of Zomax’s
executive officers, including Mr. Flaherty, misrepresented
or omitted to state material facts regarding Zomax’s
prospects of meeting quarterly revenue and earnings targets, in
violation of federal securities law. Without admitting or
denying the SEC’s charges, Mr. Flaherty consented to
the entry of a court order enjoining him from any violation of
certain provisions of federal securities law. In addition,
Mr. Flaherty agreed to disgorge $16,770 plus prejudgment
interest and pay a $75,000 civil penalty.
Brian Doughty, Vice President of Commercial
Operations.
Mr. Doughty joined us in
December 2006 as Director of Marketing, was named Vice President
of Marketing in August 2007 and became Vice President of
Commercial Operations in April 2009. Prior to joining us,
Mr. Doughty was Director of Marketing at
EKOS Corporation from February 2005 to December 2006,
National Sales Initiatives Manager of FoxHollow Technologies,
Inc. from September 2004 to February 2005, National Sales
Operations Director at Medtronic from August 2000 to September
2004, and Sales Team Leader for Johnson and Johnson from
December 1998 to August 2000. Mr. Doughty has also held
sales and sales management positions for Ameritech Information
Systems.
Scott Kraus, Vice President of
Sales.
Mr. Kraus has been with us since
September 2006, acting as a senior sales director, until
becoming Vice President of Sales in April 2009. Previously,
Mr. Kraus was at Boston Scientific Corporation where he
served as an Account Manager/Regional Sales Manager from April
2006 to September 2006. He held the same position with Guidant
Corporation from December 2000 to April 2006, before Boston
Scientific’s acquisition of Guidant in April 2006. Earlier,
he gained sales experience at C.R. Bard, Bristol-Myers Squibb
and Surgical Specialties Corporation.
Paul Koehn, Vice President of
Manufacturing.
Mr. Koehn joined us in March
2007 as Director of Manufacturing and was promoted to Vice
President of Manufacturing in October 2007. Previously,
Mr. Koehn was Vice President of Operations for Sewall Gear
Manufacturing from 2000 to March 2007 and before joining Sewall
Gear, Mr. Koehn held various quality and manufacturing
management roles with Dana Corporation.
Robert J. Thatcher, Executive Vice
President.
Mr. Thatcher joined us as Senior
Vice President of Sales and Marketing in October 2005 and became
Vice President of Operations in September 2006.
Mr. Thatcher became Executive Vice President in August
2007. Previously, Mr. Thatcher was Senior Vice President of
TriVirix Inc. from October 2003 to October 2005.
Mr. Thatcher has more than 29 years of medical device
experience in both large and
start-up
companies. Mr. Thatcher has held various sales management,
marketing management and general management positions at
Medtronic, Inc., Schneider USA, Inc. (a former division of
Pfizer Inc.), Boston Scientific Corporation and several startup
companies.
Paul Tyska, Vice President of Business
Development.
Mr. Tyska joined us in August
2006 as Vice President of Business Development. Previously,
Mr. Tyska was employed at FoxHollow Technologies, Inc.
since July 2003 where he most recently served as National Sales
Director from February 2006 to August 2006. Mr. Tyska has
held various positions with Guidant Corporation, CardioThoracic
Systems, Inc., W. L. Gore & Associates and ATI Medical
Inc.
39
PART II
|
|
|
|
Item 5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Price
Range of Common Stock and Dividend Policy
Prior to the closing of the merger on February 25, 2009,
the stock of Replidyne was traded on the Nasdaq Global Market
under the symbol “RDYN.” On February 26, 2009,
the stock of CSI began trading on the Nasdaq Global Market under
the symbol “CSII.” The following table sets forth the
high and low sales prices for our common stock (based upon
intra-day
trading) as reported by the Nasdaq Global Market, as adjusted to
reflect a
1-for-10
reverse stock split that occurred on February 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
High
|
|
Low
|
|
|
|
Fiscal Year Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.30
|
|
|
$
|
11.60
|
|
|
Second quarter
|
|
|
12.70
|
|
|
|
2.80
|
|
|
Third quarter (through February 25, 2009)
|
|
|
10.30
|
|
|
|
6.60
|
|
|
Third quarter (from February 26, 2009 through
March 31, 2009)
|
|
|
10.15
|
|
|
|
4.78
|
|
|
Fourth quarter
|
|
|
7.97
|
|
|
|
5.60
|
|
|
Fiscal Year Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
75.00
|
|
|
$
|
52.30
|
|
|
Second quarter
|
|
|
66.60
|
|
|
|
30.50
|
|
|
Third quarter
|
|
|
31.00
|
|
|
|
12.90
|
|
|
Fourth quarter
|
|
|
19.00
|
|
|
|
12.50
|
|
The number of record holders of our common stock on
September 23, 2009 was approximately 527. No cash dividends
have been previously paid on our common stock and none are
anticipated during fiscal year 2010. We are restricted from
paying dividends under our Loan and Security Agreement with
Silicon Valley Bank.
Recent
Sales of Unregistered Securities
Between February 26, 2009 and June 30, 2009, we issued
and sold 12,615 unregistered shares of our common stock pursuant
to warrant exercises with exercise price of $1.55 per share. The
shares were sold in private transactions exempt from
registration pursuant to Section 4(2) of the Securities
Act. No underwriters were involved in the transactions or
received any commissions or other compensation. Proceeds of the
sales were used to fund our working capital requirements.
Issuer
Purchases of Equity Securities
None.
Securities
Authorized For Issuance Under Equity Compensation
Plans
For information on our equity compensation plans, refer to
Item 12, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.”
|
|
|
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
You should read the following discussion and analysis of
financial condition and results of operations together with our
consolidated financial statements and the related notes included
elsewhere in this
Form 10-K.
This discussion and analysis contains forward-looking statements
about our business and operations, based on current expectations
and related to future events and our future financial
performance, that involve risks and uncertainties.
40
Our actual results may differ materially from those we
currently anticipate as a result of many important factors,
including the factors we describe under “Risk Factors”
and elsewhere in this
Form 10-K.
OVERVIEW
We are a medical device company focused on developing and
commercializing interventional treatment systems for vascular
disease. Our initial product, the Diamondback 360°, is a
minimally invasive catheter system for the treatment of
peripheral arterial disease, or PAD.
We were incorporated as Replidyne, Inc. in Delaware in 2000. On
February 25, 2009, Replidyne, Inc. completed its business
combination with Cardiovascular Systems, Inc., a Minnesota
corporation (“CSI-MN”), in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as
of November 3, 2008. Pursuant to the Merger Agreement,
CSI-MN continued after the merger as the surviving corporation
and a wholly owned subsidiary of Replidyne. Replidyne changed
its name to Cardiovascular Systems, Inc. (“CSI”) and
CSI-MN merged with and into CSI, with CSI continuing after the
merger as the surviving corporation. These transactions are
referred to herein as the “merger.” Unless the context
otherwise requires, all references herein to the
“Company,” “CSI,” “we,”
“us” and “our” refer to CSI-MN prior to the
completion of the merger and to CSI following the completion of
the merger and the name change, and all references to
“Replidyne” refer to Replidyne prior to the completion
of the merger and the name change.
At the closing of the merger, Replidyne’s net assets, as
calculated pursuant to the terms of the Merger Agreement, were
approximately $36.6 million. As of immediately following
the effective time of the merger, former CSI-MN stockholders
owned approximately 80.2% of the outstanding common stock of the
combined company, and Replidyne stockholders owned approximately
19.8% of the outstanding common stock of the combined company.
Our common stock was accepted for listing on the Nasdaq Global
Market under the symbol “CSII” and trading commenced
on February 26, 2009.
Replidyne was a biopharmaceutical company focused on
discovering, developing, in-licensing and commercializing
anti-infective products.
CSI-MN was incorporated in Minnesota in 1989. From 1989 to 1997,
we engaged in research and development on several different
product concepts that were later abandoned. Since 1997, we have
devoted substantially all of our resources to the development of
the Diamondback 360°.
From 2003 to 2005, we conducted numerous bench and animal tests
in preparation for application submissions to the FDA. We
initially focused our testing on providing a solution for
coronary in-stent restenosis but later changed the focus to PAD.
In 2006, we obtained an investigational device exemption from
the FDA to conduct our pivotal OASIS clinical trial, which was
completed in January 2007. The OASIS clinical trial was a
prospective
20-center
study that involved 124 patients with 201 lesions.
In August 2007, the FDA granted us 510(k) clearance for the use
of the Diamondback 360° as a therapy in patients with PAD.
We commenced a limited commercial introduction of the
Diamondback 360° in the United States in September
2007. This limited commercial introduction intentionally limited
the size of our sales force and the number of customers each
member of the sales force served in order to focus on obtaining
quality and timely product feedback on initial product usages.
We market the Diamondback 360° in the United States through
a direct sales force and commenced a full commercial launch in
the quarter ended March 31, 2008. We expend significant
capital on our sales and marketing efforts to expand our
customer base and utilization per customer. We manufacture the
Diamondback 360° internally at our facilities.
As of June 30, 2009, we had an accumulated deficit of
$127.4 million. We expect our losses to continue but
generally decline as we continue our commercialization
activities, develop additional product enhancements, increase
our manufacturing capacity, and make further regulatory
submissions. To date, we have financed our operations primarily
through the private placement of equity securities and
completion of the merger.
41
FINANCIAL
OVERVIEW
Revenues.
We derive substantially all of our
revenues from the sale of the Diamondback 360° and other
ancillary products. The Diamondback 360° system consists of
a disposable, single-use, low-profile catheter that travels over
our proprietary ViperWire guidewire and an external control unit
that powers the system. Our ancillary products include the
ViperSlide
tm
Lubricant, the
ViperSheath
tm
Introducer Sheath,
ViperTrack
tm
Radiopaque Tape, and
ViperCaddy
tm
Guide Wire Management.
Cost of Goods Sold.
We assemble the single-use
catheter with components purchased from third-party suppliers,
as well as with components manufactured in-house. The control
unit and guidewires are purchased from third-party suppliers.
Our cost of goods sold consists primarily of raw materials,
direct labor, and manufacturing overhead.
Selling, General and Administrative
Expenses.
Selling, general and administrative
expenses include compensation for executive, sales, marketing,
finance, information technology, human resources and
administrative personnel, including stock-based compensation.
Other significant expenses include travel and marketing costs,
professional fees, and patent expenses.
Research and Development.
Research and
development expenses include costs associated with the design,
development, testing, enhancement and regulatory approval of our
products. Research and development expenses include employee
compensation including stock-based compensation, supplies and
materials, consulting expenses, travel and facilities overhead.
We also incur significant expenses to operate clinical trials,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. All research
and development expenses are expensed as incurred.
Interest Income.
Interest income is attributed
to both interest earned on deposits in investments that consist
of money market funds and auction rate securities and the
initial fair value and changes in fair value of the auction rate
securities put option discussed below.
Interest Expense.
Interest expense results
from outstanding debt balances, the issuance of convertible
promissory notes, and debt discount amortization.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants.
Decretion (accretion) of
redeemable convertible preferred stock warrants reflects the
change in the current estimated fair market value of the
preferred stock warrants on a quarterly basis, as determined by
management and the board of directors. Decretion (accretion) is
recorded as a decrease (increase) to redeemable convertible
preferred stock warrants in the consolidated balance sheet and a
decrease (increase) to net loss in the consolidated statement of
operations. Concurrent with the merger, all preferred stock
warrants were converted into warrants to purchase common stock
and, accordingly, we stopped recording decretion (accretion) as
of the merger date.
Gain (Impairment) on Investments.
Gain
(impairment) on investments reflects the change in the fair
value of investments as determined with the assistance of
ValueKnowledge LLC, an independent third party valuation firm.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock.
Decretion (accretion) of redeemable
convertible preferred stock reflects the change in the current
estimated fair market value of the preferred stock on a
quarterly basis, as determined by management and the board of
directors. Decretion (accretion) is recorded as a decrease
(increase) to redeemable convertible preferred stock in the
consolidated balance sheet and a decrease (increase) to the loss
attributable to common stockholders in the consolidated
statement of operations. The redeemable convertible preferred
stock was converted into common stock immediately prior to the
effective time of the merger with Replidyne. As such, the
preferred stockholders forfeited their liquidation preferences
and we stopped recording decretion (accretion) as of the merger
date.
Net Operating Loss Carryforwards.
We have
established valuation allowances to fully offset our deferred
tax assets due to the uncertainty about our ability to generate
the future taxable income necessary to realize these deferred
assets, particularly in light of our historical losses. The
future use of net operating loss carryforwards is dependent on
us attaining profitable operations and will be limited in any
one year under Internal Revenue Code Section 382 due to
significant ownership changes (as defined in
Section 382) resulting from our equity financings.
42
At June 30, 2009, we had net operating loss carryforwards
for federal and state income tax reporting purposes of
approximately $110.2 million, which will expire at various
dates through fiscal 2029.
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND
ESTIMATES
Our management’s discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of our consolidated financial
statements requires us to make estimates, assumptions and
judgments that affect amounts reported in those statements. Our
estimates, assumptions and judgments, including those related to
revenue recognition, allowance for doubtful accounts, excess and
obsolete inventory, investments, stock-based compensation,
preferred stock and preferred stock warrants are updated as
appropriate at least quarterly. We use authoritative
pronouncements, our technical accounting knowledge, cumulative
business experience, judgment and other factors in the selection
and application of our accounting policies. While we believe
that the estimates, assumptions and judgments that we use in
preparing our consolidated financial statements are appropriate,
these estimates, assumptions and judgments are subject to
factors and uncertainties regarding their outcome. Therefore,
actual results may materially differ from these estimates.
Some of our significant accounting policies require us to make
subjective or complex judgments or estimates. An accounting
estimate is considered to be critical if it meets both of the
following criteria: (1) the estimate requires assumptions
about matters that are highly uncertain at the time the
accounting estimate is made, and (2) different estimates
that reasonably could have been used, or changes in the estimate
that are reasonably likely to occur from period to period, would
have a material impact on the presentation of our financial
condition, results of operations, or cash flows. We believe that
the following are our critical accounting policies and estimates:
Revenue Recognition.
We sell the majority of
our products via direct shipment to hospitals or clinics. We
recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery has
occurred; the sales price is fixed or determinable; and
collectability is reasonably assured. These criteria are met at
the time of delivery when the risk of loss and title passes to
the customer. We record estimated sales returns, discounts and
rebates as a reduction of net sales in the same period revenue
is recognized.
We also consider Emerging Issues Task Force Bulletin (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
in
revenue recognition. This standard addresses the timing and
method of revenue recognition for revenue arrangements that
include the delivery of more than one product or service. In
these cases, we recognize revenue from each element of the
arrangement as long as separate values for each element can be
determined, we have completed our obligation to deliver or
perform on that element, and collection of the resulting
receivable is reasonably assured.
Costs related to products delivered are recognized in the period
revenue is recognized. Cost of goods sold consists primarily of
raw materials, direct labor, and manufacturing overhead.
Allowance for Doubtful Accounts.
We maintain
allowances for doubtful accounts. This allowance is an estimate
and is regularly evaluated for adequacy by taking into
consideration factors such as past experience, credit quality of
the customer base, age of the receivable balances, both
individually and in the aggregate, and current economic
conditions that may affect a customer’s ability to pay.
Provisions for the allowance for doubtful accounts attributed to
bad debt are recorded in general and administrative expenses.
Excess and Obsolete Inventory.
We have
inventories that are principally comprised of capitalized direct
labor and manufacturing overhead, raw materials and components,
and finished goods. Due to the technological nature of our
products, there is a risk of obsolescence to changes in our
technology and the market, which is impacted by technological
developments and events. Accordingly, we write down our
inventories as we become aware of any situation where the
carrying amount exceeds the estimated realizable value based on
assumptions about future demands and market conditions. The
evaluation includes analyses of inventory levels, expected
product lives, product at risk of expiration, sales levels by
product and projections of future sales demand.
Investments.
Our investments include AAA rated
auction rate securities (ARS) issued primarily by state agencies
and backed by student loans substantially guaranteed by the
Federal Family Education Loan Program
43
(FFELP). In February 2008, we were informed that there was
insufficient demand for auction rate securities, resulting in
failed auctions for $23.0 million of our auction rate
securities held at June 30, 2009 and 2008. Currently, these
affected securities are not liquid and will not become liquid
until a future auction for these investments are successful,
they are redeemed by the issuer, or they mature. As a result, at
June 30, 2009 and 2008, we have classified the fair value
of the auction rate securities as a long-term asset. We have
collected all interest due on our auction rate securities and
have no reason to believe that we will not collect all interest
due in the future.
On November 7, 2008, we accepted an offer from UBS AG
(“UBS”), providing rights related to our ARS (the
“Rights”). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined for this purpose
as the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS
has the right, in its discretion, to purchase or sell our ARS at
any time until July 2, 2012, so long as we receive payment
at par value upon any sale or disposition. We expect to sell our
ARS under the Rights. However, if the Rights are not exercised
before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our ARS. So long as we hold
ARS, they will continue to accrue interest as determined by the
auction process or the terms of the ARS if the auction process
fails. Prior to accepting the UBS offer, we recorded ARS as
investments
available-for-sale.
We recorded unrealized gains and losses on
available-for-sale
securities in accumulated other comprehensive income in the
stockholders’ equity (deficiency) section of the balance
sheet. Realized gains and losses were accounted for on the
specific identification method. After accepting the UBS offer,
we recorded the ARS as trading investments and realized gains
and losses are included in earnings.
The Rights represent a firm agreement in accordance with
SFAS 133, which defines a firm agreement as an agreement
with an unrelated party, binding on both parties and usually
legally enforceable, with the following characteristics:
a) the agreement specifies all significant terms, including
the quantity to be exchanged, the fixed price, and the timing of
the transaction, and b) the agreement includes a
disincentive for nonperformance that is sufficiently large to
make performance probable. The enforceability of the Rights
results in a put option and should be recognized as a free
standing asset separate from the ARS. At June 30, 2009, we
recorded $2.8 million as the fair value of the put option
asset with a corresponding credit to interest income. We
considered the expected time until the Rights are exercised,
carrying costs of the Rights, and the expected credit risk
attributes of the Rights and UBS in their valuation of the put
option. The put option does not meet the definition of a
derivative instrument under SFAS 133. Therefore, we have
elected to measure the put option at fair value under
SFAS 159, which permits an entity to elect the fair value
option for recognized financial assets, in order to match the
changes in the fair value of the ARS. As a result, unrealized
gains and losses will be included in earnings in future periods.
We determined the fair value of our auction rate securities and
quantified the
other-than-temporary
impairment loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets. Based
on these factors, we recorded impairment of investments for the
years ended June 30, 2009 and 2008 of $1.7 million and
$1.3 million, respectively.
Stock-Based Compensation.
We account for
stock-based compensation expense in accordance with
SFAS No. 123(R),
Share-Based Payment,
as
interpreted by SAB No. 107 to account for stock-based
compensation expense associated with the issuance or amendment
of stock options and restricted stock awards.
SFAS No. 123(R) requires us to recognize stock-based
compensation expense in an amount equal to the fair value of
share-based payments computed at the date of grant. The fair
value of all stock option and restricted awards are expensed in
the consolidated statements of operations over the related
vesting period. We calculate the fair value on the date of grant
using a Black-Scholes model.
To determine the inputs for the Black-Scholes option pricing
model, we are required to develop several assumptions, which are
highly subjective. These assumptions include:
|
|
|
|
|
|
•
|
our common stock’s volatility;
|
44
|
|
|
|
|
|
•
|
the length of our options’ lives, which is based on future
exercises and cancellations;
|
|
|
|
|
•
|
the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
|
|
|
|
|
•
|
the risk-free rate of return; and
|
|
|
|
|
•
|
future dividends.
|
Prior to the consummation of the merger, we used comparable
public company data to determine volatility for option grants.
Since we have a limited history of stock purchase and sale
activity, expected volatility is based on historical data from
several public companies similar to us in size and nature of
operations. We will continue to use comparable public company
data to determine expected volatility for option grants until
our historical volatility is relevant to measure. We use a
weighted average calculation to estimate the time our options
will be outstanding. We estimated the number of options that are
expected to be forfeited based on our historical experience. The
risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant for the estimated life of the
option. We use our judgment and expectations in setting future
dividend rates, which is currently expected to be zero.
All options we have granted become exercisable over periods
established at the date of grant. The option exercise price is
generally not less than the estimated fair market value of our
common stock at the date of grant, as determined by management
and board of directors.
The absence of an active market for our common stock prior to
the merger required our management and board of directors to
estimate the fair value of our common stock for purposes of
granting options and for determining stock-based compensation
expense. In response to these requirements, prior to the merger
our management and board of directors estimated the fair market
value of common stock at each date at which options are granted
based upon stock valuations and other qualitative factors. Our
management and board of directors conducted stock valuations
using two different valuation methods: the option pricing method
and the probability weighted expected return method. Both of
these valuation methods took into consideration the following
factors: financing activity, rights and preferences of our
preferred stock, growth of the executive management team,
clinical trial activity, the FDA process, the status of our
commercial launch, our mergers and acquisitions and public
offering processes, revenues, the valuations of comparable
public companies, our cash and working capital amounts, and
additional objective and subjective factors relating to our
business. Our management and board of directors set the exercise
prices for option grants based upon their best estimate of the
fair market value of the common stock at the time they made such
grants, taking into account all information available at those
times. In some cases, management and the board of directors made
retrospective assessments of the valuation of the common stock
at later dates and determined that the fair market value of the
common stock at the times the grants were made was different
than the exercise prices established for those grants. In cases
in which the fair market was higher than the exercise price, we
recognized stock-based compensation expense for the excess of
the fair market value of the common stock over the exercise
price.
Following the merger, our stock valuations are based upon the
market price for our common stock.
Preferred Stock.
We record the current
estimated fair value of our convertible preferred stock on a
quarterly basis based on the fair market value of that stock as
determined by our management and board of directors. The
determination of fair market value included factors such as
recent financing activity, preferred stock rights and
preferences, clinical trials, revenues, and regulatory approval
process. In accordance with Accounting Series Release
No. 268,
Presentation in Financial Statements of
“Redeemable Preferred Stocks”
and EITF Abstracts,
Topic D-98,
Classification and Measurement of Redeemable
Securities
, we record changes in the current fair value of
our redeemable convertible preferred stock in the consolidated
statements of changes in stockholders’ equity (deficiency)
and comprehensive (loss) income and consolidated statements of
operations as accretion of redeemable convertible preferred
stock. Concurrent with the merger, all preferred stock was
converted to common stock and, accordingly, was reclassified to
stockholders’ equity (deficiency).
Preferred Stock Warrants.
Freestanding
warrants and other similar instruments related to shares that
are redeemable are accounted for in accordance with
SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity
, and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to our redeemable convertible preferred stock was classified as
a liability on the balance sheet
45
as of June 30, 2008. The warrant was subject to
remeasurement at each balance sheet date and any change in fair
value was recognized as a component of other income (expense).
Fair value was measured using the Black-Scholes option pricing
model. Concurrent with the merger, all preferred stock warrants
were converted into warrants to purchase common stock and,
accordingly, the liability was reclassified to
stockholders’ equity (deficiency).
RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, our
results of operations expressed as dollar amounts (in
thousands), and, for certain line items, the changes between the
specified periods expressed as percent increases or decreases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
Revenues
|
|
$
|
56,461
|
|
|
$
|
22,177
|
|
|
|
154.6
|
%
|
|
$
|
22,177
|
|
|
$
|
—
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
16,194
|
|
|
|
8,927
|
|
|
|
81.4
|
|
|
|
8,927
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,267
|
|
|
|
13,250
|
|
|
|
203.9
|
|
|
|
13,250
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
59,822
|
|
|
|
35,326
|
|
|
|
69.3
|
|
|
|
35,326
|
|
|
|
6,691
|
|
|
|
428.0
|
|
|
Research and development
|
|
|
14,678
|
|
|
|
16,068
|
|
|
|
(8.7
|
)
|
|
|
16,068
|
|
|
|
8,446
|
|
|
|
90.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
74,500
|
|
|
|
51,394
|
|
|
|
45.0
|
|
|
|
51,394
|
|
|
|
15,137
|
|
|
|
239.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(34,233
|
)
|
|
|
(38,144
|
)
|
|
|
(10.3
|
)
|
|
|
(38,144
|
)
|
|
|
(15,137
|
)
|
|
|
152.0
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,350
|
)
|
|
|
(7
|
)
|
|
|
33,471.4
|
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
|
(46.2
|
)
|
|
Interest income
|
|
|
3,380
|
|
|
|
1,167
|
|
|
|
189.6
|
|
|
|
1,167
|
|
|
|
881
|
|
|
|
32.5
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
warrants
|
|
|
2,991
|
|
|
|
(916
|
)
|
|
|
426.5
|
|
|
|
(916
|
)
|
|
|
(1,327
|
)
|
|
|
(31.0
|
)
|
|
Impairment on investments
|
|
|
(1,683
|
)
|
|
|
(1,267
|
)
|
|
|
32.8
|
|
|
|
(1,267
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,338
|
|
|
|
(1,023
|
)
|
|
|
328.5
|
|
|
|
(1,023
|
)
|
|
|
(459
|
)
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,895
|
)
|
|
|
(39,167
|
)
|
|
|
(18.6
|
)
|
|
|
(39,167
|
)
|
|
|
(15,596
|
)
|
|
|
151.1
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
22,781
|
|
|
|
(19,422
|
)
|
|
|
217.3
|
|
|
|
(19,422
|
)
|
|
|
(16,835
|
)
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(9,114
|
)
|
|
$
|
(58,589
|
)
|
|
|
(84.4
|
)%
|
|
$
|
(58,589
|
)
|
|
$
|
(32,431
|
)
|
|
|
80.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Year Ended June 30, 2009 with Fiscal Year Ended
June 30, 2008
Revenues.
Revenues increased by
$34.3 million, or 154.6%, from $22.2 million for the
year ended June 30, 2008 to $56.5 million for the year
ended June 30, 2009. This increase was primarily
attributable to increased sales of the Diamondback 360°
during the year ended June 30, 2009 compared to three
quarters in the year ended June 30, 2008. As of
June 30, 2009, we had a
124-person
direct sales organization that was selling the Diamondback
360° in 556 accounts. As of June 30, 2008, we had
an
87-person
direct sales organization that was selling the Diamondback
360° in 186 accounts. We expect our revenue to continue
increasing as we continue to increase the number of physicians
using the devices and the usage rate per physician in the
U.S. PAD market and also introduce new and improved
products.
Cost of Goods Sold.
Cost of goods sold
increased by $7.3 million, or 81.4%, from $8.9 million
for the year ended June 30, 2008 to $16.2 million for
the year ended June 30, 2009. These amounts represent the
cost of materials, labor and overhead for single-use catheters,
guidewires, control units, and other ancillary products. The
increase in gross margin from the year ended June 30, 2008
to June 30, 2009 is primarily due to increased volume,
46
manufacturing efficiencies, and product cost reductions. Cost of
goods sold for the years ended June 30, 2009 and 2008
includes $475,000 and $232,000, respectively, for stock-based
compensation. We expect that cost of goods sold as a percentage
of revenues will decline in the future as sales volumes
increase, although quarterly fluctuations could occur based on
timing of new product introductions, sales mix, unanticipated
warranty claims, or other unanticipated circumstances.
Selling, General and Administrative
Expenses.
Our selling, general and administrative
expenses increased by $24.5 million, from
$35.3 million for the year ended June 30, 2008 to
$59.8 million for the year ended June 30, 2009. The
primary reasons for the increase included the building of our
sales and marketing team, contributing $22.2 million;
increased consulting and professional services, including
$1.7 million in previously capitalized initial public
offering costs, contributing $2.4 million; and payroll
related expenses related to building our administrative team,
contributing $1.0 million. Selling, general, and
administrative expenses for the years ended June 30, 2009
and 2008 includes $5.7 million and $6.9 million,
respectively, for stock-based compensation. We expect our
selling, general and administrative expenses to increase in the
future due primarily to the costs associated with expanding our
sales and marketing organization to further commercialize our
products.
Research and Development Expenses.
Research
and development expenses decreased by $1.4 million, or
8.7%, from $16.1 million for the year ended June 30,
2008 to $14.7 million for the year ended June 30,
2009. Research and development expenses relate to specific
projects to improve our product or expand into new markets, such
as the development of a new control unit, shaft designs, crown
designs, and PAD and coronary clinical trials. The reduction in
expense related to costs of a coronary clinical trial occurring
during the year ended June 30, 2008, along with fewer PAD
development projects in 2009. Research and development for the
years ended June 30, 2009 and 2008 includes $612,000 and
$297,000, respectively, for stock-based compensation. As we
continue to expand our product portfolio within the market for
the treatment of peripheral arteries and leverage our core
technology into the coronary market, we expect to incur research
and development expenses at a similar rate as for the year ended
June 30, 2009, although fluctuations could occur based on
the number of projects and studies and the timing of
expenditures.
Interest Expense.
Interest expense increased
by $2.3 million, from $7,000 for the year ended
June 30, 2008 to $2.4 million for the year ended
June 30, 2009. Interest expense for the year ended
June 30, 2009 consisted of the amortization of debt
discount of $1.2 million and interest on outstanding debt
facilities of $1.1 million.
Interest Income.
Interest income increased by
$2.2 million, from $1.2 million for the year ended
June 30, 2008 to $3.4 million for the year ended
June 30, 2009. The increase was primarily due to the impact
of recording the put option asset of $2.8 million related
to our auction rate securities. This was offset by lower average
cash and cash equivalent balances along with reduced yields.
Average cash and cash equivalent balances were
$16.5 million and $20.4 million for the years ended
June 30, 2009 and 2008, respectively.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants.
Decretion of redeemable
convertible preferred stock warrants for the year ended
June 30, 2009 was $3.0 million. Accretion of
redeemable convertible preferred stock warrants for the year
ended June 30, 2008 was $916,000. Decretion (accretion) of
redeemable convertible preferred stock warrants reflects the
change in estimated fair value of preferred stock warrants at
the balance sheet dates. Due to the merger, decretion recognized
during the year ended June 30, 2009 reflects a change in
the estimated fair value of preferred stock warrants between
July 1, 2008, and February 25, 2009 (date of merger)
at which time the preferred stock warrants converted to common
stock warrants. Due to the conversion there will be no further
decretion (accretion) recorded for these warrants in the future.
Impairment on Investments.
Impairment on
investments was $1.7 million and $1.3 million for the
years ended June 30, 2009 and 2008, respectively.
Impairment on investments was due to a decrease in the fair
value of investments in both periods.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock.
Decretion of redeemable convertible
preferred stock for the year ended June 30, 2009 was
$22.8 million. Accretion of redeemable convertible
preferred stock for the year ended June 30, 2008 was
$19.4 million. Decretion (accretion) of redeemable
convertible preferred stock reflects the change in estimated
fair value of preferred stock at the balance sheet dates. Due to
the merger, decretion recognized during the year ended
June 30, 2009 reflects a change in the estimated fair value
of preferred
47
stock between July 1, 2008, and February 25, 2009
(date of merger) at which time the preferred stock converted to
common stock. Due to the conversion there will be no further
decretion (accretion) recorded for these shares in the future.
Comparison
of Fiscal Year Ended June 30, 2008 with Fiscal Year Ended
June 30, 2007
Revenues.
We generated revenues of
$22.2 million during the year ended June 30, 2008
attributable to sales of the Diamondback 360° to customers
following FDA clearance in August 2007. We commenced a limited
commercial introduction of the Diamondback 360° in the
United States in September 2007, followed by a full commercial
launch in the quarter ended March 31, 2008. Since September
2007, we expanded our sales and marketing efforts and shipped
more than 6,800 single-use catheters through June 30, 2008.
We applied EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables
, the
primary impact of which was to treat the Diamondback 360°
as a single unit of accounting for initial customer orders. As
such, revenues were deferred until the title and risk of loss of
each Diamondback 360° component, consisting of catheters,
guidewires, and a control unit, were transferred to the customer
based on the shipping terms. Many initial shipments to customers
also included a loaner control unit, which we provided, until
the new control unit received clearance from the FDA and was
subsequently available for sale.
Cost of Goods Sold.
For the year ended
June 30, 2008, cost of goods sold was $8.9 million.
This amount represents the cost of materials, labor and overhead
for single-use catheters, guidewires and control units shipped
subsequent to obtaining FDA clearance for the Diamondback
360° in August 2007. Cost of goods sold for the year ended
June 30, 2008 includes $232,000 for stock-based
compensation. For the year ended June 30, 2007, there was
no cost of goods sold due to revenues not occurring until the
year ended June 30, 2008.
Selling, General and Administrative
Expenses.
Our selling, general and administrative
expenses increased by $28.6 million, from $6.7 million
for the year ended June 30, 2007 to $35.3 million for
the year ended June 30, 2008. The primary reasons for the
increase included the building of our sales and marketing team,
contributing $18.6 million, and increased consulting and
professional services, contributing $2.1 million. Selling,
general and administrative for the years ended June 30,
2008 and 2007 includes $6.9 million and $327,000,
respectively, for stock-based compensation.
Research and Development Expenses.
Our
research and development expenses increased by
$7.7 million, from $8.4 million for the year ended
June 30, 2007 to $16.1 million for the year ended
June 30, 2008. Research and development spending increased
as we initiated projects to improve our product, such as the
development of a new control unit, shaft designs, crown designs,
and began human feasibility trials in the coronary market.
Research and development for the years ended June 30, 2008
and 2007 includes $297,000 and $63,000, respectively, for
stock-based compensation.
Interest Expense.
Interest expense decreased
by $6,000, from $13,000 for the year ended June 30, 2007 to
$7,000 for the year ended June 30, 2008. The decrease was
due to the redemption of convertible promissory notes in the
year ended June 30, 2007.
Interest Income.
Interest income increased by
$286,000, from $881,000 for the year ended June 30, 2007 to
$1.2 million for the year ended June 30, 2008. The
increase was primarily due to higher average cash and cash
equivalent balances. Average cash and cash equivalent balances
were $20.4 million and $18.5 million for the years
ended June 30, 2008 and 2007, respectively.
Decretion (Accretion) of Redeemable Convertible Preferred
Stock Warrants.
Accretion of redeemable
convertible preferred stock warrants for the years ended
June 30, 2008 and 2007 was $916,000 and $1.3 million,
respectively. Decretion (accretion) of redeemable convertible
preferred stock warrants reflects the change in estimated fair
value of preferred stock warrants at the balance sheet dates.
Impairment on Investments.
Impairment on
investments was $1.3 million for the year ended
June 30, 2008. This impairment was due to a decrease in the
fair value of investments.
Accretion of Redeemable Convertible Preferred
Stock.
Accretion of redeemable convertible
preferred stock was $19.4 million and $16.8 million
for the years ended June 30, 2008 and 2007, respectively.
Accretion of
48
redeemable convertible preferred stock reflects the change in
estimated fair value of preferred stock at the balance sheet
dates.
LIQUIDITY
AND CAPITAL RESOURCES
We had cash and cash equivalents of $33.4 million and
$7.6 million at June 30, 2009 and 2008, respectively.
During the year ended June 30, 2009, net cash used in
operations amounted to $29.3 million. As of June 30,
2009, we had an accumulated deficit of $127.4 million. We
have historically funded our operating losses primarily from the
issuance of common and preferred stock, convertible promissory
notes, and debt. We have incurred negative cash flows and net
losses since inception.
On February 25, 2009, we completed the merger, in
accordance with the terms of the Merger Agreement. At closing,
Replidyne’s net assets, as calculated pursuant to the terms
of the Merger Agreement, were approximately $36.6 million.
In February 2008, we were notified that recent conditions in the
global credit markets have caused insufficient demand for
auction rate securities, resulting in failed auctions for
$23.0 million of our auction rate securities held at
June 30, 2009 and 2008. These securities are currently not
liquid, as we have an inability to sell the securities due to
continued failed auctions. On March 28, 2008, we obtained a
margin loan from UBS Financial Services, Inc., the entity
through which we originally purchased our auction rate
securities, for up to $12.0 million, which was secured by
the $23.0 million par value of our auction rate securities.
The outstanding balance on this loan at June 30, 2008 was
$11.9 million. On August 21, 2008, we replaced this
loan with a margin loan from UBS Bank USA, which increased
maximum borrowings available to $23.0 million, which may be
adjusted from time to time by UBS Bank in its sole discretion.
The margin loan bears interest at variable rates that equal the
lesser of (i) 30 day LIBOR plus 1.25% or (ii) the
applicable reset rate, maximum auction rate or similar rate as
specified in the prospectus or other documentation governing the
pledged taxable student loan auction rate securities; however,
interest expense charged on the loan will not exceed interest
income earned on the auction rate securities. The loan is due on
demand and UBS Bank will require us to repay it in full from the
proceeds received from a public equity offering where net
proceeds exceed $50.0 million. In addition, if at any time
any of our auction rate securities may be sold, exchanged,
redeemed, transferred or otherwise conveyed for no less than
their par value by UBS, then we must immediately effect such a
transfer and the proceeds must be used to pay down outstanding
borrowings under this loan. The margin requirements are
determined by UBS Bank and are subject to change. From
August 21, 2008, the date this loan was initially funded,
through June 30, 2009, the margin requirements included
maximum borrowings, including interest, of $23.0 million.
If these margin requirements are not maintained, UBS Bank may
require us to make a loan payment in an amount necessary to
comply with the applicable margin requirements or demand
repayment of the entire outstanding balance. We have maintained
the margin requirements under the loans from both UBS entities.
The outstanding balance on this loan at June 30, 2009 was
$22.9 million.
On September 12, 2008, we entered into a loan and security
agreement with Silicon Valley Bank with maximum available
borrowings of $13.5 million, which agreement was amended on
February 25, 2009 and April 30, 2009. The agreement
includes a $3.0 million term loan, a $10.0 million
accounts receivable line of credit, and a $5.5 million term
loan that reduces availability of borrowings on the accounts
receivable line of credit. The terms of each of these loans are
as follows:
|
|
|
|
|
|
•
|
The $3.0 million term loan has a fixed interest rate of
10.5% and a final payment amount equal to 3.0% of the loan
amount due at maturity. This term loan has a 36 month
maturity, with repayment terms that include interest only
payments during the first six months followed by 30 equal
principal and interest payments. This term loan also includes an
acceleration provision that requires us to pay the entire
outstanding balance, plus a penalty ranging from 1.0% to 6.0% of
the principal amount, upon prepayment or the occurrence and
continuance of an event of default. As part of the term loan
agreement, we granted Silicon Valley Bank a warrant to purchase
8,493 shares of Series B redeemable convertible
preferred stock at an exercise price of $14.16 per share. This
warrant was assigned a value of $75,000 for accounting purposes,
is immediately exercisable, and expires ten years after
issuance. The balance outstanding on the term loan at
June 30, 2009 was $2.6 million.
|
49
|
|
|
|
|
|
•
|
The accounts receivable line of credit has a two year maturity
and a floating interest rate equal to the prime rate, plus 2.0%,
with an interest rate floor of 7.0%. Interest on borrowings is
due monthly and the principal balance is due at maturity.
Borrowings on the line of credit are based on 80% of eligible
domestic receivables, which is defined as receivables aged less
than 90 days from the invoice date along with specific
exclusions for contra-accounts, concentrations, and government
receivables. Accounts receivable receipts are deposited into a
lockbox account in the name of Silicon Valley Bank. The accounts
receivable line of credit is subject to non-use fees, annual
fees, cancellation fees, and maintaining a minimum liquidity
ratio. There was no balance outstanding on the line of credit at
June 30, 2009. On April 30, 2009, the accounts
receivable line of credit was amended to allow for an increase
in borrowings from $5.0 million to $10.0 million. All
other terms and conditions of the original line of credit
agreement remain in place. The $5.5 million term loan
reduces available borrowings under the line of credit agreement.
|
|
|
|
|
•
|
The $5.5 million term loan was originally two guaranteed
term loans each with a one year maturity. Each of the guaranteed
term loans had a floating interest rate equal to the prime rate,
plus 2.25%, with an interest rate floor of 7.0%. Interest on
borrowings were due monthly and the principal balance was due at
maturity. One of our directors and stockholders and two entities
who held preferred shares and were also affiliated with two of
our directors agreed to act as guarantors of these term loans.
In consideration for guarantees, we issued the guarantors
warrants to purchase an aggregate of 296,539 shares of our
common stock at an exercise price of $9.28 per share.
|
On April 30, 2009, the guaranteed term loans were
refinanced into a $5.5 million term loan that has a fixed
interest rate of 9.0% and a final payment amount equal to 1.0%
of the loan amount due at maturity. As a result of the
refinancing, the guarantees on the original term loans have been
released. This term loan has a 30 month maturity, with
repayment terms that include equal monthly payments of principal
and interest beginning June 1, 2009. This term loan also
includes an acceleration provision that requires us to pay the
entire outstanding balance, plus a penalty ranging from 1.0% to
3.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. The term loan reduces
available borrowings under the amended accounts receivable line
of credit agreement. The balance outstanding on the guaranteed
term loans at June 30, 2009 was $5.3 million
(excluding debt discount of $0.7 million).
The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, we estimated the fair value of the term loans without
the guarantees and calculated the fair value of the common stock
warrants using the Black-Scholes method. The relative fair value
of the loans and warrants were applied to the loan proceeds of
$5.5 million resulting in an assigned value of
$3.7 million for the loans and $1.8 million for the
warrants. The assigned value of the warrants of
$1.8 million is treated as a debt discount. The balance of
the debt discount at June 30, 2009 is $0.7 million and
is being amortized over the remaining term of the
$5.5 million term loan.
Borrowings from Silicon Valley Bank are secured by all of our
assets, other than our auction rate securities and intellectual
property, and, until April 30, 2009, the investor
guarantees. The borrowings are subject to prepayment penalties
and financial covenants, and our achievement of minimum monthly
net revenue goals. The agreement also includes subjective
acceleration clauses which permit Silicon Valley Bank to
accelerate the due date under certain circumstances, including,
but not limited to, material adverse effects on our financial
status or otherwise. Any non-compliance by us under the terms of
our debt arrangements could result in an event of default under
the Silicon Valley Bank loan, which, if not cured, could result
in the acceleration of this debt. We were in compliance with all
financial covenants at June 30, 2009.
The reported changes in cash and cash equivalents and
investments for the year ended June 30, 2009 and 2008 are
summarized below.
Cash and Cash Equivalents.
Cash and cash
equivalents was $33.4 million and $7.6 million at
June 30, 2009 and 2008, respectively. This increase is
primarily attributable to net assets acquired in the merger with
Replidyne.
Investments.
Investments were
$20.0 million and $21.7 million at June 30, 2009
and 2008, respectively.
Our investments include AAA rated auction rate securities issued
primarily by state agencies and backed by student loans
substantially guaranteed by the Federal Family Education Loan
Program, or FFELP. The federal
50
government insures loans in the FFELP so that lenders are
reimbursed at least 97% of the loan’s outstanding principal
and accrued interest if a borrower defaults. Approximately 99.2%
of the par value of our auction rate securities is supported by
student loan assets that are guaranteed by the federal
government under the FFELP.
In February 2008, we were informed that there was insufficient
demand for auction rate securities, resulting in failed auctions
for $23.0 million of our auction rate securities held at
June 30, 2009 and 2008. Currently, these affected
securities are not liquid and will not become liquid until a
future auction for these investments is successful, they are
redeemed by the issuer, they mature, or they are repurchased by
UBS. As a result, we have determined the fair value of our
auction rate securities at June 30, 2009 to be
$20.0 million and have classified them as a long-term
asset. We determined the fair value of our auction rate
securities with the assistance of ValueKnowledge LLC, an
independent third party valuation firm, which utilized various
valuation methods and considered, among other factors, estimates
of present value of the auction rate securities based upon
expected cash flows, the likelihood and potential timing of
issuers of the auction rate securities exercising their
redemption rights at par value, the likelihood of a return of
liquidity to the market for these securities and the potential
to sell the securities in secondary markets.
On November 7, 2008, we accepted an offer from UBS AG
(“UBS”), providing rights related to our auction rate
securities (the “Rights”). The Rights permit us to
require UBS to purchase our auction rate securities at par
value, which is defined for this purpose as the liquidation
preference of the auction rate securities plus accrued but
unpaid dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS
has the right, in its discretion, to purchase or sell our
auction rate securities at any time until July 2, 2012, so
long as we receive payment at par value upon any sale or
disposition. We expect to sell our auction rates securities
under the Rights. However, if the Rights are not exercised
before July 2, 2012 they will expire and UBS will have no
further rights or obligation to buy our auction rate securities.
At June 30, 2009, we have determined the fair value of our
auction rate security rights to be $2.8 million and have
classified them as a long-term asset. So long as we hold auction
rate securities, they will continue to accrue interest as
determined by the auction process or the terms of the auction
rate securities if the auction process fails.
Operating Activities.
Net cash used in
operating activities was $29.7 million and
$31.9 million for the years ended June 30, 2009 and
2008, respectively. For the years ended June 30, 2009 and
2008, we had a net loss of $31.9 million and
$39.2 million, respectively. Changes in working capital
accounts also contributed to the net cash used in the years
ended June 30, 2009 and 2008. Significant changes in
working capital during these periods included:
|
|
|
|
|
|
•
|
cash used in accounts receivable of $3.7 million and
$5.1 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
|
•
|
cash used in (provided by) inventory of $(407,000) and
$2.7 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
|
•
|
cash used in (provided by) prepaid expenses and other current
assets of $(2.4) million and $1.3 million during the
years ended June 30, 2009 and 2008, respectively;
|
|
|
|
|
•
|
cash used in (provided by) accounts payable of $1.1 million
and $(3.6) million during the years ended June 30,
2009 and 2008, respectively; and
|
|
|
|
|
•
|
cash used in accrued expenses and other liabilities of $267,000
and $2.8 million during the years ended June 30, 2009
and 2008, respectively.
|
Investing Activities.
Net cash provided by
(used in) investing activities was $36.0 million and
$(12.4) million for the years ended June 30, 2009 and
2008, respectively. For the year ended June 30, 2009, cash
acquired in the merger with Replidyne, net of transaction costs
paid, was $37.0 million. For the year ended June 30,
2008, we purchased investments in the amount of
$31.3 million. For the years ended June 30, 2009 and
2008, we sold investments in the amount of $50,000 and
$20.0 million, respectively. The balance of cash provided
by (used in) investing activities primarily related to the
purchase of property and equipment. Purchases of property and
equipment used cash of $957,000 and $721,000 for the years ended
June 30, 2009 and 2008, respectively.
51
Financing Activities.
Net cash provided by
financing activities was $19.5 million and
$44.0 million in the years ended June 30, 2009 and
2008, respectively. Cash provided by financing activities during
these periods included:
|
|
|
|
|
|
•
|
proceeds from long-term debt of $19.8 million and
$16.4 million during the years ended June 30, 2009 and
2008, respectively;
|
|
|
|
|
•
|
exercise of stock options and warrants of $525,000 and
$1.9 million during the years ended June 30, 2009 and
2008, respectively; and
|
|
|
|
|
•
|
net proceeds from the issuance of convertible preferred stock of
$30.3 million in the year ended June 30, 2008.
|
Cash used in financing activities in these periods included:
|
|
|
|
|
|
•
|
payment of long-term debt of $945,000 and $4.5 million
during the years ended June 30, 2009 and 2008, respectively.
|
Our future liquidity and capital requirements will be influenced
by numerous factors, including the extent and duration of future
operating losses, the level and timing of future sales and
expenditures, the results and scope of ongoing research and
product development programs, working capital required to
support our sales growth, the receipt of and time required to
obtain regulatory clearances and approvals, our sales and
marketing programs, the continuing acceptance of our products in
the marketplace, competing technologies and market and
regulatory developments. As of June 30, 2009, we believe
our current cash and cash equivalents and available debt will be
sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future. We
intend to retain any future earnings to support operations and
to finance the growth and development of our business, and we do
not anticipate paying any dividends in the foreseeable future.
Contractual Cash Obligations.
Our contractual
obligations and commercial commitments as of June 30, 2009
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
(In thousands)
|
|
|
|
|
Operating leases(1)
|
|
$
|
1,642
|
|
|
$
|
478
|
|
|
$
|
962
|
|
|
$
|
202
|
|
|
$
|
—
|
|
|
Purchase commitments(2)
|
|
|
5,424
|
|
|
|
5,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Debt maturities(3)
|
|
|
30,202
|
|
|
|
25,823
|
|
|
|
4,379
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,234
|
|
|
$
|
31,707
|
|
|
$
|
5,325
|
|
|
$
|
202
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts reflected in the table above for operating leases
represent future minimum payments under a non-cancellable
operating lease for our office and production facility along
with equipment.
|
|
|
|
(2)
|
|
This amount reflects open purchase orders.
|
|
|
|
(3)
|
|
The amounts reflected in the table above represents debt
maturities under various debt agreements.
|
INFLATION
We do not believe that inflation has had a material impact on
our business and operating results during the periods presented.
OFF-BALANCE
SHEET ARRANGEMENTS
Since inception, we have not engaged in any off-balance sheet
activities as defined in Item 303(a)(4) of
Regulation S-K.
52
RECENT
ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168,
The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — A
Replacement of FASB Statement No. 162
.
SFAS No. 168 establishes the
FASB Accounting
Standards
Codification
tm
(Codification) as the single source of authoritative
U.S. generally accepted accounting principles
(U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.
SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. When effective, the Codification will
supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates, which will serve
only to: (
a
) update the Codification; (
b
) provide
background information about the guidance; and (
c
)
provide the bases for conclusions on the change(s) in the
Codification. We do not expect the adoption of this standard
will have a material impact on our consolidated financial
position or results of operations.
In April 2009, the FASB issued FSP SFAS,
No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
. This FSP amends SFAS Statement
No. 107,
Disclosures about Fair Values of Financial
Instruments
, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This
FSP also amends APB Opinion No. 28,
Interim Financial
Reporting
, to require those disclosures in all interim
financial statements. This FSP is effective for interim periods
ending after June 15, 2009. We do not expect the adoption
of this standard will have a material impact on our consolidated
financial position or results of operations.
In June 2008, the FASB issued
EITF 07-05,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock
.
EITF 07-05
provides guidance in assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entity’s own stock for purposes of determining whether the
appropriate accounting treatment falls under the scope of
SFAS 133, “Accounting For Derivative Instruments and
Hedging Activities”
and/or
EITF 00-19,
“Accounting For Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock.”
EITF 07-05
is effective for year-ends beginning after December 15,
2008. We are currently evaluating the impact that the adoption
of this standard will have on our financial position and
consolidated results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157,
or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities. The portion of
SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective beginning in the first quarter of fiscal year
2010. We are currently evaluating the impact of this statement.
SFAS No. 157 was adopted for financial assets and
liabilities on July 1, 2008 and did not have a material
impact on our financial position or consolidated results of
operations during the year ended June 30, 2009.
In October 2008, the FASB issued FASB Staff Position
(“FSP”)
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active.
FSP
SFAS No. 157-3
clarifies the application of SFAS No. 157, which we
adopted for financial assets and liabilities on July 1,
2008, in situations where the market is not active. We have
considered the guidance provided by FSP
SFAS No. 157-3
in our determination of estimated fair values as of
June 30, 2009.
In June 2008, the FASB issued Staff Position
EITF 03-06-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities”
(“FSP
EITF 03-06-1”).
FSP
EITF 03-06-1
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method in SFAS No. 128, “Earnings
per Share”. FSP
EITF 03-06-1
is effective on July 1, 2009 and requires all prior-period
earnings per share data to be adjusted retrospectively. We do
53
not expect the adoption of this standard will have a material
impact on our consolidated financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
, and
SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51
. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods including the accounting for contingent consideration.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS 141(R) and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008 with
SFAS 141(R) to be applied prospectively while SFAS 160
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. We are
currently evaluating the impact of these statements, but expect
that the adoption of SFAS No. 141(R) will have a
material impact on how we will identify, negotiate, and value
any future acquisitions and a material impact on how an
acquisition will affect our consolidated financial statements,
and that SFAS No. 160 will not have a material impact
on our financial position or consolidated results of operations.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies
. FSP
SFAS No. 141(R)-1 amends and clarifies the initial
recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from
contingencies in a business combination under
SFAS No. 141(R). FSP SFAS No. 141(R)-1 is
effective beginning fiscal year 2010 and must be applied to
assets and liabilities arising from contingencies in business
combinations for which the acquisition date is on or after
April 25, 2009. The adoption of FSP
SFAS No. 141(R)-1 will not be material to the
consolidated financial statements.
PRIVATE
SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a
“safe harbor” for forward-looking statements. Such
“forward-looking” information is included in this
Form 10-K
and in other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or
to be made by the Company). Forward-looking statements include
all statements based on future expectations. This
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, including our expectation that our losses will
continue; our plans to continue to expand our sales and
marketing efforts, conduct research and development and increase
our manufacturing capacity to support anticipated future growth;
the expected benefits of the Rights from UBS and our expectation
that we will sell our auction rate securities under the Rights;
our expectation of increased revenue, selling, general and
administrative expenses and research and development expenses;
our expectation that cost of goods sold as a percentage of
revenues will decline in the future; the sufficiency of our
current and anticipated financial resources; and our belief that
our current cash and cash equivalents and available debt will be
sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future. In some
cases, you can identify forward-looking statements by the
following words: “anticipate,” “believe,”
“continue,” “could,” “estimate,”
“expect,” “intend,” “may,”
“ongoing,” “plan,” “potential,”
“predict,” “project,” “should,”
“will,” “would,” or the negative of these
terms or other comparable terminology, although not all
forward-looking statements contain these words. Forward-looking
statements are only predictions and are not guarantees of
performance. These statements are based on our management’s
beliefs and assumptions, which in turn are based on their
interpretation of currently available information.
These statements involve known and unknown risks, uncertainties
and other factors that may cause our results or our
industry’s actual results, levels of activity, performance
or achievements to be materially different from the information
expressed or implied by these forward-looking statements. These
factors include regulatory developments in the U.S. and
foreign countries; the experience of physicians regarding the
effectiveness and reliability of the Diamondback
360
o
;
competition from other devices; unanticipated developments
affecting our estimates regarding expenses, future revenues and
capital requirements; fluctuations in results and expenses based
on new product introductions, sales mix, unanticipated warranty
claims, and the timing of project expenditures; our
54
inability to expand our sales and marketing organization and
research and development efforts; the sufficiency of UBS’s
financial resources to purchase our auction rate securities; the
market for auction rate securities; our ability to obtain and
maintain intellectual property protection for product
candidates; our actual financial resources; general economic
conditions; and those matters identified and discussed in
Item 1A of this
Form 10-K
under “Risk Factors.”
You should read these risk factors and the other cautionary
statements made in this
Form 10-K
as being applicable to all related forward-looking statements
wherever they appear in this
Form 10-K.
We cannot assure you that the forward-looking statements in this
Form 10-K
will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be
material. You should read this
Form 10-K
completely. Other than as required by law, we undertake no
obligation to update these forward-looking statements, even
though our situation may change in the future.
|
|
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk or
availability. To achieve these objectives, our investment policy
allows us to maintain a portfolio of cash equivalents and
investments in a variety of marketable securities, including
money market funds, U.S. government securities, and certain
bank obligations. Our cash and cash equivalents as of
June 30, 2009 include liquid money market accounts. Due to
the short-term nature of these investments, we believe that
there is no material exposure to interest rate risk.
In February 2008, we were informed that there was insufficient
demand for auction rate securities (ARS), resulting in failed
auctions for $23.0 million of our ARS held at June 30,
2009 and June 30, 2008. Currently, these affected
securities are not liquid and will not become liquid until a
future auction for these investments is successful, they are
redeemed by the issuer, or they mature. For discussion of the
related risks, see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”
55
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
56
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Cardiovascular Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
stockholders’ equity (deficiency) and comprehensive (loss)
income and cash flows present fairly, in all material respects,
the financial position of Cardiovascular Systems, Inc. (the
“Company”) at June 30, 2009 and 2008, and the
results of its operations and its cash flows for each of the
three years in the period ended June 30, 2009, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 28, 2009
F-1
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
|
|
ASSETS
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,411
|
|
|
$
|
7,595
|
|
|
Accounts receivable, net
|
|
|
8,474
|
|
|
|
4,897
|
|
|
Inventories
|
|
|
3,369
|
|
|
|
3,776
|
|
|
Prepaid expenses and other current assets
|
|
|
798
|
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
46,052
|
|
|
|
18,204
|
|
|
Auction rate securities put option
|
|
|
2,800
|
|
|
|
—
|
|
|
Investments, trading
|
|
|
20,000
|
|
|
|
—
|
|
|
Investments,
available-for-sale
|
|
|
—
|
|
|
|
21,733
|
|
|
Property and equipment, net
|
|
|
1,719
|
|
|
|
1,041
|
|
|
Patents, net
|
|
|
1,363
|
|
|
|
980
|
|
|
Other assets
|
|
|
436
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
72,370
|
|
|
$
|
41,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
25,823
|
|
|
$
|
11,888
|
|
|
Accounts payable
|
|
|
4,751
|
|
|
|
5,851
|
|
|
Accrued expenses
|
|
|
5,600
|
|
|
|
3,583
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
36,174
|
|
|
|
21,322
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
4,379
|
|
|
|
—
|
|
|
Redeemable convertible preferred stock warrants
|
|
|
—
|
|
|
|
3,986
|
|
|
Lease obligation and other liabilities
|
|
|
1,485
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
5,864
|
|
|
|
4,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,038
|
|
|
|
25,408
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, no par
value; authorized 3,511,269 shares, issued and outstanding
3,081,375 at June 30, 2008; aggregate liquidation value
$31,230 at June 30, 2008
|
|
|
—
|
|
|
|
51,213
|
|
|
Series A-1
redeemable convertible preferred stock, no par value; authorized
1,461,220 shares at June 30, 2008; issued and
outstanding 1,461,220 at June 30, 2008; aggregate
liquidation value $19,862 at June 30, 2008
|
|
|
—
|
|
|
|
23,657
|
|
|
Series B redeemable convertible preferred stock, no par
value; authorized 1,412,908 shares, issued and outstanding
1,412,591 at June 30, 2008; aggregate liquidation value
$20,871 at June 30, 2008
|
|
|
—
|
|
|
|
23,372
|
|
|
Stockholders’ equity (deficiency)
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value at June 30, 2009 and no
par value at June 30, 2008; authorized 100,000,000 common
shares at June 30, 2009 and 45,290,000 common shares and
3,235,000 undesignated shares at June 30, 2008,
respectively; issued and outstanding 14,113,904 at June 30,
2009 and 4,900,984 at June 30, 2008, respectively
|
|
|
14
|
|
|
|
35,933
|
|
|
Additional paid in capital
|
|
|
146,455
|
|
|
|
—
|
|
|
Common stock warrants
|
|
|
11,282
|
|
|
|
680
|
|
|
Accumulated deficit
|
|
|
(127,419
|
)
|
|
|
(118,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficiency)
|
|
|
30,332
|
|
|
|
(81,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficiency)
|
|
$
|
72,370
|
|
|
$
|
41,958
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands, except per share and
|
|
|
|
|
share amounts)
|
|
|
|
|
Revenues
|
|
$
|
56,461
|
|
|
$
|
22,177
|
|
|
$
|
—
|
|
|
Cost of goods sold
|
|
|
16,194
|
|
|
|
8,927
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,267
|
|
|
|
13,250
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
59,822
|
|
|
|
35,326
|
|
|
|
6,691
|
|
|
Research and development
|
|
|
14,678
|
|
|
|
16,068
|
|
|
|
8,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
74,500
|
|
|
|
51,394
|
|
|
|
15,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(34,233
|
)
|
|
|
(38,144
|
)
|
|
|
(15,137
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,350
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
Interest income
|
|
|
3,380
|
|
|
|
1,167
|
|
|
|
881
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
warrants
|
|
|
2,991
|
|
|
|
(916
|
)
|
|
|
(1,327
|
)
|
|
Impairment on investments
|
|
|
(1,683
|
)
|
|
|
(1,267
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,338
|
|
|
|
(1,023
|
)
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(31,895
|
)
|
|
|
(39,167
|
)
|
|
|
(15,596
|
)
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
|
22,781
|
|
|
|
(19,422
|
)
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(9,114
|
)
|
|
$
|
(58,589
|
)
|
|
$
|
(32,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.13
|
)
|
|
$
|
(13.25
|
)
|
|
$
|
(8.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
4,020,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Cardiovascular
Systems, Inc.
Comprehensive
(Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid In Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Total
|
|
|
(Loss) Income
|
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006
|
|
|
4,010,799
|
|
|
$
|
25,578
|
|
|
$
|
—
|
|
|
$
|
1,280
|
|
|
$
|
(27,285
|
)
|
|
$
|
—
|
|
|
$
|
(427
|
)
|
|
$
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.55 per share
|
|
|
44,158
|
|
|
|
86
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued in connection with
Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
(15,596
|
)
|
|
|
(15,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
4,054,957
|
|
|
$
|
26,054
|
|
|
$
|
—
|
|
|
$
|
1,366
|
|
|
$
|
(59,716
|
)
|
|
$
|
(7
|
)
|
|
$
|
(32,303
|
)
|
|
$
|
(15,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/forfeiture of restricted stock awards, net
|
|
|
525,473
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at
$1.55 - $12.37 per share
|
|
|
320,554
|
|
|
|
2,382
|
|
|
|
|
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
(19,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
(39,167
|
)
|
|
|
(39,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
4,900,984
|
|
|
$
|
35,933
|
|
|
$
|
—
|
|
|
$
|
680
|
|
|
$
|
(118,305
|
)
|
|
$
|
—
|
|
|
$
|
(81,692
|
)
|
|
$
|
(39,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance/forfeiture of restricted stock awards, net
|
|
|
425,359
|
|
|
|
2,464
|
|
|
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
756
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants at $1.55-$8.83 per share
|
|
|
100,333
|
|
|
|
640
|
|
|
|
307
|
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
(8,217
|
)
|
|
|
10,031
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred warrants to common warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,781
|
|
|
|
|
|
|
|
22,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
5,954,389
|
|
|
|
6
|
|
|
|
75,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger with Replidyne, net of merger costs
|
|
|
2,732,839
|
|
|
|
3
|
|
|
|
35,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To adjust common stock to par value
|
|
|
|
|
|
|
(39,864
|
)
|
|
|
39,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,895
|
)
|
|
|
|
|
|
|
(31,895
|
)
|
|
|
(31,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
14,113,904
|
|
|
$
|
14
|
|
|
$
|
146,455
|
|
|
$
|
11,282
|
|
|
$
|
(127,419
|
)
|
|
$
|
—
|
|
|
$
|
30,332
|
|
|
$
|
(31,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Cardiovascular
Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands, except per share and share amounts)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,895
|
)
|
|
$
|
(39,167
|
)
|
|
$
|
(15,596
|
)
|
|
Adjustments to reconcile net loss to net cash used in operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
417
|
|
|
|
264
|
|
|
|
153
|
|
|
Provision for doubtful accounts
|
|
|
95
|
|
|
|
164
|
|
|
|
—
|
|
|
Amortization of patents
|
|
|
53
|
|
|
|
29
|
|
|
|
45
|
|
|
(Decretion) accretion of redeemable convertible preferred stock
warrants
|
|
|
(2,991
|
)
|
|
|
916
|
|
|
|
1,327
|
|
|
Amortization of debt discount
|
|
|
1,228
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
6,771
|
|
|
|
7,381
|
|
|
|
390
|
|
|
Amortization of discount on investments
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
(293
|
)
|
|
Impairment on investments
|
|
|
1,683
|
|
|
|
1,267
|
|
|
|
—
|
|
|
Gain on auction rate securities put option
|
|
|
(2,800
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in assets and liabilities, net of merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,672
|
)
|
|
|
(5,061
|
)
|
|
|
—
|
|
|
Inventories
|
|
|
407
|
|
|
|
(2,726
|
)
|
|
|
(322
|
)
|
|
Prepaid expenses and other assets
|
|
|
2,362
|
|
|
|
(1,323
|
)
|
|
|
(113
|
)
|
|
Accounts payable
|
|
|
(1,100
|
)
|
|
|
3,631
|
|
|
|
1,709
|
|
|
Accrued expenses and other liabilities
|
|
|
(268
|
)
|
|
|
2,809
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
(29,710
|
)
|
|
|
(31,868
|
)
|
|
|
(12,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(957
|
)
|
|
|
(720
|
)
|
|
|
(465
|
)
|
|
Purchases of investments
|
|
|
—
|
|
|
|
(31,314
|
)
|
|
|
(23,169
|
)
|
|
Sales of investments
|
|
|
50
|
|
|
|
19,988
|
|
|
|
11,840
|
|
|
Costs incurred in connection with patents
|
|
|
(436
|
)
|
|
|
(397
|
)
|
|
|
(58
|
)
|
|
Cash acquired in Replidyne merger, net of transaction costs paid
|
|
|
37,369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
36,026
|
|
|
|
(12,443
|
)
|
|
|
(11,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of redeemable convertible preferred stock
|
|
|
—
|
|
|
|
30,296
|
|
|
|
30,294
|
|
|
Payment of offering costs
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
(1,776
|
)
|
|
Issuance of common stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
103
|
|
|
Issuance of convertible preferred stock warrants
|
|
|
75
|
|
|
|
—
|
|
|
|
1,767
|
|
|
Exercise of stock options and warrants
|
|
|
525
|
|
|
|
1,865
|
|
|
|
94
|
|
|
Proceeds from long-term debt
|
|
|
19,845
|
|
|
|
16,398
|
|
|
|
—
|
|
|
Payments on long-term debt
|
|
|
(945
|
)
|
|
|
(4,510
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
19,500
|
|
|
|
43,998
|
|
|
|
30,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
25,816
|
|
|
|
(313
|
)
|
|
|
6,354
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
7,595
|
|
|
|
7,908
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
33,411
|
|
|
$
|
7,595
|
|
|
$
|
7,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decretion (accretion) of redeemable convertible preferred stock
|
|
$
|
(22,781
|
)
|
|
$
|
19,422
|
|
|
$
|
16,835
|
|
|
Conversion of Series A warrants to common warrants
|
|
|
1,069
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of common stock warrants
|
|
|
1,814
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of common stock warrants in connection with merger
|
|
|
8,217
|
|
|
|
—
|
|
|
|
—
|
|
|
Conversion of redeemable convertible preferred stock to common
stock
|
|
|
75,456
|
|
|
|
—
|
|
|
|
—
|
|
|
Expiration of common warrants
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
|
Adjustment of common stock to par value
|
|
|
39,864
|
|
|
|
—
|
|
|
|
—
|
|
|
Capitalized financing costs included in accounts payable
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
|
Capitalized financing costs included in accrued expenses
|
|
|
—
|
|
|
|
47
|
|
|
|
—
|
|
|
Net unrealized gain (loss) on investments
|
|
|
—
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
Conversion of convertible promissory notes and accrued interest
into Series A redeemable convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,145
|
)
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,051
|
|
|
$
|
7
|
|
|
$
|
13
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CARDIOVASCULAR
SYSTEMS, INC.
(dollars
in thousands, except per share and share amounts)
|
|
|
|
1.
|
Summary
of Significant Accounting Policies
|
Company
Description
Cardiovascular Systems, Inc. was incorporated as Replidyne, Inc.
in Delaware in 2000. On February 25, 2009, Replidyne, Inc.
completed its reverse merger with Cardiovascular Systems, Inc.,
a Minnesota corporation (“CSI-MN”) incorporated in
1989, in accordance with the terms of the Agreement and Plan of
Merger and Reorganization, dated as of November 3, 2008.
Pursuant to the Merger Agreement, CSI-MN continued after the
merger as the surviving corporation and a wholly owned
subsidiary of Replidyne. Replidyne changed its name to
Cardiovascular Systems, Inc. (“CSI”) and CSI-MN merged
with and into CSI, with CSI continuing after the merger as the
surviving corporation. These transactions are referred to herein
as the “merger.”
Unless the context otherwise requires, all references herein to
the “Company,” “CSI,” “we,”
“us” and “our” refer to CSI-MN prior to the
completion of the merger and to CSI following the completion of
the merger and the name change, and all references to
“Replidyne” refer to Replidyne prior to the completion
of the merger and the name change. CSI is considered the
accounting acquirer in the merger and financial results
presented for all periods reflect historical CSI results.
The Company develops, manufactures and markets devices for the
treatment of vascular diseases. The Company has completed a
pivotal clinical trial in the United States to demonstrate the
safety and efficacy of the Company’s Diamondback 360°
PAS System in treating peripheral arterial disease. On
August 30, 2007, the U.S. Food and Drug
Administration, or FDA, granted the Company 510(k) clearance to
market the Diamondback 360° for the treatment of peripheral
arterial disease. The Company commenced a limited commercial
introduction of the Diamondback 360° in the United States
in September 2007. During the quarter ended March 31, 2008,
the Company began its full commercial launch of the Diamondback
360°. Prior to the merger, Replidyne was a
biopharmaceutical company focused on discovering, developing,
in-licensing and commercializing anti-infective products.
For the fiscal year ended June 30, 2007, the Company was
considered a “development stage enterprise” as
prescribed in Statement of Financial Accounting Standards
(“SFAS”) No. 7,
Accounting and Reporting by
Development Stage Enterprises
. During that time, the
Company’s major emphasis was on planning, research and
development, recruitment and development of a management and
technical staff, and raising capital. The Company no longer
considers itself a development stage enterprise as these
development stage activities were completed prior to the first
quarter of fiscal 2008. The Company’s management team,
organizational structure and distribution channel are in place.
The Company’s primary focus is on the sale and
commercialization of its current product to end user customers.
Principles
of Consolidation
The consolidated balance sheets, statements of operations,
changes in stockholders’ equity (deficiency) and
comprehensive (loss) income, and cash flows include the accounts
of the Company and its wholly owned inactive Netherlands
subsidiary, SCS B.V., after elimination of all significant
intercompany transactions and accounts. SCS B.V. was formed for
the purpose of conducting human trials and the development of
production facilities. Operations of the subsidiary ceased in
fiscal 2002; accordingly, there are no assets or liabilities
included in the consolidated financial statements related to SCS
B.V.
Cash
and Cash Equivalents
The Company considers all money market funds and other
investments purchased with an original maturity of three months
or less to be cash and cash equivalents.
F-6
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Customer credit terms are established
prior to shipment with the general standard being net
30 days. Collateral or any other security to support
payment of these receivables generally is not required. The
Company maintains allowances for doubtful accounts. This
allowance is an estimate and is regularly evaluated by the
Company for adequacy by taking into consideration factors such
as past experience, credit quality of the customer base, age of
the receivable balances, both individually and in the aggregate,
and current economic conditions that may affect a
customer’s ability to pay. Provisions for the allowance for
doubtful accounts attributed to bad debt are recorded in general
and administrative expenses. The following table shows allowance
for doubtful accounts activity for the fiscal years ended
June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
Balance at June 30, 2007
|
|
$
|
—
|
|
|
Provision for doubtful accounts
|
|
|
164
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
164
|
|
|
Provision for doubtful accounts
|
|
|
95
|
|
|
Write-offs
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
253
|
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a
first-in,
first-out (“FIFO”) method of valuation. The
establishment of inventory allowances for excess and obsolete
inventories is based on estimated exposure on specific inventory
items.
Investments
The Company’s investments include AAA rated auction rate
securities (ARS) issued primarily by state agencies and backed
by student loans substantially guaranteed by the Federal Family
Education Loan Program (FFELP). In February 2008, the Company
was informed that there was insufficient demand for auction rate
securities, resulting in failed auctions for $23,000 of the
Company’s auction rate securities held at June 30,
2009 and 2008. Currently, these affected securities are not
liquid and will not become liquid until a future auction for
these investments are successful, they are redeemed by the
issuer, or they mature. As a result, at June 30, 2009 and
2008, the Company has classified the fair value of the auction
rate securities as a long-term asset. The Company has collected
all interest due on its auction rate securities and has no
reason to believe that it will not collect all interest due in
the future.
On November 7, 2008, the Company accepted an offer from UBS
AG (“UBS”), providing rights related to the
Company’s ARS (the “Rights”). The Rights permit
the Company to require UBS to purchase the Company’s ARS at
par value, which is defined for this purpose as the liquidation
preference of the ARS plus accrued but unpaid dividends or
interest, at any time during the period of June 30, 2010
through July 2, 2012. Conversely, UBS has the right, in its
discretion, to purchase or sell the Company’s ARS at any
time until July 2, 2012, so long as the Company receives
payment at par value upon any sale or disposition. The Company
expects to sell its ARS under the Rights. However, if the Rights
are not exercised before July 2, 2012 they will expire and
UBS will have no further rights or obligation to buy the
Company’s ARS. So long as the Company holds ARS, they will
continue to accrue interest as determined by the auction process
or the terms of the ARS if the auction process fails. Prior to
accepting the UBS offer, the Company recorded ARS as investments
available-for-sale.
The Company recorded unrealized gains and losses on
available-for-sale
securities in accumulated other comprehensive income in the
stockholders’ equity (deficiency) section of the balance
sheet. Realized gains and losses were accounted for on the
specific identification
F-7
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
method. After accepting the UBS offer, the Company recorded ARS
as trading investments and unrealized gains and losses are
included in earnings.
The Rights represent a firm agreement in accordance with
SFAS 133, which defines a firm agreement as an agreement
with an unrelated party, binding on both parties and usually
legally enforceable, with the following characteristics:
a) the agreement specifies all significant terms, including
the quantity to be exchanged, the fixed price, and the timing of
the transaction, and b) the agreement includes a
disincentive for nonperformance that is sufficiently large to
make performance probable. The enforceability of the Rights
results in a put option and should be recognized as a free
standing asset separate from the ARS. At June 30, 2009, the
Company recorded $2,800 as the fair value of the put option
asset with a corresponding credit to interest income. The
Company considered the expected time until the Rights are
exercised, carrying costs of the Rights, and the expected credit
risk attributes of the Rights and UBS in their valuation of the
put option. The put option does not meet the definition of a
derivative instrument under SFAS 133. Therefore, the
Company has elected to measure the put option at fair value
under SFAS 159, which permits an entity to elect the fair
value option for recognized financial assets, in order to match
the changes in the fair value of the ARS. As a result,
unrealized gains and losses will be included in earnings in
future periods.
The Company determined the fair value of its auction rate
securities and quantified the
other-than-temporary
impairment loss and the unrealized loss with the assistance of
ValueKnowledge LLC, an independent third party valuation firm,
which utilized various valuation methods and considered, among
other factors, estimates of present value of the auction rate
securities based upon expected cash flows, the likelihood and
potential timing of issuers of the auction rate securities
exercising their redemption rights at par value, the likelihood
of a return of liquidity to the market for these securities and
the potential to sell the securities in secondary markets. Based
on these factors, the Company recorded impairment of investments
for the years ended June 30, 2009 and 2008 of $1,683 and
$1,267, respectively.
The amortized cost and fair value of
available-for-sale
investments as of June 30, 2008 was $21,733. All ARS at
June 30, 2008 had original maturities greater than ten
years.
Property
and Equipment
Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over estimated useful lives of five
years for production equipment and furniture and fixtures; three
years for computer equipment and software; and the shorter of
their estimated useful lives or the lease term for leasehold
improvements. Expenditures for maintenance and repairs and minor
renewals and betterments which do not extend or improve the life
of the respective assets are expensed as incurred. All other
expenditures for renewals and betterments are capitalized. The
assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gains or
losses included in the consolidated statement of operations.
Patents
The capitalized costs incurred to obtain patents are amortized
using the straight-line method over their remaining estimated
lives, not exceeding 20 years. The recoverability of
capitalized patent costs is dependent upon the Company’s
ability to derive revenue-producing products from such patents
or the ultimate sale or licensing of such patent rights. Patents
that are abandoned are written off at the time of abandonment.
Operating
Lease
The Company leases office space under an operating lease. The
lease arrangement contains a rent escalation clause for which
the lease expense is recognized on a straight-line basis over
the terms of the lease. Rent expense
F-8
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that is recognized but not yet paid is included in lease
obligation and other liabilities on the consolidated balance
sheets.
Long-Lived
Assets
The Company regularly evaluates the carrying value of long-lived
assets for events or changes in circumstances that indicate that
the carrying amount may not be recoverable or that the remaining
estimated useful life should be changed. An impairment loss is
recognized when the carrying amount of an asset exceeds the
anticipated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. The
amount of the impairment loss to be recorded, if any, is
calculated by the excess of the asset’s carrying value over
its fair value.
Revenue
Recognition
The Company sells the majority of its products via direct
shipment to hospitals or clinics. The Company recognizes revenue
when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred; the sales price
is fixed or determinable; and collectability is reasonably
assured. These criteria are met at the time of delivery when the
risk of loss and title passes to the customer. The Company
records estimated sales returns, discounts and rebates as a
reduction of net sales in the same period revenue is recognized.
The Company also considers Emerging Issues Task Force Bulletin
(EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
in
revenue recognition. This standard addresses the timing and
method of revenue recognition for revenue arrangements that
include the delivery of more than one product or service. In
these cases, the Company recognizes revenue from each element of
the arrangement as long as separate values for each element can
be determined, the Company has completed its obligation to
deliver or perform on that element, and collection of the
resulting receivable is reasonably assured.
Costs related to products delivered are recognized in the period
revenue is recognized. Cost of goods sold consists primarily of
raw materials, direct labor, and manufacturing overhead.
Warranty
Costs
The Company provides its customers with the right to receive a
replacement if a product is determined to be defective at the
time of shipment. Warranty reserve provisions are estimated
based on Company experience, volume, and expected warranty
claims. Warranty reserve, provisions and claims for the fiscal
years ended June 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
Balance at June 30, 2007
|
|
$
|
—
|
|
|
Provision
|
|
|
137
|
|
|
Claims
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
12
|
|
|
Provision
|
|
|
559
|
|
|
Claims
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
65
|
|
|
|
|
|
|
|
Income
Taxes
Deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts based on enacted tax rates applicable to the
F-9
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the
determination of deferred tax assets. The Company’s
judgment and tax strategies are subject to audit by various
taxing authorities.
Research
and Development Expenses
Research and development expenses include costs associated with
the design, development, testing, enhancement and regulatory
approval of the Company’s products. Research and
development expenses include employee compensation, including
stock-based compensation, supplies and materials, consulting
expenses, travel and facilities overhead. The Company also
incurs significant expenses to operate clinical trials,
including trial design, third-party fees, clinical site
reimbursement, data management and travel expenses. Research and
development expenses are expensed as incurred.
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents, investments and accounts receivable. The Company
maintains its cash and investment balances primarily with two
financial institutions. At times, these balances exceed
federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk in cash and cash equivalents.
Fair
Value of Financial Instruments
Effective July 1, 2008, the Company adopted
SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”), which provides a
framework for measuring fair value and expands disclosures about
fair value measurements. In February 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff
Position
No. 157-2,
Effective Date of FASB Statement No. 157,
which
provides a one-year deferral on the effective date of
SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at least annually.
Therefore, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and
financial liabilities only.
SFAS 157 classifies these inputs into the following
hierarchy:
Level 1 Inputs
— quoted prices in active
markets for identical assets and liabilities
Level 2 Inputs
— observable inputs other
than quoted prices in active markets for identical assets and
liabilities
Level 3 Inputs
— unobservable inputs
F-10
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the fair value of the
Company’s auction rate securities that were measured on a
recurring basis as of June 30, 2009. Assets are measured on
a recurring basis if they are remeasured at least annually:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
|
|
Available-for-
|
|
|
Trading
|
|
|
Securities Put
|
|
|
|
|
Sale Securities
|
|
|
Securities
|
|
|
Option
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
21,733
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Transfer to trading securities
|
|
|
(21,733
|
)
|
|
|
21,733
|
|
|
|
—
|
|
|
Gain on auction rate securities put option
|
|
|
—
|
|
|
|
—
|
|
|
|
2,800
|
|
|
Sales of investments
|
|
|
—
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
Impairment on investments
|
|
|
—
|
|
|
|
(1,683
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
—
|
|
|
$
|
20,000
|
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the Company believes that the carrying
amounts of its other financial instruments, including accounts
receivable, accounts payable and accrued liabilities approximate
their fair value due to the short-term maturities of these
instruments. The carrying amount of long-term debt approximates
fair value based on interest rates currently available for debt
with similar terms and maturities.
Use of
Estimates
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based
Compensation
Effective July 1, 2006, the Company adopted Financial
Accounting Standards Board (“FASB”)
SFAS No. 123(R),
Share-Based Payment,
as
interpreted by SAB No. 107 to account for stock-based
compensation expense associated with the issuance or amendment
of stock options and restricted stock awards.
SFAS No. 123(R) requires the Company to recognize
stock-based compensation expense in an amount equal to the fair
value of share-based payments computed at the date of grant. The
fair value of all stock option and restricted stock awards are
expensed in the consolidated statements of operations over the
related vesting period. The Company calculates the fair value on
the date of grant using a Black-Scholes model.
Preferred
Stock
The Company recorded the estimated fair value of its redeemable
convertible preferred stock based on the fair market value of
that stock as determined by management and the Board of
Directors. In accordance with Accounting Series Release
No. 268,
Presentation in Financial Statements of
“Redeemable Preferred Stocks,”
and EITF Abstracts,
Topic D-98,
Classification and Measurement of Redeemable
Securities,
the Company recorded changes in the fair value
of its redeemable convertible preferred stock in the
consolidated statements of changes in stockholders’ equity
(deficiency) and comprehensive (loss) income and consolidated
statements of operations as decretion (accretion) of redeemable
convertible preferred stock. The Company adjusted redeemable
convertible preferred stock for changes in fair value until the
date of merger at which time all redeemable convertible
preferred stock was converted into common stock and,
accordingly, was reclassified to stockholders’ equity
(deficiency).
F-11
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Preferred
Stock Warrants
Freestanding warrants and other similar instruments related to
shares that are redeemable are accounted for in accordance with
SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity,
and its related interpretations. Under
SFAS No. 150, the freestanding warrant that is related
to the Company’s redeemable convertible preferred stock is
classified as a liability on the consolidated balance sheets as
of June 30, 2008. The warrant was subject to remeasurement
at each balance sheet date and any change in fair value was
recognized as a component of interest (expense) income. Fair
value on the grant date was measured using the Black-Scholes
option pricing model and similar underlying assumptions
consistent with the issuance of stock option awards. The Company
adjusted the liability for changes in fair value until the date
of merger at which time all preferred stock warrants were
converted into warrants to purchase common stock and,
accordingly, the liability was reclassified to equity.
Recent
Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168,
The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — A
Replacement of FASB Statement No. 162
.
SFAS No. 168 establishes the
FASB Accounting
Standards
Codification
tm
(Codification) as the single source of authoritative
U.S. generally accepted accounting principles
(U.S. GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.
SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. When effective, the Codification will
supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not
issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates, which will serve
only to: (
a
) update the Codification; (
b
) provide
background information about the guidance; and (
c
)
provide the bases for conclusions on the change(s) in the
Codification. The Company does not expect the adoption of this
standard will have a material impact on its consolidated
financial position or results of operations.
In April 2009, the FASB issued FSP SFAS,
No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
. This FSP amends SFAS Statement
No. 107,
Disclosures about Fair Values of Financial
Instruments
, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This
FSP also amends APB Opinion No. 28,
Interim Financial
Reporting
, to require those disclosures in all interim
financial statements. This FSP is effective for interim periods
ending after June 15, 2009. The Company does not expect the
adoption of this standard will have a material impact on its
consolidated financial position or results of operations.
In June 2008, the FASB issued
EITF 07-05,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock
.
EITF 07-05
provides guidance in assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entity’s own stock for purposes of determining whether the
appropriate accounting treatment falls under the scope of
SFAS 133, “Accounting For Derivative Instruments and
Hedging Activities”
and/or
EITF 00-19,
“Accounting For Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock.”
EITF 07-05
is effective for year-ends beginning after December 15,
2008. The Company is currently evaluating the impact that the
adoption of this standard will have on its financial condition
and consolidated results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This standard clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop these
assumptions. On February 12, 2008, the FASB issued FASB
Staff Position, or FSP,
FAS 157-2,
Effective Date of FASB Statement No. 157,
or FSP
FAS 157-2.
FSP
FAS 157-2
defers the implementation of SFAS No. 157 for
F-12
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
certain nonfinancial assets and nonfinancial liabilities. The
portion of SFAS No. 157 that has been deferred by FSP
FAS 157-2
will be effective for the Company beginning in the first quarter
of fiscal year 2010. The Company is currently evaluating the
impact of this statement. SFAS No. 157 was adopted for
financial assets and liabilities on July 1, 2008 and did
not have a material impact on the Company’s financial
position or consolidated results of operations during the year
ended June 30, 2009.
In October 2008, the FASB issued FASB Staff Position
(“FSP”)
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active.
FSP
SFAS No. 157-3
clarifies the application of SFAS No. 157, which the
Company adopted for financial assets and liabilities on
July 1, 2008, in situations where the market is not active.
The Company has considered the guidance provided by FSP
SFAS No. 157-3
in its determination of estimated fair values as of
June 30, 2009.
In June 2008, the FASB issued Staff Position
EITF 03-06-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities”
(“FSP
EITF 03-06-1”).
FSP
EITF 03-06-1
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method in SFAS No. 128, “Earnings
per Share”. FSP
EITF 03-06-1
is effective for the Company on July 1, 2009 and requires
all prior-period earnings per share data to be adjusted
retrospectively. The Company does not expect the adoption of
this standard will have a material impact on its consolidated
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations
, and
SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51
. The revised standards continue the movement
toward the greater use of fair values in financial reporting.
SFAS 141(R) will significantly change how business
acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent
periods including the accounting for contingent consideration.
SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS 141(R) and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008 with
SFAS 141(R) to be applied prospectively while SFAS 160
requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. The Company is
currently evaluating the impact of these statements, but expects
that the adoption of SFAS No. 141(R) will have a
material impact on how the Company will identify, negotiate, and
value any future acquisitions and a material impact on how an
acquisition will affect its consolidated financial statements,
and that SFAS No. 160 will not have a material impact
on its financial position or consolidated results of operations.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies
. FSP
SFAS No. 141(R)-1 amends and clarifies the initial
recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from
contingencies in a business combination under
SFAS No. 141(R). FSP SFAS No. 141(R)-1 is
effective for the Company beginning fiscal year 2010 and must be
applied to assets and liabilities arising from contingencies in
business combinations for which the acquisition date is on or
after April 25, 2009. The adoption of FSP
SFAS No. 141(R)-1 will not be material to the
consolidated financial statements.
On February 25, 2009, the Company completed its reverse
merger with Replidyne, Inc. Immediately prior to the merger each
share of CSI-MN’s Series A,
A-1,
and B
convertible preferred stock automatically converted into
approximately one share of CSI-MN’s common stock.
At closing, Replidyne’s net assets, as calculated pursuant
to the terms of the Merger Agreement, were $36,607. Based on the
amount of net assets, each outstanding share of CSI-MN’s
common stock, including each share
F-13
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
issuable upon conversion of CSI-MN Series A,
Series A-1
and Series B convertible preferred stock as described
above, was converted at the effective time of the merger into
the right to receive 0.647 shares of Company common stock,
taking into account a
1-for-10
reverse stock split approved by Replidyne’s stockholders
and board of directors on February 24, 2009. All share and
per share amounts reflect the effect of the conversion factor
for all periods presented. Immediately following the effective
time of the merger, former CSI-MN stockholders owned
approximately 80.2% of the outstanding common stock of the
Company, and Replidyne stockholders owned approximately 19.8% of
the outstanding common stock of the Company. Options exercisable
for a total of 5,681,974 shares of CSI-MN common stock
(equivalent to a total of 3,676,208 shares of Company
common stock) and warrants exercisable for a total of
4,836,051 shares of CSI-MN common stock (equivalent to a
total of 3,128,740 shares of Company common stock) were
assumed by the Company in connection with the merger.
Immediately prior to the merger, warrants to purchase shares of
CSI-MN Series A and Series B convertible preferred
stock were converted into warrants to purchase shares of CSI-MN
common stock at the same ratios as the preferred stock converted
into common stock. Each option and warrant to purchase CSI-MN
common stock outstanding at the effective time of the merger was
assumed by the Company at the effective time of the merger. Each
such option or warrant became an option or warrant, as
applicable, to acquire that number of shares of Company common
stock equal to the product obtained by multiplying the number of
shares of CSI-MN common stock subject to such option or warrant
by 0.647, rounded down to the nearest whole share of Company
common stock. Following the merger, each such option or warrant
has a purchase price per share of Company common stock equal to
the quotient obtained by dividing the per share purchase price
of CSI-MN common stock subject to such option or warrant by
0.647, rounded up to the nearest whole cent.
The Company’s common stock was accepted for listing on the
Nasdaq Global Market under the symbol “CSII” and
trading commenced on February 26, 2009.
The Company believes that Replidyne did not meet the definition
of a business in accordance with the Statements of Financial
Accounting Standards No. 141, Business Combinations, and
Emerging Issues Task Force (EITF)
No. 98-3,
Determining Whether a Nonmonetary Transaction Involves Receipt
of Productive Assets or of a Business, because as of the date of
merger Replidyne had reduced its employee headcount to three
employees that were not engaged in development or
commercialization efforts and did not transition to the combined
company, and had discontinued and engaged in a process to sell
or otherwise dispose of its research and development programs.
As such, at the time the transaction was consummated,
Replidyne’s sole business activity was liquidation through
the merger. Under EITF
No. 98-3,
the total estimated purchase price is allocated to the assets
acquired and liabilities assumed in connection with the
transaction, based on their estimated fair values. As a result,
the cost of the merger has been measured at the estimated fair
value of the net assets acquired, and no goodwill has been
recognized. While the accounting treatment of the transaction is
an acquisition of assets and assumption of certain liabilities
by the Company, the manner in which such transaction was
consummated is a merger whereby former CSI-MN stockholders
control the combined entity. Accordingly, consistent with
guidance relating to such transactions, CSI-MN (the legal
acquiree, but the accounting acquirer) is considered to be the
continuing reporting entity that acquires the registrant,
Replidyne (the legal acquirer, but the accounting acquiree), and
therefore the transaction is considered to be a reverse merger.
The merger qualified as a tax-free reorganization under
provisions of Section 368(a) of the Internal Revenue Code.
CSI-MN directors constitute a majority of the combined
company’s board of directors and CSI-MN executive officers
constitute all members of executive management of the combined
company.
The financial statements of the combined entity reflect the
historical results of CSI-MN before the merger and do not
include the historical financial results of Replidyne before the
completion of the merger. The combined entity has changed its
year-end to June 30 to correspond to the historical results of
CSI-MN. Stockholders’ equity and earnings per share of the
combined entity and, except as noted, all other share references
have been retroactively restated to reflect the number of shares
of common stock received by CSI-MN security holders in the
merger, after
F-14
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
giving effect to the difference between the par values of the
capital stock of CSI-MN and Replidyne, with the offset to
additional paid-in capital.
A summary of the estimated fair value of the net assets acquired
and merger costs incurred in the merger are as follows:
|
|
|
|
|
|
|
Description
|
|
Amount
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,479
|
|
|
Prepaid expenses and other current assets
|
|
|
1,135
|
|
|
Property and equipment
|
|
|
138
|
|
|
Other assets
|
|
|
525
|
|
|
Liabilities
|
|
|
(3,670
|
)
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
36,607
|
|
|
|
|
|
|
|
The Company incurred merger related costs of $1,110 that were
recorded in additional paid in capital as part of the
transaction.
The Company has recorded a current and long-term asset totaling
$651 at June 30, 2009 related to a deposit for a portion of
the vacated Replidyne office and production facility that has
been subleased to two tenants. The tenants have prepaid the
entire sublease amount and this prepayment has been netted
against the lease liability that is included in accrued expenses
and lease obligation and other liabilities on the balance sheet.
The deposit is being held at an escrow agent and returned in
monthly payments until lease expiration in September 2011. The
Company has recorded the unreturned portion of the deposit at
June 30, 2009, resulting in $281 in prepaid expenses and
other current assets and $370 in other assets on the balance
sheet.
The Company has recorded a current and long-term liability
totaling $2,389 at June 30, 2009 related to
Replidyne’s lease on the vacated office and production
facility. The lease currently requires monthly base rent
payments of $50 plus common area maintenance and operating
expenses. Monthly base rent escalates over the remaining lease
term to a maximum of $59 at lease expiration in September 2011.
The Company has recorded the estimated net present value of the
base rent, common area maintenance and operating expenses offset
by estimated rental income at June 30, 2009, resulting in
$998 in accrued expenses and $1,391 in lease obligation and
other liabilities on the balance sheet.
F-15
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
3.
|
Selected
Consolidated Financial Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
8,727
|
|
|
$
|
5,061
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(253
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,474
|
|
|
$
|
4,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,536
|
|
|
$
|
2,338
|
|
|
Work in process
|
|
|
348
|
|
|
|
117
|
|
|
Finished goods
|
|
|
1,485
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,369
|
|
|
$
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
2,313
|
|
|
$
|
1,360
|
|
|
Furniture
|
|
|
168
|
|
|
|
169
|
|
|
Leasehold improvements
|
|
|
109
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,590
|
|
|
|
1,619
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(871
|
)
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,719
|
|
|
$
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,715
|
|
|
$
|
1,279
|
|
|
Less: Accumulated amortization
|
|
|
(352
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,363
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, future estimated amortization of
patents and patent licenses will be:
|
|
|
|
|
|
|
2010
|
|
$
|
46
|
|
|
2011
|
|
|
45
|
|
|
2012
|
|
|
45
|
|
|
2013
|
|
|
45
|
|
|
2014
|
|
|
45
|
|
|
Thereafter
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
$
|
1,363
|
|
|
|
|
|
|
|
F-16
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
This future amortization expense is an estimate. Actual amounts
may vary from these estimated amounts due to additional
intangible asset acquisitions, potential impairment, accelerated
amortization or other events.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
|
Salaries and bonus
|
|
$
|
1,453
|
|
|
$
|
1,229
|
|
|
Commissions
|
|
|
1,441
|
|
|
|
1,493
|
|
|
Accrued vacation
|
|
|
1,198
|
|
|
|
554
|
|
|
Merger related lease obligation
|
|
|
998
|
|
|
|
—
|
|
|
Other
|
|
|
510
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,600
|
|
|
$
|
3,583
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and Security Agreement with Silicon Valley Bank
On September 12, 2008, the Company entered into a loan and
security agreement with Silicon Valley Bank with maximum
available borrowings of $13,500, which agreement was amended on
February 25, 2009 and April 30, 2009. The agreement
includes a $3,000 term loan, a $10,000 accounts receivable line
of credit, and a $5,500 term loan that reduces the availability
of funds on the accounts receivable line of credit. The terms of
each of these loans are as follows:
|
|
|
|
|
|
•
|
The $3,000 term loan has a fixed interest rate of 10.5% and a
final payment amount equal to 3.0% of the loan amount due at
maturity. This term loan has a 36 month maturity, with
repayment terms that include interest only payments during the
first six months followed by 30 equal principal and interest
payments. This term loan also includes an acceleration provision
that requires the Company to pay the entire outstanding balance,
plus a penalty ranging from 1.0% to 6.0% of the principal
amount, upon prepayment or the occurrence and continuance of an
event of default. As part of the term loan agreement, the
Company granted Silicon Valley Bank a warrant to purchase
8,493 shares of Series B redeemable convertible
preferred stock at an exercise price of $14.16 per share. This
warrant was assigned a value of $75 for accounting purposes, is
immediately exercisable, and expires ten years after issuance.
The balance outstanding on the term loan at June 30, 2009
was $2,642.
|
|
|
|
|
•
|
The accounts receivable line of credit as amended has a two year
maturity and a floating interest rate equal to the prime rate,
plus 2.0%, with an interest rate floor of 7.0%. Interest on
borrowings is due monthly and the principal balance is due at
maturity. Borrowings on the line of credit are based on 80% of
eligible domestic receivables, which is defined as receivables
aged less than 90 days from the invoice date along with
specific exclusions for contra-accounts, concentrations, and
government receivables. The Company’s accounts receivable
receipts are deposited into a lockbox account in the name of
Silicon Valley Bank. The accounts receivable line of credit is
subject to non-use fees, annual fees, cancellation fees, and
maintaining a minimum liquidity ratio. There was no balance
outstanding on the line of credit at June 30, 2009. On
April 30, 2009, the accounts receivable line of credit was
amended to allow for an increase in borrowings from $5,000 to
$10,000. All other terms and conditions of the original line of
credit agreement remain in place. The $5,500 term loan reduces
available borrowings under the line of credit agreement.
|
|
|
|
|
•
|
The term loan was originally two guaranteed term loans each with
a one year maturity. Each of the guaranteed term loans had a
floating interest rate equal to the prime rate, plus 2.25%, with
an interest rate floor of 7.0%. Interest on borrowings was due
monthly and the principal balance was due at maturity. One of
the Company’s directors and stockholders and two entities
who held the Company’s preferred shares and were also
affiliated with two of the Company’s directors agreed to
act as guarantors of these term loans. In
|
F-17
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
consideration for guarantees, the Company issued the guarantors
warrants to purchase an aggregate of 296,539 shares of the
Company’s common stock at an exercise price of $9.28 per
share.
|
On April 30, 2009, the guaranteed term loans were
refinanced into a $5,500 term loan that has a fixed interest
rate of 9.0% and a final payment amount equal to 1.0% of the
loan amount due at maturity. As a result of the refinancing, the
guarantees on the original term loans have been released. This
term loan has a 30 month maturity, with repayment terms
that include equal monthly payments of principal and interest
beginning June 1, 2009. This term loan also includes an
acceleration provision that requires the Company to pay the
entire outstanding balance, plus a penalty ranging from 1.0% to
3.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. The term loan reduces
available borrowings under the amended accounts receivable line
of credit agreement. The balance outstanding on the term loan at
June 30, 2009 was $5,328.
The guaranteed term loans and common stock warrants were
allocated using the relative fair value method. Under this
method, the Company estimated the fair value of the term loans
without the guarantees and calculated the fair value of the
common stock warrants using the Black-Scholes method. The
relative fair value of the loans and warrants were applied to
the loan proceeds of $5,500, resulting in an assigned value of
$3,686 for the loans and $1,814 for the warrants. The assigned
value of the warrants of $1,814 is treated as a debt discount.
The balance of the debt discount at June 30, 2009 is $661
and is being amortized over the remaining term of the $5,500
term loan.
Borrowings from Silicon Valley Bank are collateralized by all of
the Company’s assets, other than the Company’s ARS and
intellectual property, and, until April 30, 2009, the
investor guarantees. The borrowings are subject to prepayment
penalties and financial covenants, including the Company’s
achievement of minimum monthly net revenue goals. The agreement
also includes subjective acceleration clauses which permit
Silicon Valley Bank to accelerate the due date under certain
circumstances, including, but not limited to, material adverse
effects on a Company’s financial status or otherwise. Any
non-compliance by the Company under the terms of the
Company’s debt arrangements could result in an event of
default under the Silicon Valley Bank loan, which, if not cured,
could result in the acceleration of this debt. The Company was
in compliance with all monthly financial covenants through
August 31, 2009.
Loan
Payable
On March 28, 2008, the Company obtained a margin loan from
UBS Financial Services, Inc. for up to $12,000, with a floating
interest rate equal to
30-day
LIBOR, plus 0.25%. The loan was collateralized by the
$23,000 par value of the Company’s auction rate
securities. The maximum borrowing amount may have been adjusted
from time to time by UBS Financial Services in its sole
discretion. The loan was due on demand and UBS Financial
Services may have required the Company to repay it in full from
any loan or financing arrangement or a public equity offering.
The margin requirements were determined by UBS Financial
Services and were subject to change. As of June 30, 2008,
the margin requirements provided that UBS Financial Services
would require a margin call on this loan if at any time the
outstanding borrowings, including interest, exceed $12,000 or
75% of UBS Financial Services’ estimate of the fair value
of the Company’s auction rate securities. If these margin
requirements were not maintained, UBS Financial Services may
have required the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. As of
June 30, 2008, the Company maintained these margin
requirements.
On August 21, 2008, the Company replaced this loan with a
margin loan from UBS Bank USA, which increased maximum
borrowings available to $23,000, which may be adjusted from time
to time by UBS Bank in its sole discretion. The margin loan
bears interest at variable rates that equal the lesser of
(i) 30 day LIBOR plus 1.25% or (ii) the
applicable reset rate, maximum auction rate or similar rate as
specified in the prospectus or other documentation governing the
pledged taxable student loan auction rate securities; however,
interest expense charged on the loan will not exceed interest
income earned on the auction rate securities. The loan is due on
demand and UBS Bank will require the Company to repay it in full
from the proceeds received from a public equity offering
F-18
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
where net proceeds exceed $50,000. In addition, if at any time
any of the Company’s auction rate securities may be sold,
exchanged, redeemed, transferred or otherwise conveyed for no
less than their par value by UBS, then the Company must
immediately effect such a transfer and the proceeds must be used
to pay down outstanding borrowings under this loan. The margin
requirements are determined by UBS Bank and are subject to
change. As of June 30, 2009, the margin requirements
include maximum borrowings, including interest, of $22,950. If
these margin requirements are not maintained, UBS Bank may
require the Company to make a loan payment in an amount
necessary to comply with the applicable margin requirements or
demand repayment of the entire outstanding balance. The Company
has maintained the margin requirements under the loans from both
UBS entities. The outstanding balance on this loan at
June 30, 2009 was $22,893 and is included in maturities
during the year ending June 30, 2010.
As of June 30, 2009, debt maturities (including debt
discount) were as follows:
|
|
|
|
|
|
|
2010
|
|
$
|
25,823
|
|
|
2011
|
|
|
3,252
|
|
|
2012
|
|
|
1,127
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,202
|
|
|
Less: Current Maturities
|
|
|
(25,823
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
4,379
|
|
|
|
|
|
|
|
Immediately prior to consummation of the merger, the Company
issued warrants to preferred stockholders to purchase an
aggregate of 2,264,264 shares of Company common stock at an
exercise price at $8.83 per share. The warrants were assigned a
value of $8,217 for accounting purposes and were recorded as
additional paid in capital as part of the merger. The warrants
are immediately exercisable and expire five years after issuance.
In connection with the merger, 439,317 fully exercisable
preferred stock warrants were converted into common stock
warrants. The exercise prices on these warrants range from $8.83
- $14.16 and expire at various dates through September 2018.
During the year ended June 30, 2009, the Company issued the
former guarantors of the Silicon Valley Bank guaranteed term
loans warrants to purchase an aggregate of 296,539 shares
of the Company’s common stock at an exercise price of $9.28
per share. The warrants were assigned a value of $1,810 for
accounting purposes, are immediately exercisable, and expire
five years after issuance.
F-19
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes common stock warrant activity:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Price Range
|
|
|
|
Outstanding
|
|
per Share
|
|
|
|
Warrants outstanding at June 30, 2006
|
|
|
169,978
|
|
|
$1.55-12.37
|
|
Warrants issued
|
|
|
88,864
|
|
|
$8.83
|
|
Warrants exercised
|
|
|
(2,102
|
)
|
|
$1.55
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2007
|
|
|
256,740
|
|
|
$1.55-12.37
|
|
Warrants exercised
|
|
|
(76,312
|
)
|
|
$1.55-12.37
|
|
Warrants expired
|
|
|
(22,387
|
)
|
|
$7.73
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2008
|
|
|
158,041
|
|
|
$1.55-12.37
|
|
Warrants issued
|
|
|
2,560,803
|
|
|
$8.83-9.28
|
|
Warrants converted
|
|
|
439,317
|
|
|
$8.83-14.16
|
|
Warrants exercised
|
|
|
(33,431
|
)
|
|
$1.55-7.73
|
|
Warrants expired
|
|
|
(8,605
|
)
|
|
$7.73
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at June 30, 2009
|
|
|
3,116,125
|
|
|
$1.55-$14.16
|
|
|
|
|
|
|
|
|
The following assumptions were utilized in determining the fair
value of warrants issued under the Black-Scholes model:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
|
Weighted average fair value of warrants granted
|
|
$4.06
|
|
Risk-free interest rates
|
|
2.5%-3.0%
|
|
Expected life
|
|
5 years
|
|
Expected volatility
|
|
46.7%-55.5%
|
|
Expected dividends
|
|
None
|
|
|
|
|
6.
|
Stock
Options and Restricted Stock Awards
|
The Company has a 2007 Equity Incentive Plan (the “2007
Plan”), which was assumed from CSI-MN, under which options
to purchase common stock and restricted stock awards have been
granted to employees, directors and consultants at exercise
prices determined by the board of directors; and also in
connection with the merger the Company assumed options and
restricted stock awards granted by CSI-MN under its 1991 Stock
Option Plan (the “1991 Plan”) and 2003 Stock Option
Plan (the “2003 Plan”) (the 2007 Plan, the 1991 Plan
and the 2003 Plan collectively, the “Plans”). The 1991
Plan and 2003 Plan permitted the granting of incentive stock
options and nonqualified options. A total of 485,250 shares
of common stock were originally reserved for issuance under the
1991 Plan, but with the execution of the 2003 Plan no additional
options were granted under it. A total of 2,458,600 shares
of common stock were originally reserved for issuance under the
2003 Plan but with the approval of the 2007 Plan no additional
options will be granted under it. The 2007 Plan originally
allowed for the granting of up to 1,941,000 shares of
common stock as approved by the board of directors in the form
of nonqualified or incentive stock options, restricted stock
awards, restricted stock unit awards, performance share awards,
performance unit awards or stock appreciation rights to
officers, directors, consultants and employees of the Company.
The Plan was amended in February 2009 to increase the number of
authorized shares to 2,509,969. The amended 2007 Plan also
includes a renewal provision whereby the number of shares shall
automatically be increased on the first day of each fiscal year
beginning July 1, 2008, and ending July 1, 2017, by
the lesser of (i) 970,500 shares, (ii) 5% of the
outstanding common shares on such date, or (iii) a lesser
amount determined by the board of directors.
F-20
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On July 1, 2009 the number of shares available for grant
was increased by 705,695 under the 2007 plan’s renewal
provision.
All options granted under the Plans become exercisable over
periods established at the date of grant. The option exercise
price is generally not less than the estimated fair market value
of the Company’s common stock at the date of grant, as
determined by the Company’s management and board of
directors. In addition, the Company has granted nonqualified
stock options to employees, directors and consultants outside of
the Plans.
In estimating the value of the Company’s common stock prior
to the merger for purposes of granting options and determining
stock-based compensation expense, the Company’s management
and board of directors conducted stock valuations using two
different valuation methods: the option pricing method and the
probability weighted expected return method. Both of these
valuation methods took into consideration the following factors:
financing activity, rights and preferences of the Company’s
preferred stock, growth of the executive management team,
clinical trial activity, the FDA process, the status of the
Company’s commercial launch, the Company’s mergers and
acquisitions and public offering processes, revenues, the
valuations of comparable public companies, the Company’s
cash and working capital amounts, and additional objective and
subjective factors relating to the Company’s business. The
Company’s management and board of directors set the
exercise prices for option grants based upon their best estimate
of the fair market value of the common stock at the time they
made such grants, taking into account all information available
at those times. In some cases, management and the board of
directors made retrospective assessments of the valuation of the
common stock at later dates and determined that the fair market
value of the common stock at the times the grants were made was
different than the exercise prices established for those grants.
In cases in which the fair market was higher than the exercise
price, the Company recognized stock-based compensation expense
for the excess of the fair market value of the common stock over
the exercise price.
Following the merger, the Company’s stock valuations are
based upon the market price for the common stock.
Stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
Options(a)
|
|
|
Exercise Price
|
|
|
|
|
Options outstanding at June 30, 2006
|
|
|
1,180,004
|
|
|
$
|
6.08
|
|
|
Options granted
|
|
|
1,696,984
|
|
|
$
|
8.72
|
|
|
Options exercised
|
|
|
(42,055
|
)
|
|
$
|
1.55
|
|
|
Options forfeited or expired
|
|
|
(61,367
|
)
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2007
|
|
|
2,773,566
|
|
|
$
|
7.67
|
|
|
Options granted
|
|
|
1,871,089
|
|
|
$
|
11.14
|
|
|
Options exercised
|
|
|
(244,242
|
)
|
|
$
|
5.07
|
|
|
Options forfeited or expired
|
|
|
(597,289
|
)
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
|
3,803,124
|
|
|
$
|
10.19
|
|
|
Options granted
|
|
|
99,314
|
|
|
$
|
9.13
|
|
|
Options exercised
|
|
|
(59,524
|
)
|
|
$
|
8.12
|
|
|
Options forfeited or expired
|
|
|
(205,032
|
)
|
|
$
|
9.32
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
3,637,882
|
|
|
$
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes the effect of options granted, exercised, forfeited or
expired from the 1991 Plan, 2003 Plan, 2007 Plan, and options
granted outside the stock option plans described above.
|
F-21
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Options outstanding and exercisable at June 30, 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
|
|
$7.90
|
|
|
600,885
|
|
|
|
8.10
|
|
|
$
|
7.90
|
|
|
|
295,971
|
|
|
|
8.09
|
|
|
$
|
7.90
|
|
|
$8.75
|
|
|
92,844
|
|
|
|
9.68
|
|
|
$
|
8.75
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
8.75
|
|
|
$8.83
|
|
|
1,276,093
|
|
|
|
4.00
|
|
|
$
|
8.83
|
|
|
|
946,523
|
|
|
|
4.00
|
|
|
$
|
8.83
|
|
|
$9.28
|
|
|
78,931
|
|
|
|
0.79
|
|
|
$
|
9.28
|
|
|
|
78,931
|
|
|
|
0.79
|
|
|
$
|
9.28
|
|
|
$11.38
|
|
|
85,143
|
|
|
|
8.38
|
|
|
$
|
11.38
|
|
|
|
85,143
|
|
|
|
8.38
|
|
|
$
|
11.38
|
|
|
$12.15
|
|
|
1,184,807
|
|
|
|
8.49
|
|
|
$
|
12.15
|
|
|
|
683,382
|
|
|
|
8.51
|
|
|
$
|
12.15
|
|
|
$12.37
|
|
|
176,307
|
|
|
|
1.56
|
|
|
$
|
12.37
|
|
|
|
176,307
|
|
|
|
1.56
|
|
|
$
|
12.37
|
|
|
$13.98
|
|
|
111,421
|
|
|
|
8.63
|
|
|
$
|
13.98
|
|
|
|
111,421
|
|
|
|
8.63
|
|
|
$
|
13.98
|
|
|
$18.55
|
|
|
31,451
|
|
|
|
6.75
|
|
|
$
|
18.55
|
|
|
|
31,451
|
|
|
|
6.75
|
|
|
$
|
18.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,637,882
|
|
|
|
6.36
|
|
|
$
|
10.24
|
|
|
|
2,409,129
|
|
|
|
5.90
|
|
|
$
|
10.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued to employees and directors that are vested or
expected to vest at June 30, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
Number of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Shares
|
|
Life (Years)
|
|
Price
|
|
Value
|
|
|
|
Options vested or expected to vest
|
|
|
3,295,921
|
|
|
|
6.36
|
|
|
$
|
10.24
|
|
|
$
|
—
|
|
An additional requirement of SFAS No. 123(R) is that
estimated pre-vesting forfeitures be considered in determining
stock-based compensation expense. As of June 30, 2009,
2008, and 2007, the Company estimated its forfeiture rate at
9.4%, 5.0%, and 5.0%, respectively. As of June 30, 2009,
2008, and 2007, the total compensation cost for non-vested
awards not yet recognized in the consolidated statements of
operations was $5,820, $6,316, and $2,367, respectively, net of
the effect of estimated forfeitures. These amounts are expected
to be recognized over a weighted-average period of 1.50, 2.17,
and 2.72 years, respectively.
Options typically vest over three years. An employee’s
unvested options are forfeited when employment is terminated;
vested options must be exercised at or within 90 days of
termination to avoid forfeiture. The Company determines the fair
value of options using the Black-Scholes option pricing model.
The estimated fair value of options, including the effect of
estimated forfeitures, is recognized as expense on a
straight-line basis over the options’ vesting periods. The
following assumptions were used in determining the fair value of
stock options granted under the Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Weighted average fair value of options granted
|
|
$4.66
|
|
$5.78
|
|
$1.66
|
|
Risk-free interest rates
|
|
2.82%
|
|
2.45%-4.63%
|
|
4.56%-5.18%
|
|
Expected life
|
|
6 years
|
|
3.5-6 years
|
|
3.5-6 years
|
|
Expected volatility
|
|
55.5%
|
|
43.1%-46.4%
|
|
43.8%-45.1%
|
|
Expected dividends
|
|
None
|
|
None
|
|
None
|
The risk-free interest rate for periods within the five and ten
year contractual life of the options is based on the
U.S. Treasury yield curve in effect at the grant date and
the expected option life of 3.5 to 6 years. Expected
volatility is based on the historical volatility of the stock of
companies within the Company’s peer group.
F-22
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. The aggregate intrinsic value for
outstanding options at June 30, 2009, 2008 and 2007 was $0,
$21,441, and $5,181, respectively. The aggregate intrinsic value
for exercisable options at June 30, 2009, 2008 and 2007 was
$0, $9,692, and $4,417, respectively. The total aggregate
intrinsic value of options exercised during the years ended
June 30, 2009 and 2008 was $387 and $1,435, respectively.
Shares supporting option exercises are sourced from new share
issuances.
On December 12, 2007, the Company granted 501,425
performance based incentive stock options to certain executives.
The options originally were to become exercisable in full on the
third anniversary of the date of grant provided that the Company
had completed its initial public offering of common stock or a
change of control transaction before December 31, 2008 and
would terminate on the tenth anniversary of the date of the
grant. For this purpose, “change of control
transaction” was defined as an acquisition of the Company
through the sale of substantially all of the Company’s
assets and the consequent discontinuance of its business or
through a merger, consolidation, exchange, reorganization or
similar transaction. On December 12, 2008, the Company
amended the vesting terms of these options to delete the
aforementioned vesting terms and to provide instead that the
exercisability of the options was to be conditioned upon the
closing of the merger and that the options would vest to the
extent of 50% of the total shares subject to the first
anniversary of the merger and for the remaining 50% on the
second anniversary of the merger. The Company has calculated
compensation expense of $4,716 related to the stock options that
is expected to be recognized over the vesting period. The
Company began recording stock-based compensation expense related
to the performance based incentive stock options effective at
the closing of the merger, the time at which it became probable
that the options would vest.
The Company also maintains its 2006 Equity Incentive Plan (the
“2006 Plan”), relating to Replidyne activity prior to
the merger in February 2009. A total of 794,641 shares were
originally reserved under the 2006 Plan but effective with the
merger no additional options will be granted under it. Options
granted under the 2006 Plan were either incentive or
nonqualified stock options. Incentive stock options were only
granted to Replidyne employees. Nonqualified stock options were
granted by Replidyne to its employees, directors, and
nonemployee consultants. Generally, options granted under the
2006 Plan expired ten years from the date of grant and vested
over four years. Vested options granted to employees terminate
90 days after termination.
Stock option activity since the date of merger is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
Options outstanding at February 25, 2009
|
|
|
239,716
|
|
|
$
|
31.11
|
|
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
|
Options exercised
|
|
|
(7,379
|
)
|
|
$
|
6.13
|
|
|
Options forfeited or expired
|
|
|
(162,337
|
)
|
|
$
|
37.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
70,000
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
|
|
$14.00
|
|
|
4,000
|
|
|
|
3.51
|
|
|
$
|
14.00
|
|
|
|
4,000
|
|
|
|
3.51
|
|
|
$
|
14.00
|
|
|
$16.40
|
|
|
6,000
|
|
|
|
3.51
|
|
|
$
|
16.40
|
|
|
|
6,000
|
|
|
|
3.51
|
|
|
$
|
16.40
|
|
|
$18.60
|
|
|
60,000
|
|
|
|
2.66
|
|
|
$
|
18.60
|
|
|
|
60,000
|
|
|
|
2.66
|
|
|
$
|
18.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
2.78
|
|
|
$
|
18.15
|
|
|
|
70,000
|
|
|
|
2.78
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The aggregate intrinsic value of a stock award is the amount by
which the market value of the underlying stock exceeds the
exercise price of the award. There was no aggregate intrinsic
value for outstanding options or exercisable options under the
former Replidyne plan at June 30, 2009. The total aggregate
intrinsic value of options exercised during the years ended
June 30, 2009 was $6.
As of June 30, 2009, the Company had granted 1,075,605
restricted stock awards. The fair value of each restricted stock
award was equal to the fair market value of the Company’s
common stock at the date of grant. Vesting of restricted stock
awards range from one to three years. The estimated fair value
of restricted stock awards, including the effect of estimated
forfeitures, is recognized on a straight-line basis over the
restricted stock’s vesting period. Restricted stock award
activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
Restricted stock awards granted
|
|
|
543,481
|
|
|
$
|
14.67
|
|
|
Restricted stock awards forfeited
|
|
|
(18,008
|
)
|
|
$
|
14.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2008
|
|
|
525,473
|
|
|
$
|
14.68
|
|
|
Restricted stock awards granted
|
|
|
532,124
|
|
|
$
|
9.08
|
|
|
Restricted stock awards forfeited
|
|
|
(106,765
|
)
|
|
$
|
14.06
|
|
|
Restricted stock awards vested
|
|
|
(206,455
|
)
|
|
$
|
14.52
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards outstanding at June 30, 2009
|
|
|
744,377
|
|
|
$
|
10.81
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2009, the Company granted
restricted stock units to members of the Board of Directors.
Restricted stock units represent the right to receive payment
from the Company equal in value to the market price per share of
Company stock on date of payment. Restricted stock unit payments
would occur on the six month anniversary after a Director
terminates from the Board. A total of 42,238 restricted stock
units were granted at the applicable market price of $8.75. The
aggregate restricted stock unit liability of $323,086 has been
included in accrued expenses in the balance sheet at
June 30, 2009.
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
Stock
|
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Purchase Plan
|
|
|
Total
|
|
|
|
|
Cost of goods sold
|
|
$
|
199
|
|
|
$
|
274
|
|
|
$
|
2
|
|
|
$
|
475
|
|
|
Selling, general and administrative
|
|
|
1,786
|
|
|
|
3,862
|
|
|
|
36
|
|
|
|
5,684
|
|
|
Research and development
|
|
|
276
|
|
|
|
331
|
|
|
|
5
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,261
|
|
|
$
|
4,467
|
|
|
$
|
43
|
|
|
$
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Restricted
|
|
|
|
|
|
|
|
Options
|
|
|
Stock Awards
|
|
|
Total
|
|
|
|
|
Cost of goods sold
|
|
$
|
91
|
|
|
$
|
141
|
|
|
$
|
232
|
|
|
Selling, general and administrative
|
|
|
5,957
|
|
|
|
895
|
|
|
|
6,852
|
|
|
Research and development
|
|
|
181
|
|
|
|
116
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,229
|
|
|
$
|
1,152
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following amounts were recognized as stock-based
compensation expense in the consolidated statements of
operations for the year ended June 30, 2007:
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
Options
|
|
|
|
|
Selling, general and administrative
|
|
$
|
327
|
|
|
Research and development
|
|
|
63
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
390
|
|
|
|
|
|
|
|
The following summarizes shares available for grant under the
Company’s various equity incentive plans:
|
|
|
|
|
|
|
|
|
Shares Available
|
|
|
|
|
for Grant(a)
|
|
|
|
|
Shares available for grant at June 30, 2006
|
|
|
404,213
|
|
|
Shares reserved
|
|
|
1,617,500
|
|
|
Shares granted
|
|
|
(1,696,984
|
)
|
|
Shares forfeited, expired or cancelled
|
|
|
51,663
|
|
|
|
|
|
|
|
|
Shares outstanding at June 30, 2007
|
|
|
376,392
|
|
|
Shares reserved
|
|
|
1,941,000
|
|
|
Shares granted(b)
|
|
|
(2,369,280
|
)
|
|
Shares forfeited, expired or cancelled
|
|
|
70,953
|
|
|
|
|
|
|
|
|
Shares available for grant at June 30, 2008
|
|
|
19,065
|
|
|
Shares reserved
|
|
|
575,444
|
|
|
Shares granted
|
|
|
(631,438
|
)
|
|
Shares forfeited, expired or cancelled
|
|
|
121,767
|
|
|
|
|
|
|
|
|
Shares available for grant at June 30, 2009
|
|
|
84,838
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Excludes the effect of shares granted, exercised, forfeited or
expired related to activity from shares granted outside the
stock option plans described above. Excludes share forfeitures
from grants not under the 2007 plan.
|
|
|
|
(b)
|
|
Excludes a grant of 45,290 shares outside of plans
|
Employee
Stock Purchase Plan
The Company maintains an employee stock purchase plan (ESPP).
The plan provides eligible employees the opportunity to acquire
common stock in accordance with Section 423 of the Internal
Revenue Code of 1986. Stock can be purchased each six-month
period per year (twice per year), however the initial period is
from June 1, 2009 through December 31, 2009. The
purchase price is equal to 85% of the lower of the price at the
beginning or the end of the respective period. Shares reserved
under the plan at June 30, 2009 totaled 192,087. The ESPP
allows for an annual increase in reserved shares on July 1 equal
to the lesser of (i) one percent of the outstanding common
shares outstanding, or (ii) 180,000 shares, provided
that the Board of Directors may designate a smaller amount of
shares to be reserved. On July 1, 2009, 141,139 shares
were added to plan.
F-25
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the Company’s overall deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
3,398
|
|
|
$
|
2,053
|
|
|
Accrued expenses
|
|
|
508
|
|
|
|
154
|
|
|
Inventories
|
|
|
488
|
|
|
|
358
|
|
|
Debt warrant amortization
|
|
|
466
|
|
|
|
—
|
|
|
Other
|
|
|
188
|
|
|
|
575
|
|
|
Research and development credit carryforwards
|
|
|
2,974
|
|
|
|
2,192
|
|
|
Net operating loss carryforwards
|
|
|
33,124
|
|
|
|
24,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
41,146
|
|
|
|
29,373
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation and amortization
|
|
|
(29
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(29
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(41,117
|
)
|
|
|
(29,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The Company has established valuation allowances to fully offset
its deferred tax assets due to the uncertainty about the
Company’s ability to generate the future taxable income
necessary to realize these deferred assets, particularly in
light of the Company’s historical losses. The future use of
net operating loss carryforwards is dependent on the Company
attaining profitable operations, and will be limited in any one
year under Internal Revenue Code Section 382 (“IRC
Section 382”) due to significant ownership changes, as
defined under the Code Section, as a result of the
Company’s equity financings. A summary of the valuation
allowances are as follows:
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
Balance at June 30, 2007
|
|
$
|
16,889
|
|
|
Additions
|
|
|
12,464
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
29,353
|
|
|
Additions
|
|
|
11,764
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
41,117
|
|
|
|
|
|
|
|
At June 30, 2009, the Company had net operating loss
carryforwards for federal and state income tax reporting
purposes of approximately $108,166 which will expire at various
dates through fiscal 2029.
The Company adopted the provisions of FIN 48,
Accounting
for Uncertainty in Income Taxes
, on July 1, 2007. Under
FIN 48, the Company recognizes the financial statement
benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, the
Company applied FIN 48 to all tax positions for which the
statute of limitations remained open. The Company did not record
any adjustment to the liability for unrecognized income tax
benefits or accumulated deficit for the cumulative effect of the
adoption of FIN 48.
F-26
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In addition, the amount of unrecognized tax benefits as of
June 30, 2009 and 2008 was zero. There have been no
material changes in unrecognized tax benefits since July 1,
2007, and the Company does not anticipate a significant change
to the total amount of unrecognized tax benefits within the next
12 months. The Company recognizes penalties and interest
accrued related to unrecognized tax benefits in income tax
expense for all periods presented. The Company did not have an
accrual for the payment of interest and penalties related to
unrecognized tax benefits as of June 30, 2009 or 2008.
The Company is subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant
judgment to apply. The Company is potentially subject to income
tax examinations by tax authorities for the tax years ended
June 30, 2009, 2008 and 2007. The Company is not currently
under examination by any taxing jurisdiction.
|
|
|
|
8.
|
Commitment
and Contingencies
|
Operating
Lease
The Company leases manufacturing and office space and equipment
under various lease agreements which expire at various dates
through November 2012. Rental expenses were $658, $572 and $341
for the years ended June 30, 2009, 2008 and 2007,
respectively.
Future minimum lease payments under the agreements as of
June 30, 2009 are as follows:
|
|
|
|
|
|
|
2010
|
|
$
|
478
|
|
|
2011
|
|
|
482
|
|
|
2012
|
|
|
480
|
|
|
2013
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
$
|
1,642
|
|
|
|
|
|
|
|
The Company offers a 401(k) plan to its employees. Eligible
employees may authorize up to $16 of their annual compensation
as a contribution to the plan, subject to Internal Revenue
Service limitations. The plan also allows eligible employees
over 50 years old to contribute an additional $6 subject to
Internal Revenue Service limitations. All employees must be at
least 21 years of age to participate in the plan. The
Company did not provide any employer matching contributions for
the years ended June 30, 2009, 2008 and 2007.
|
|
|
|
10.
|
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
Warrants
|
The Company issued 3,081,375 shares of Series A
redeemable convertible preferred stock during fiscal 2007, no
par value, for total proceeds of $27,000. In addition,
Series A convertible preferred stock warrants were issued
to purchase 436,710 shares of Series A redeemable
convertible preferred stock in connection with the sale of the
Series A redeemable convertible preferred stock. The
Series A convertible preferred stock warrants have a
purchase price of $8.83 per share with a five-year term and were
assigned an initial value of $1,767 for accounting purposes
using the Black-Scholes model. The change in value of the
Series A convertible preferred stock warrants due to
decretion (accretion) as a result of remeasurement was $2,991,
($916), and ($1,327) for the years ended June 30, 2009,
2008 and 2007, respectively, and is included in the consolidated
statements of operations.
As of June 30, 2007, the Company had sold
652,377 shares of
Series A-1
redeemable convertible preferred stock, no par value, for total
proceeds of $8,271, net of offering costs of $34. During the
period from July 2007 to September 2007, the Company sold an
additional 808,843 shares of
Series A-1
redeemable convertible preferred stock for total proceeds of
$10,282, net of offering costs of $14.
F-27
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On December 17, 2007, the Company completed the sale of
1,412,591 shares of Series B redeemable convertible
preferred stock for total proceeds of $19,963, net of offering
costs of $37.
In connection with the closing of the merger at
February 25, 2009, and preparation of the Company’s
financial statements as of June 30, 2008, the
Company’s management and Board of Directors established
what it believed to be a fair market value of the Company’s
Series A,
Series A-1,
and Series B redeemable convertible preferred stock. This
determination was based on concurrent significant stock
transactions with third parties and a variety of factors,
including the Company’s business milestones achieved and
future financial projections, the Company’s position in the
industry relative to its competitors, external factors impacting
the value of the Company in its marketplace, the stock
volatility of comparable companies in its industry, general
economic trends and the application of various valuation
methodologies.
Changes in the current market value of the Series A,
Series A-1,
and Series B redeemable convertible preferred stock were
recorded as decretion (accretion) of redeemable convertible
preferred stock and as accumulated deficit in the consolidated
statements of changes in stockholders’ equity (deficiency)
and in the consolidated statements of operations as decretion
(accretion) of redeemable convertible preferred stock.
Immediately prior to the merger with Replidyne, each share of
CSI-MN’s Series A,
A-1,
and B
convertible preferred stock automatically converted into
approximately one share of CSI-MN’s common stock pursuant
to an agreement with the preferred stockholders. In addition,
immediately prior to the merger, warrants to purchase shares of
CSI-MN Series A and B convertible preferred stock were
converted into warrants to purchase CSI-MN common stock
outstanding at the effective time of the merger.
Subsequent to the merger with Replidyne, the Company has
5,000,000 preferred shares authorized. There are no preferred
shares issued or outstanding at June 30, 2009.
ev3
Legal Proceedings
The Company is party to a legal proceeding with ev3 Inc., ev3
Endovascular, Inc. and FoxHollow Technologies, Inc., together
referred to as the Plaintiffs, which filed a complaint on
December 28, 2007 in the Ramsey County District Court for
the State of Minnesota against the Company and former employees
of FoxHollow currently employed by the Company, which complaint
was subsequently amended.
The complaint, as amended, alleges the following:
|
|
|
|
|
|
•
|
That certain of the Company’s employees (i) violated
provisions in their employment agreements with their former
employer FoxHollow, barring them from misusing FoxHollow
confidential information and from soliciting or encouraging
employees of FoxHollow to join the Company, and
(ii) breached a duty of loyalty owed to FoxHollow.
|
|
|
|
|
•
|
That the Company and certain of its employees misappropriated
trade secrets of one or more of the Plaintiffs.
|
|
|
|
|
•
|
That all defendants engaged in unfair competition and conspired
to gain an unfair competitive and economic advantage for the
Company to the detriment of the Plaintiffs.
|
|
|
|
|
•
|
That (i) the Company tortiously interfered with the
contracts between FoxHollow and certain of the Company’s
employees by allegedly procuring breaches of the
non-solicitation — encouragement provision in those
agreements, and (ii) one of the Company’s employees
tortiously interfered with the contracts between certain of the
Company’s employees and FoxHollow by allegedly procuring
breaches of the confidential information provision in those
agreements.
|
The Plaintiffs seek, among other forms of relief, an award of
damages in an amount greater than $50, a variety of forms of
injunctive relief, exemplary damages under the Minnesota Trade
Secrets Act, and recovery of their
F-28
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
attorney fees and litigation costs. Although the Company has
requested the information, the Plaintiffs have not yet disclosed
what specific amount of damages they claim.
The Company is defending this litigation vigorously, and
believes that the outcome of this litigation will not have a
materially adverse effect on the Company’s business,
operations, cash flows or financial condition. The Company has
not recognized any expense related to the settlement of this
matter as an adverse outcome of this action is not probable. If
the Company is not successful in this litigation, it could be
required to pay substantial damages and could be subject to
equitable relief that could include a requirement that the
Company terminate or otherwise alter the terms or conditions of
employment of certain employees, including certain key sales
personnel who were formerly employed by FoxHollow. In any event,
the defense of this litigation, regardless of the outcome, could
result in substantial legal costs and diversion of
management’s time and efforts from the operation of
business.
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted earnings per
common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available in basic calculation
|
|
$
|
31,895
|
|
|
$
|
39,167
|
|
|
$
|
15,596
|
|
|
Accretion (decretion) of redeemable convertible preferred
stock(a)
|
|
|
(22,781
|
)
|
|
|
19,422
|
|
|
|
16,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
9,114
|
|
|
$
|
58,589
|
|
|
$
|
32,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares — basic
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
4,020,988
|
|
|
Effect of dilutive stock options and warrants(b)(c)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — diluted
|
|
|
8,068,689
|
|
|
|
4,422,326
|
|
|
|
4,020,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share — basic and diluted
|
|
$
|
(1.13
|
)
|
|
$
|
(13.25
|
)
|
|
$
|
(8.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The calculation for accretion of redeemable convertible
preferred stock marks the redeemable convertible preferred stock
to fair value, which equals or exceeds the amount of any
undeclared dividends on the redeemable convertible preferred
stock.
|
|
|
|
(b)
|
|
At June 30, 2009, 2008 and 2007, 3,116,125, 464,170 and
691,175 warrants, respectively, were outstanding. The effect of
the shares that would be issued upon exercise of these warrants
has been excluded from the calculation of diluted loss per share
because those shares are anti-dilutive.
|
|
|
|
(c)
|
|
At June 30, 2009, 2008 and 2007, 3,707,882, 3,803,124 and
2,773,566 stock options, respectively, were outstanding. The
effect of the shares that would be issued upon exercise of these
options has been excluded from the calculation of diluted loss
per share because those shares are anti-dilutive.
|
|
|
|
|
13.
|
Initial
Public Offering Costs
|
The Company withdrew the registration statement for its initial
public offering in conjunction with the announcement of the
execution of the Merger Agreement in November 2008. Therefore,
previously capitalized offering costs of approximately $1,700
were included in selling, general and administrative during the
year ended June 30, 2009.
F-29
CARDIOVASCULAR
SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In September 2009, the Company entered into a corporate job
creation agreement and lease agreement with the Pearland
Economic Development Corporation of Pearland, Texas (PEDC).
The corporate job creation agreement provides the Company
various cash incentives for attaining and maintaining specified
employment levels in Pearland, Texas. These incentives are
provided by the PEDC and Texas Enterprise Fund and total $6,000
if all specified employment levels are attained and maintained.
The incentives are subject to partial or full repayment over a
five year period if the Company becomes in default of the
agreement, which is the reduction in the Company’s work
force, after the first year of operation, resulting in the
Company having fewer than 25 employees at the facility for
more than 120 consecutive days.
The agreement includes the Company leasing a production facility
from the PEDC. The lease commences on April 1, 2010 and is
for a ten year period. The lease requires annual base rent of
$416 in years one through five and $460 in years 6-10. The lease
also requires the Company to provide for adequate liability
insurance and real estate taxes related to the facility.
The Company has performed an evaluation of subsequent events
through September 28, 2009, which is the date the financial
statements were issued.
F-30
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
|
|
Item 9A(T).
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer,
referred to collectively herein as the Certifying Officers, are
responsible for establishing and maintaining our disclosure
controls and procedures. The Certifying Officers have reviewed
and evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in
Rules 240.13a-15(e)
and
15d-15(e)
promulgated under the Exchange Act) as of June 30, 2009.
Based on that review and evaluation, which included inquiries
made to certain other employees of the Company, the Certifying
Officers have concluded that, as of the end of the period
covered by this Annual Report on
Form 10-K,
the Company’s disclosure controls and procedures, as
designed and implemented, are effective in ensuring that
information relating to the Company required to be disclosed in
the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commission’s rules and forms, including ensuring that such
information is accumulated and communicated to the
Company’s management, including the Chief Executive Officer
and the Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Internal
Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, also
referred to herein as ICFR, as defined in
Rule 13a-15
and
15d-15
under the Exchange Act. Our internal control over financial
reporting has been designed to provide reasonable assurance to
our management and board of directors regarding the preparation
and fair presentation of published financial statements.
Internal control over financial reporting is promulgated under
the Exchange Act as a process designed by, or under the
supervision of, our principal executive and principal financial
officers and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles and includes those
policies and procedures that:
|
|
|
|
|
|
•
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and dispositions
of our assets;
|
|
|
|
|
•
|
Provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and
|
|
|
|
|
•
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition or disposition of our
assets that could have a material effect on the financial
statements.
|
Internal control over financial reporting, no matter how well
designed, has inherent limitations and may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may
deteriorate. Therefore, even effective internal control over
financial reporting can only provide reasonable assurance with
respect to financial statement preparation and presentation.
This annual report on
Form 10-K
does not include a report of management’s assessment
regarding ICFR, or an attestation report of the Company’s
independent registered public accounting firm regarding ICFR,
based upon guidance from the Securities and Exchange Commission
and for the reasons explained below.
On February 25, 2009, Replidyne, Inc. completed its reverse
merger with Cardiovascular Systems, Inc., a Minnesota
corporation (“CSI-MN”), in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as
of November 3, 2008, by and among Replidyne, Responder
Merger Sub, Inc., a wholly-owned subsidiary of Replidyne
(“Merger Sub”), and CSI-MN (the “Merger
Agreement”). Pursuant to the Merger Agreement, Merger Sub
merged with and into CSI-MN, with CSI-MN continuing after the
merger as the surviving
57
corporation and a wholly owned subsidiary of Replidyne. At the
effective time of the merger, Replidyne changed its name to
Cardiovascular Systems, Inc. (“CSI”) and CSI-MN
changed its name to CSI Minnesota, Inc. Following the merger of
Merger Sub with CSI-MN, CSI-MN merged with and into CSI, with
CSI continuing after the merger as the surviving corporation.
These transactions are referred to herein as the
“merger.” The following were certain material effects
of the merger:
|
|
|
|
|
|
•
|
Immediately following the merger, our executive management team
was composed entirely of CSI-MN’s executive management team
prior to the merger and did not include any of Replidyne’s
executive officers or other employees.
|
|
|
|
|
•
|
The merger did not affect the operation of CSI-MN’s
business, other than by providing additional funds, and we do
not utilize any aspects of Replidyne’s former business.
|
|
|
|
|
•
|
We assumed CSI-MN’s fiscal year, which ends on June 30 of
each year, while Replidyne’s fiscal year ended on December
31 of each year.
|
|
|
|
|
•
|
The merger has been treated as an acquisition of the net assets
of Replidyne by CSI-MN in accordance with U.S. generally
accepted accounting principles and the merger was accounted for
as a reverse merger and a recapitalization. CSI-MN is considered
to have acquired Replidyne in the merger.
|
|
|
|
|
•
|
Our financial statements after the merger reflect the historical
results of CSI-MN before the merger and do not include the
historical financial results of Replidyne before the completion
of the merger.
|
|
|
|
|
•
|
The merger resulted in a complete change of our ICFR environment
from that of Replidyne to that of
CSI-MN.
|
We believe that it was impracticable for our management to
complete an assessment of ICFR with respect to CSI-MN’s
systems and business between the closing date of the merger and
the end of our fiscal year on June 30, for the following
reasons:
|
|
|
|
|
|
•
|
Prior to consummation of the merger, CSI-MN management has not
previously conducted an ICFR assessment under the Securities and
Exchange Commission’s standards, nor had CSI-MN undergone
an ICFR audit in accordance with Section 404 of the
Sarbanes-Oxley Act and the Securities and Exchange
Commission’s rules. In the absence of the merger, CSI-MN
would not have been required to include a management’s
assessment of ICFR until its second annual report. Consistent
with Securities and Exchange Commission guidance regarding the
transition period granted for newly public companies, it would
be an additional burden for our management to perform an
assessment of ICFR as part of the process to prepare its first
annual report.
|
|
|
|
|
•
|
The merger closed on February 25, 2009 and our fiscal year
ended June 30, 2009, which would have provided management
with approximately four months to perform the ICFR assessment.
Management would have been required to divert substantial
resources to conduct an ICFR assessment for this
Form 10-K,
which it had not planned to devote until the fiscal year ending
June 30, 2010, and it is doubtful that management would
have been able to sufficiently complete the assessment in such
period.
|
|
|
|
|
•
|
The management of the Company completely changed from the
management of Replidyne to the management of CSI-MN.
|
|
|
|
|
•
|
CSI had over 230 employees at the time of the merger, in
comparison to Replidyne’s three employees at the time. As a
result, business- and personnel-related activities and processes
substantially increased compared to Replidyne’s operations
given the size of CSI-MN’s business and number of
employees. Thus, the overall amount of work to perform an ICFR
assessment would likely have been substantial and
time-consuming, as compared to an ICFR assessment of Replidyne,
the sole business activity of which as of the closing of the
merger was liquidation through the merger.
|
|
|
|
|
•
|
Replidyne’s financial accounting systems were phased out
and removed from use shortly after the closing of the merger,
and we exclusively use CSI-MN’s financial accounting
systems.
|
|
|
|
|
•
|
CSI-MN’s business was significant relative to
Replidyne’s business at the time of the merger. Replidyne
had no revenue and its operating expenses were directed
primarily to research and development, which efforts
|
58
|
|
|
|
|
|
|
Replidyne ceased entirely by August 2008, while CSI-MN had
revenues from the sale of the Diamondback 360° and related
costs of good sold and substantially more operating expenses
expended for selling and marketing efforts. In addition,
Replidyne’s assets consisted primarily of cash and cash
equivalents and short term investments, while CSI-MN had
accounts receivable and inventories, representing its ongoing
business.
|
We also believe that including a management’s report on
ICFR relating to Replidyne’s business and systems in this
Form 10-K
would not be meaningful and would potentially be misleading.
Replidyne did not have any revenue or significant operations for
the period beginning July 1, 2008 through the closing of
the merger, and there have been no continuing operations of
Replidyne after the closing of the merger. Furthermore, on
February 24, 2009, Replidyne filed a
Form 10-K
for the fiscal year ended December 31, 2008, which included
Replidyne management’s assessment of Replidyne’s ICFR
for that period. The only operations of Replidyne between
January 1, 2009 and the closing of the merger were to take
actions necessary to consummate the merger and file its
Form 10-K.
Accordingly, at the time of filing of its
Form 10-K,
Replidyne provided an ICFR assessment for its last complete
fiscal year, and there were no meaningful operations or
financial activity during the approximately two-month period
before the closing of the merger that would be relevant to our
stockholders. Furthermore, our current management would be
required to perform the assessment of Replidyne’s ICFR for
that period, and those individuals would not be in a position to
do so without substantial efforts. Finally, as our financial
statements do not include the historical financial results of
Replidyne before completion of the merger, an assessment of
Replidyne’s ICFR by our management in this
Form 10-K
would not only have little meaning to a stockholder, but it
would also be potentially misleading because it would not relate
in any way to our business or financial statements for the
fiscal year ended June 30, 2009.
We are in the process of preparing to issue a report of
management’s assessment regarding ICFR in our next
Form 10-K.
We have taken steps internally toward formalizing and improving
our ICFR, and we have engaged an outside consulting firm to
assist with formalizing our control documentation and
administering test plans relating to our ICFR. We expect that
interim testing will occur before the end of calendar 2009, with
continued testing late in fiscal 2010, and that we will be in a
position to issue the required report in the
Form 10-K
for the fiscal year ending June 30, 2010.
This Annual Report on
Form 10-K
does not include an attestation report of the Company’s
independent registered public accounting firm regarding ICFR
pursuant to temporary rules of the Securities and Exchange
Commission.
Changes
in Internal Control Over Financial Reporting
As noted above, on February 25, 2009, we completed the
transactions contemplated by the Merger Agreement. As of the
closing of the merger, the Company’s accounting and
financial personnel, processes and systems were replaced by
those of CSI-MN that existed before the merger, and the
Company’s system of internal controls was replaced by
CSI-MN’s pre-merger system of internal controls. There were
no changes in the internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) of the Company during the three months
ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
|
|
Item 9B.
|
Other
Information.
|
None.
59
PART III
|
|
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Other than the information included in this
Form 10-K
under the heading “Executive Officers of the
Registrant,” which is set forth at the end of
Part I, the information required by Item 10 is
incorporated by reference to the sections labeled “Election
of Directors,” “Information Regarding the Board of
Directors and Corporate Governance” and
“Section 16(a) Beneficial Ownership Reporting
Compliance,” all of which appear in our definitive proxy
statement for our 2009 Annual Meeting.
|
|
|
|
Item 11.
|
Executive
Compensation.
|
The information required by Item 11 is incorporated herein
by reference to the sections entitled “Executive
Compensation,” “Director Compensation,” and
“Compensation Committee,” all of which appear in our
definitive proxy statement for our 2009 Annual Meeting.
|
|
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by Item 12 is incorporated herein
by reference to the sections entitled “Principal
Stockholders” and “Equity Compensation Plan
Information,” which appear in our definitive proxy
statement for our 2009 Annual Meeting.
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by Item 13 is incorporated herein
by reference to the sections entitled “Information
Regarding the Board of Directors and Corporate
Governance — Independence of the Board of
Directors” and “Transactions With Related
Persons,” which appear in our definitive proxy statement
for our 2009 Annual Meeting.
|
|
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by Item 14 is incorporated herein
by reference to the section entitled “Principal Accountant
Fees and Services,” which appears in our definitive proxy
statement for our 2009 Annual Meeting.
PART IV
|
|
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) Documents filed as part of this report.
(1) Financial Statements. The following financial
statements are included in Part II, Item 8 of this
Annual Report on
Form 10-K:
|
|
|
|
|
|
•
|
Report of Independent Public Registered Accounting Firm
|
|
|
|
|
•
|
Consolidated Balance Sheets as of June 30, 2009 and 2008
|
|
|
|
|
•
|
Consolidated Statements of Operations for the years ended
June 30, 2009, 2008 and 2007
|
|
|
|
|
•
|
Consolidated Statements of Stockholders’ Equity
(Deficiency) and Comprehensive (Loss) Income for the years ended
June 30, 2009, 2008 and 2007
|
|
|
|
|
•
|
Consolidated Statements of Cash Flows for the years ended
June 30, 2009, 2008 and 2007
|
|
|
|
|
•
|
Notes to Consolidated Financial Statements
|
(2) Financial Statement Schedules.
|
|
|
|
|
|
•
|
All financial statement schedules have been omitted, because
they are not applicable, are not required, or the information is
included in the Financial Statements or Notes thereto
|
(3) Exhibits. See “Exhibit Index to
Form 10-K”
immediately following the signature page of this
Form 10-K
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CARDIOVASCULAR SYSTEMS, INC.
David L. Martin
President and Chief Executive Officer
Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Each person whose signature appears below constitutes and
appoints David L. Martin and Laurence L. Betterley as the
undersigned’s true and lawful attorneys-in fact and agents,
each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the
undersigned’s name, place and stead, in any and all
amendments to this Annual Report on
Form 10-K
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granted unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby
ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/ David
L. Martin
David
L. Martin
|
|
President, Chief Executive Officer and Director (principal
executive officer)
|
|
September 28, 2009
|
|
|
|
|
|
|
|
/s/ Laurence
L. Betterley
Laurence
L. Betterley
|
|
Chief Financial Officer (principal financial and accounting
officer)
|
|
September 28, 2009
|
|
|
|
|
|
|
|
/s/ Edward
Brown
Edward
Brown
|
|
Director
|
|
September 28, 2009
|
|
|
|
|
|
|
|
/s/ Brent
G. Blackey
Brent
G. Blackey
|
|
Director
|
|
September 28, 2009
|
|
|
|
|
|
|
|
John
H. Friedman
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/ Geoffrey
O. Hartzler
Geoffrey
O. Hartzler
|
|
Director
|
|
September 28, 2009
|
|
|
|
|
|
|
|
Roger
J. Howe
|
|
Director
|
|
|
61
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
Augustine
Lawlor
|
|
Director
|
|
|
|
|
|
|
|
|
|
/s/ Glen
D. Nelson
Glen
D. Nelson
|
|
Director
|
|
September 28, 2009
|
|
|
|
|
|
|
|
/s/ Gary
M. Petrucci
Gary
M. Petrucci
|
|
Director
|
|
September 28, 2009
|
62
EXHIBIT INDEX
CARDIOVASCULAR
SYSTEMS, INC.
FORM 10-K
|
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
Description
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation, as amended.(7)
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws.(2)
|
|
|
4
|
.1
|
|
Specimen Common Stock Certificate.(2)
|
|
|
4
|
.2
|
|
Form of Cardiovascular Systems, Inc. common stock warrant issued
to former preferred stockholders.(2)
|
|
|
4
|
.3
|
|
Registration Rights Agreement by and among Cardiovascular
Systems, Inc. and certain of its stockholders, dated as of
March 16, 2009.(1)
|
|
|
4
|
.4
|
|
Termination of Fourth Amended and Restated Stockholders
Agreement by and among Cardiovascular Systems, Inc. and certain
of its stockholders, dated as of March 16, 2009.(1)
|
|
|
10
|
.1
|
|
Client’s Agreement, dated March 24, 2008, by and
between Cardiovascular Systems, Inc., a Minnesota corporation,
and UBS Financial Services Inc.(3)
|
|
|
10
|
.2
|
|
Borrower Agreement and Credit Line Agreement, dated
July 24, 2008, by and between Cardiovascular Systems, Inc.,
a Minnesota corporation, and UBS Bank USA.(3)
|
|
|
10
|
.3
|
|
Loan and Security Agreement, dated September 12, 2008, by
and between Cardiovascular Systems, Inc., a Minnesota
corporation, and Silicon Valley Bank.(4)
|
|
|
10
|
.4
|
|
Assumption Agreement and First Amendment to Loan and Security
Agreement, dated as of February 25, 2009, by and between
Silicon Valley Bank, Cardiovascular Systems, Inc. and CSI
Minnesota, Inc.(7)
|
|
|
10
|
.5
|
|
Second Amendment to Loan and Security Agreement between Silicon
Valley Bank and Cardiovascular Systems, Inc., dated
April 30, 2009.(9)
|
|
|
10
|
.6
|
|
Amended and Restated Warrant to Purchase Stock, dated
February 25, 2009, issued by Cardiovascular Systems, Inc.
to Silicon Valley Bank.(7)
|
|
|
10
|
.7
|
|
Form of Warrant to Guarantors, dated September 12, 2008.(4)
|
|
|
10
|
.8
|
|
Lease, dated September 26, 2005, by and between
Cardiovascular Systems, Inc., a Minnesota corporation, and
Industrial Equities Group LLC.(3)
|
|
|
10
|
.9
|
|
First Amendment to the Lease, dated February 20, 2007, by
and between Cardiovascular Systems, Inc., a Minnesota
corporation, and Industrial Equities Group LLC.(3)
|
|
|
10
|
.10
|
|
Second Amendment to the Lease, dated March 9, 2007, by and
between Cardiovascular Systems, Inc., a Minnesota corporation,
and Industrial Equities Group LLC.(3)
|
|
|
10
|
.11
|
|
Third Amendment to the Lease, dated September 26, 2007, by
and between Cardiovascular Systems, Inc., a Minnesota
corporation, and Industrial Equities Group LLC.(3)
|
|
|
10
|
.12
|
|
Lease Agreement, dated October 25, 2005, by and between the
Registrant and Triumph 1450 LLC.(8)
|
|
|
10
|
.13
|
|
Assumption of Lease, dated March 23, 2009 by Cardiovascular
Systems, Inc.(7)
|
|
|
10
|
.14†
|
|
Employment Agreement, dated December 19, 2006, by and
between Cardiovascular Systems, Inc., a Minnesota corporation,
and David L. Martin.(3)
|
|
|
10
|
.15†
|
|
Employment Agreement, dated April 14, 2008, by and between
Cardiovascular Systems, Inc., a Minnesota corporation, and
Laurence L. Betterley.(3)
|
|
|
10
|
.16†
|
|
Form of Standard Employment Agreement.(3)
|
|
|
10
|
.17†
|
|
Summary of Fiscal Year 2009 Executive Officer Base Salaries.(7)
|
|
|
10
|
.18†
|
|
Summary of Fiscal Year 2009 Executive Officer Annual Cash
Incentive Compensation.(7)
|
|
|
10
|
.19†
|
|
Form of Director and Officer Indemnification Agreement.(7)
|
|
|
10
|
.20†
|
|
Cardiovascular Systems, Inc. Amended and Restated 2007 Equity
Incentive Plan.(5)
|
|
|
10
|
.21†
|
|
Form of Incentive Stock Option Agreement under the Amended and
Restated 2007 Equity Incentive Plan.(7)
|
63
|
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
Description
|
|
|
|
|
10
|
.22†
|
|
Form of Non-Qualified Stock Option Agreement under the Amended
and Restated 2007 Equity Incentive Plan.(7)
|
|
|
10
|
.23†
|
|
Form of Restricted Stock Agreement under the Amended and
Restated 2007 Equity Incentive Plan.(7)
|
|
|
10
|
.24†
|
|
Form of Restricted Stock Unit Agreement under the Amended and
Restated 2007 Equity Incentive Plan.(7)
|
|
|
10
|
.25†
|
|
Form of Performance Share Award under the Amended and Restated
2007 Equity Incentive Plan.(7)
|
|
|
10
|
.26†
|
|
Form of Performance Unit Award under the Amended and Restated
2007 Equity Incentive Plan.(7)
|
|
|
10
|
.27†
|
|
Form of Stock Appreciation Rights Agreement under the Amended
and Restated 2007 Equity Incentive Plan.(7)
|
|
|
10
|
.28†
|
|
2003 Stock Option Plan of Cardiovascular Systems, Inc., a
Minnesota corporation.(3)
|
|
|
10
|
.29†
|
|
Form of Incentive Stock Option Agreement under the 2003 Stock
Option Plan of Cardiovascular Systems, Inc., a Minnesota
corporation.(3)
|
|
|
10
|
.30†
|
|
Form of Nonqualified Stock Option Agreement under the 2003 Stock
Option Plan of Cardiovascular Systems, Inc., a Minnesota
corporation.(3)
|
|
|
10
|
.31†
|
|
1991 Stock Option Plan of Cardiovascular Systems, Inc., a
Minnesota corporation.(3)
|
|
|
10
|
.32†
|
|
Form of Non-Qualified Stock Option Agreement outside the 1991
Stock Option Plan of Cardiovascular Systems, Inc., a Minnesota
corporation.(3)
|
|
|
10
|
.33†
|
|
Cardiovascular Systems, Inc. Amended and Restated 2006 Employee
Stock Purchase Plan.(6)
|
|
|
10
|
.34†*
|
|
Director Compensation Arrangements.
|
|
|
10
|
.35*
|
|
Corporate Job Creation Agreement between Pearland Economic
Development Corporation and Cardiovascular Systems, Inc., dated
June 17, 2009.
|
|
|
10
|
.36*
|
|
Build-To-Suit
Lease Agreement between Pearland Economic Development
Corporation and Cardiovascular Systems, Inc., dated
September 9, 2009.
|
|
|
10
|
.37*
|
|
Letter Agreement between Silicon Valley Bank and Cardiovascular
Systems, Inc., dated September 9, 2009.
|
|
|
14
|
.1*
|
|
Code of Ethics.
|
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
23
|
.2*
|
|
Consent of ValueKnowledge LLC.
|
|
|
24
|
.1*
|
|
Power of Attorney (included on the signature page).
|
|
|
31
|
.1*
|
|
Certification of principal executive officer required by
Rule 13a-14(a).
|
|
|
31
|
.2*
|
|
Certification of principal financial officer required by
Rule 13a-14(a).
|
|
|
32
|
.1*
|
|
Section 1350 Certification.
|
|
|
|
|
|
*
|
|
Filed herewith.
|
|
|
|
†
|
|
Compensatory plan or agreement.
|
|
|
|
(1)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Current Report on
Form 8-K
filed on March 18, 2009.
|
|
|
|
(2)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Current Report on
Form 8-K
filed on March 3, 2009.
|
|
|
|
(3)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from CSI Minnesota, Inc.’s Registration
Statement on
Form S-1,
File
No. 333-148798.
|
|
|
|
(4)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from CSI Minnesota, Inc.’s Registration
Statement on Form 10, File
No. 000-53478.
|
64
|
|
|
|
|
(5)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Registration
Statement on
Form S-8,
File
No. 333-158755.
|
|
|
|
(6)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Registration
Statement on
Form S-8,
File
No. 333-158987.
|
|
|
|
(7)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2009.
|
|
|
|
(8)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Registration
Statement on
Form S-1,
File
No. 333-133021.
|
|
|
|
(9)
|
|
Previously filed with the SEC as an Exhibit to and incorporated
herein by reference from the Company’s Current Report on
Form 8-K
filed on May 4, 2009.
|
65
Exhibit 10.36
Execution Copy
BUILD-TO-SUIT LEASE AGREEMENT
BY AND BETWEEN
PEARLAND ECONOMIC DEVELOPMENT CORPORATION
(“LANDLORD”)
AND
CARDIOVASCULAR SYSTEMS, INC.
(“TENANT”)
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
SEC. 1 LEASED PREMISES
|
|
|
1
|
|
|
SEC. 2 TERM
|
|
|
1
|
|
|
SEC. 3 USE
|
|
|
2
|
|
|
SEC. 4 SECURITY DEPOSIT:
|
|
|
2
|
|
|
SEC. 5 BASE RENT:
|
|
|
2
|
|
|
SEC. 6 ADDITIONAL RENT:
|
|
|
3
|
|
|
SEC. 7 TAXES:
|
|
|
4
|
|
|
SEC. 8 MAINTENANCE AND REPAIRS; UTILITIES:
|
|
|
6
|
|
|
SEC. 9 QUIET ENJOYMENT; RIGHTS RESERVED:
|
|
|
7
|
|
|
SEC. 10 ALTERATIONS:
|
|
|
8
|
|
|
SEC. 11 FURNITURE, FIXTURES AND PERSONAL PROPERTY:
|
|
|
9
|
|
|
SEC. 12 SUBLETTING AND ASSIGNMENT:
|
|
|
10
|
|
|
SEC. 13 FIRE AND CASUALTY:
|
|
|
11
|
|
|
SEC. 14 CONDEMNATION:
|
|
|
12
|
|
|
SEC. 15 DEFAULT BY TENANT:
|
|
|
13
|
|
|
SEC. 16 REMEDIES OF LANDLORD:
|
|
|
13
|
|
|
SEC. 17 WAIVER OF LANDLORD’S LIEN:
|
|
|
15
|
|
|
SEC. 18 NON-WAIVER:
|
|
|
15
|
|
|
SEC. 19 COMPLIANCE WITH LAWS:
|
|
|
15
|
|
|
SEC. 20 ASSIGNMENT BY LANDLORD; LIMITATION OF LANDLORD’S LIABILITY:
|
|
|
15
|
|
|
SEC. 21 SEVERABILITY:
|
|
|
15
|
|
|
SEC. 22 SIGNS:
|
|
|
16
|
|
|
SEC. 23 SUCCESSORS AND ASSIGNS:
|
|
|
16
|
|
|
SEC. 24 SUBORDINATION; NONDISTURBANCE:
|
|
|
16
|
|
|
SEC. 25 RESERVED:
|
|
|
17
|
|
|
SEC. 26 HOLDING OVER:
|
|
|
17
|
|
|
SEC. 27 INDEPENDENT OBLIGATION TO PAY RENT:
|
|
|
17
|
|
|
SEC. 28 RELEASE AND WAIVER: INDEMNITY:
|
|
|
18
|
|
|
SEC. 29 INSURANCE:
|
|
|
18
|
|
|
SEC. 30 ENTIRE AGREEMENT:
|
|
|
19
|
|
|
SEC. 31 NOTICES:
|
|
|
19
|
|
|
SEC. 32 MEMORANDUM OF COMMENCEMENT DATE:
|
|
|
19
|
|
|
SEC. 33 INSPECTION:
|
|
|
19
|
|
|
SEC. 34 BROKERS:
|
|
|
19
|
|
|
SEC. 35 ESTOPPEL CERTIFICATES:
|
|
|
19
|
|
|
SEC. 36 ANTI-TERRORISM LAWS:
|
|
|
20
|
|
|
SEC. 37 BANKRUPTCY:
|
|
|
20
|
|
|
SEC. 38 RESERVED:
|
|
|
21
|
|
|
SEC. 39 HAZARDOUS SUBSTANCES:
|
|
|
21
|
|
|
SEC. 40 NO MONEY DAMAGES FOR FAILURE TO CONSENT; WAIVER OF CERTAIN DAMAGES:
|
|
|
22
|
|
|
SEC. 41 ACKNOWLEDGMENT OF NON-APPLICABILITY OF DTPA:
|
|
|
22
|
|
|
SEC. 42 ATTORNEYS’ FEES:
|
|
|
22
|
|
|
SEC. 43 AUTHORITY OF TENANT:
|
|
|
22
|
|
|
SEC. 44 INABILITY TO PERFORM:
|
|
|
22
|
|
|
SEC. 45 JOINT AND SEVERAL TENANCY:
|
|
|
23
|
|
|
SEC. 46 EXECUTION OF THIS LEASE AGREEMENT:
|
|
|
23
|
|
|
SEC. 47 WAIVER OF TRIAL BY JURY; COUNTERCLAIM:
|
|
|
23
|
|
|
SEC. 48 CALCULATION OF TIME PERIODS:
|
|
|
23
|
|
|
SEC. 49 RENEWAL OPTIONS:
|
|
|
23
|
|
|
SEC. 50 PREVAILING MARKET RENTAL RATE DETERMINATION:
|
|
|
24
|
|
|
SEC. 51 PURCHASE OPTION:
|
|
|
25
|
|
|
SEC. 52 FIRST EXPANSION OPTION:
|
|
|
26
|
|
-i-
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
SEC. 53 SECOND EXPANSION OPTION:
|
|
|
27
|
|
|
SEC. 54 TENANT’S RIGHT OF FIRST REFUSAL:
|
|
|
28
|
|
|
SEC. 55 TENANT’S SELF-HELP REMEDY:
|
|
|
29
|
|
|
SEC. 56 CONSTRUCTION OF IMPROVEMENTS:
|
|
|
31
|
|
|
SEC. 57 PERMITTED ENCUMBRANCES:
|
|
|
32
|
|
|
SEC. 58 RELATIONSHIP OF THE PARTIES; NO PARTNERSHIP
|
|
|
32
|
|
|
SEC. 59 EXHIBITS:
|
|
|
32
|
|
EXHIBITS
:
EXHIBIT A — DEPICTION OF THE LAND
EXHIBIT B — ACCEPTANCE OF PREMISES MEMORANDUM
EXHIBIT C — TENANT’S ESTOPPEL CERTIFICATE
EXHIBIT D — IMPROVEMENTS
EXHIBIT E — INSURANCE REQUIREMENTS
EXHIBIT F — AMENDMENT TO LEASE AGREEMENT
EXHIBIT G — ARBITRATION PROCEDURES
EXHIBIT H — INTENTIONALLY DELETED
EXHIBIT I — DEPICTION OF FIRST EXPANSION OPTION LAND AND SECOND EXPANSION OPTION LAND
EXHIBIT J — BUILDING PLANS AND CONSTRUCTION DRAWINGS
EXHIBIT K—PERMITTED ENCUMBRANCES
-ii-
BUILD-TO-SUIT LEASE AGREEMENT
This Build-To-Suit Lease Agreement (this
“Lease Agreement”
) is made and entered into as of
the Effective Date (as defined on the signature page attached hereto) by and between the Pearland
Economic Development Corporation, a corporation operating under Chapter 505 of the Texas Local
Government Code, hereinafter referred to as
“Landlord”
, and Cardiovascular Systems, Inc., a
Delaware corporation, hereinafter referred to as
“Tenant”
:
WITNESSETH:
SEC. 1 LEASED PREMISES
In consideration of the mutual covenants as set forth herein, Landlord and
Tenant hereby agree as follows:
A. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, for the rental
and on the terms and conditions hereinafter set forth, the following described property
(collectively, the
“Leased Premises”
): (i) the tract of land in Pearland, Texas (the
“Land”
), more
particularly depicted on
Exhibit A
attached hereto, together with any and all easements,
rights and appurtenances appertaining to same, and (ii) that certain building (the
“Building”
) to
contain approximately forty-six thousand (46,000) square feet and to be constructed by Landlord on
the Land in accordance with the terms of this Lease Agreement. For greater certainty, Landlord and
Tenant hereby agree that the term “Leased Premises” shall include, but not be limited to, the
Improvements (as defined in
Exhibit D
).
B. Landlord, at Landlord’s expense, will construct the Improvements in accordance with the
terms and provisions of this Lease Agreement and
Exhibit D
attached hereto.
SEC. 2 TERM
A. The term of this Lease Agreement (the
“Term”
) shall commence on the date, subject to the
terms of
Exhibit D
, Section 3 of this Lease Agreement, that is the later of (i) the date
of Substantial Completion (as defined in
Exhibit D
), or (ii) April 1, 2010 or such earlier
date as Tenant may designate upon no less than one hundred five (105) days’ written notice to
Landlord (such date being herein referred to as the
“Commencement Date”
), and, unless sooner
terminated or renewed and extended in accordance with the terms and conditions set forth herein,
shall expire at 11:59 p.m. on the day preceding the tenth (10th) anniversary of the Rent
Commencement Date (as defined in
Schedule 1
) (the
“Expiration Date”
).
B. Notwithstanding the terms of this Section 2 or anything to the contrary contained in this
Lease Agreement, Landlord shall not be obligated to commence construction of the interior build-out
portion of the Improvements (the
“Build-out”
) until Landlord receives written notice (the
“Build-out Notice”
) from Tenant to commence construction of the Build-out and that Tenant requests
Substantial Completion to occur on a date on or prior to April 1, 2010, which notice shall be
delivered during the period between the Effective Date and
December 5, 2009.
In the event Tenant
does not deliver to Landlord the Build-out Notice on or before December 5, 2009, Landlord shall
deliver written notice (the
“Warning Notice”
) to Tenant of such failure. If Tenant does not deliver
to Landlord the Build-out Notice within five (5) days after receipt of the Warning Notice, Landlord
shall have the right to terminate this Lease Agreement, and as pursuant to terms that expressly
survive the expiration or earlier termination of this Lease Agreement, the parties shall have not
further rights or obligations hereunder. In the event Landlord terminates this Lease Agreement
pursuant to the preceding sentence, Tenant shall, within five (5) business days after the date of
such termination pay to Landlord as liquidated damages an amount equal to the sum of $69,000 and
all amounts paid to Tenant by Landlord prior to such date pursuant to the terms of that certain
Corporate Job Creation Agreement of even date herewith by and between Landlord and Tenant (the
“Termination Fee”).
Landlord and Tenant agree that because of the difficulty or impossibility of
determining Landlord’s actual damages by way of loss of the costs of construction and financing,
the costs of anticipated rent from the Leased Premises and the cost of re-bidding the Leased
Premises to secure a new tenant, the difficulties of proof of loss and the inconvenience or
nonfeasibility of Landlord otherwise having a remedy for such termination, the Termination Fee is a
reasonable amount to be paid by Tenant for the failure to satisfy the conditions set forth in this
Section 2. Further and without limiting the foregoing, Tenant hereby waives any right that it may
have to challenge the amount of the Termination Fee or its appropriateness as an estimate of
Landlord’s damages as a result of a termination of
this Lease Agreement. Landlord’s right to receive the Termination Fee shall be Landlord’s sole and
exclusive remedy as a result of the termination of this Lease pursuant to this Section 2.B. but
shall not limit Landlord’s remedies with respect to the other provisions which expressly survive
termination of this Lease Agreement. The terms and provisions of this Section 2.B. shall survive
the expiration or earlier termination of this Lease Agreement.
C. This Lease Agreement shall be effective as of the Effective Date and in the event Tenant
or its
agents, employees or contractors enters the Leased Premises prior to the Commencement Date in
accordance with the terms of
Exhibit D
,
Section 4 of this Lease Agreement, such entry shall
be subject to the terms and conditions of this Lease Agreement, except that the Rent (as
hereinafter defined) shall not commence to accrue as a result of such entry until the Rent
Commencement Date.
SEC. 3
USE:
The Leased Premises shall be used and occupied by Tenant (and any of its permitted
subtenants and assignees) solely for the engineering, design, storage, warehouse, manufacturing,
assembly, distribution and sale of medical devices produced by Tenant or its affiliates and for all
related and associated purposes. Tenant shall not use the Leased Premises for any other uses
without Landlord’s prior written consent, which consent may be withheld in Landlord’s sole and
absolute discretion. Notwithstanding anything contained in this Lease Agreement to the contrary,
but subject to Landlord’s representations and warranties set forth in Section 9.C., Tenant will not
use, occupy, or permit the use or occupancy of the Leased Premises for any purpose which is,
directly or indirectly, forbidden by federal, state or local laws, rules, statutes, regulations,
court order or decision, governmental directives, restrictive covenants, ordinances, or
governmental or municipal regulations or orders
(
“Laws”
) or which may be dangerous to life, limb or
property, or permit the maintenance of any public or private nuisance.
SEC. 4 SECURITY DEPOSIT:
$38,333.33 payable on the Effective Date. Upon the occurrence of any
Event of Default (as hereinafter defined) by Tenant, Landlord may, from time to time, without
prejudice to any other remedy, use the security deposit paid to Landlord by Tenant as herein
provided to the extent necessary to make good any arrears of Rent (as hereinafter defined) and any
other damage, injury, expense or liability caused to Landlord by such Event of Default. Following
any such application of the security deposit, Tenant shall pay to Landlord on demand the amount so
applied in order to restore the security deposit to the amount thereof existing prior to such
application. Any remaining balance of the security deposit shall be returned by Landlord to Tenant
within sixty (60) days after the termination of this Lease Agreement and after Tenant provides
written notice to Landlord of Tenant’s forwarding address; provided, however, Landlord shall have
the right to retain and expend such remaining balance (a) to reimburse Landlord for any and all
rentals or other sums due hereunder that have not been paid in full by Tenant and/or (b) for
cleaning and repairing the Leased Premises if Tenant shall fail to deliver same at the termination
of this Lease Agreement in the condition required under this Lease Agreement. Tenant shall not be
entitled to any interest on the security deposit. Such security deposit shall not be considered an
advance payment of rental or a measure of Landlord’s damages in case of an Event of Default by
Tenant. If Landlord assigns its interest in the Leased Premises during the Term hereof, Landlord
may assign the security deposit to the assignee, and so long as such assignee assumes all of
Landlord’s obligations under this Lease Agreement with respect to the security deposit thereafter
Landlord shall have no further liability for the return of such security deposit, and Tenant
agrees to look solely to the new Landlord for the return of such security deposit. The provisions
of the preceding sentence shall apply to every transfer or assignment made of the security deposit
to a new Landlord. Tenant agrees that it will not assign or encumber, or attempt to assign or
encumber, the monies deposited hereunder as security, and that Landlord and its successors and
assigns shall not be bound by any such actual or attempted assignment or encumbrance. Regardless
of any assignment of this Lease Agreement by Tenant, Landlord may return the security deposit to
the original Tenant, in the absence of evidence satisfactory to Landlord of an assignment of the
right to receive such security deposit or any part of the balance thereof.
SEC. 5 BASE RENT:
A. Tenant shall pay to Landlord in advance, without demand, deduction or set off, except as
provided in
Section 55
and
Section 14
of this
Lease Agreement, a sum (the
“Base Rent”
) equal to
the amounts for the corresponding intervals as indicated on
Schedule 1
attached hereto.
B. Installments of Base Rent shall be due monthly, in advance, on the first day of each
calendar month following the Rent Commencement Date. Base Rent for the month in which the Rent
Commencement Date
2
occurs shall be due and payable on the Rent Commencement Date and Base Rent for any partial month
shall be prorated.
C. In addition to the foregoing Base Rent and the Additional Rent (as hereinafter defined)
to be paid
by Tenant pursuant to Section 6 below, Tenant agrees to pay to Landlord as Additional Rent all
other sums payable by Tenant to Landlord hereunder, within ten (10) days after Landlord renders a
statement therefor to Tenant. All Rent (as hereinafter defined) shall bear interest from five (5)
days after the date due until paid at the greater of (i) two percent (2%) above the “prime rate”
per annum of the JPMorgan Chase Bank, a New York banking corporation or its successor or such
other “money center” as Landlord and Tenant may agree from time to time
(“Chase”)
in effect on
said due date (or if the “prime rate” be discontinued, the base reference rate then being used by
Chase to define the rate of interest charged to commercial borrowers) or (ii) twelve percent (12%)
per annum; provided, however, in no event shall the rate of interest hereunder exceed the maximum
non-usurious rate of interest (hereinafter called the
“Maximum Rate”)
permitted by applicable
Laws. In addition thereto, if Tenant has failed to pay Rent within five (5) days after the date
when due, then, Tenant shall pay Landlord a
“Late Charge”
of one percent (1%) of the overdue
amount. Notwithstanding the foregoing, with respect to Tenant’s first late payment of Rent in a
consecutive twelve (12) month period, Tenant shall not be required to pay the Late Charge with
respect to such late payment. Tenant agrees that the Late Charge is not a penalty, and will
compensate Landlord for costs not contemplated under this Lease Agreement that are impracticable
or extremely difficult to fix. Landlord’s acceptance of a Late Charge does not waive Tenant’s
default.
SEC. 6 ADDITIONAL RENT:
A. In addition to Base Rent, Tenant shall pay, as Additional Rent, the cost of the Commercial
General Liability Insurance that Landlord is required to maintain under
Exhibit E
of this
Lease Agreement relating to the Leased Premises and all charges for any services, goods or
materials furnished by Landlord at Tenant’s written request which are not required to be furnished
by Landlord under this Lease Agreement
(“Additional Rent”
and, together with Base Rent,
“Rent”)
. In
the event Landlord maintains a blanket policy of Commercial General Liability Insurance, Landlord
and Tenant agree that the costs therefor attributable to this Lease Agreement and to be
characterized as Additional Rent hereunder shall be determined on a pro rata basis among the
matters insured by such blanket policy. Notwithstanding the foregoing, during the periods in which
the Pearland Economic Development Corporation is the Landlord hereunder, the term
“Additional Rent”
shall not include the cost of Landlord’s Commercial General Liability Insurance.
B. Additional Rent under this Section 6 shall be payable by Tenant to Landlord in monthly
installments equal to 1/12th of Landlord’s estimate of the annual Additional Rent. The initial
monthly payments are based upon Landlord’s estimate of the Additional Rent for the year in
question, and shall be increased or decreased annually to reflect the projected actual Additional
Rent for that year. Within one hundred twenty (120) days after each calendar year or as soon
thereafter as is reasonably practicable, Landlord shall deliver to Tenant a statement setting
forth the actual Additional Rent for such year. If Tenant’s total payments in respect of
Additional Rent for any year are less than the actual Additional Rent for that year, Tenant shall
pay the difference to Landlord within ten (10) days after Landlord’s request therefor. If such
payments made by Tenant are more than such actual Additional Rent for that year, Landlord shall,
at Landlord’s option, either (i) credit such excess against Tenant’s next accruing Rent hereunder,
or (ii) repay such excess to Tenant within thirty (30) days. There shall be no duplication of
costs for reimbursements in calculating Additional Rent, and any excess retained by Landlord at
the end of the Term shall be refunded to Tenant within thirty (30) days after the end of the Term.
Upon request from Tenant, Landlord shall deliver to Tenant the invoice from Landlord’s insurance
carrier documenting the cost of the Commercial General Liability Insurance.
C. The first monthly installment (subject to proration, if any) of Additional Rent shall be
due on the Rent Commencement Date; thereafter, monthly installments of such Additional Rent shall
be due monthly, in advance, on the first day of each calendar month following the Rent
Commencement Date. In connection with the first monthly installment of Additional Rent, Landlord
shall provide to Tenant a written estimate of the Additional Rent that will be owed by Tenant, at
least ten (10) days prior to the Rent Commencement Date.
3
D. All payments and reimbursements required to be made by Tenant under this Lease Agreement
shall constitute
“Rent”
(herein so called) and shall be payable without demand, deduction or set
off, except as set forth in Section 55 and Section 14 of this Lease Agreement.
E. Landlord and Tenant hereby each acknowledge and agree that they are knowledgeable and
experienced in commercial transactions and further hereby acknowledge and agree that the
provisions of this Lease Agreement for determining Additional Rent and other charges are
commercially reasonable and valid even though such methods may not state precise mathematical
formulae for determining such Additional Rent.
ACCORDINGLY, TENANT HEREBY VOLUNTARILY AND
KNOWINGLY WAIVES ALL RIGHTS AND BENEFITS TO WHICH TENANT MAY BE ENTITLED UNDER SECTION 93.012 OF
THE TEXAS PROPERTY CODE, AS SUCH SECTION NOW EXISTS OR AS SAME MAY BE HEREAFTER AMENDED OR
SUCCEEDED.
Notwithstanding the foregoing, nothing set forth in this Section 6.E. shall be deemed
to waive Tenant’s right to confirm that the Additional Rent charged to Tenant pursuant to the
terms of Section 6.A. was calculated in accordance with the terms of Section 6.A.
SEC. 7 TAXES:
A. Prior to the Rent Commencement Date, Landlord shall pay and discharge of record any
delinquent Taxes (as hereinafter defined) owing with respect to periods prior to the Rent
Commencement Date. Tenant shall pay, at least thirty (30) days prior to delinquency, all taxes and
assessments and other governmental charges (whether federal, state, county or municipal and whether
they be by taxing districts or authorities presently taxing the Leased Premises or by others
subsequently created or otherwise) and any other taxes and improvement assessments due and payable
for the Leased Premises (excluding, however, the costs of any assessments (i) levied of pending as
of the Effective Date and (ii) levied after the Effective Date that were factored into the
determination of the amount of Base Rent payable under this Lease Agreement, so as to prevent
Tenant from paying the costs of such assessments as Base Rent and also paying such costs as
Additional Rent), or its operation or the revenues or rents received therefrom (whether directly or
indirectly through the use of a franchise, margin or other similar tax and whether or not such
taxes allow for the deduction of expenses in calculating the base amount on which the tax is
levied) but excluding, however, federal and state taxes on income sales, transfer, estate or other
similar tax in lieu of income, transfer or estate taxes (collectively, “
Taxes
”); provided, however,
that if at any time during the Term, new taxes, assessments, levies, impositions or charges are
imposed in lieu of amounts previously charged, or the present method of taxation or assessment
shall be so changed that the whole or any part of the taxes, assessments, levies, impositions or
charges now levied, assessed or imposed on real estate and the improvements thereof shall be
discontinued and as a substitute therefor, or in lieu of an increase to the tax rate thereof,
taxes, assessments, levies, impositions or charges shall be levied, assessed and/or imposed wholly
or partially as a capital levy or otherwise on the rents received from the Leased Premises or the
rents reserved herein or any part thereof (whether directly or indirectly through the use of a
franchise, margin or similar tax and whether or not such taxes allow for the deduction of expenses
in calculating the base amount on which the tax is levied), then such substitute or additional
taxes, assessments, levies, impositions or charges, to the extent so levied, assessed or imposed,
shall be deemed to be included within the term
“Taxes”
to the extent that such substitute or
additional tax would be payable if the Leased Premises were the only property of the Landlord
subject to such tax. For greater certainty, Landlord and Tenant agree that the term “Taxes” will
include all management district fees assessed against the Leased Premises. Notwithstanding the
foregoing or anything to the contrary contained herein, in the event that after the Effective Date
(i) new taxes, assessments, levies, impositions or charges are imposed on rents received from the
Leased Premises or the rents reserved herein or any part thereof (whether directly or indirectly
through the use of a franchise, margin or similar tax) and (ii) the Law levying such new tax,
assessment, levy, imposition or charges requires Landlord, as a landlord under a lease agreement,
to pay such new tax, assessment, levy, imposition or charge, then the term “Taxes” shall not
include such new tax, assessment, levy, imposition or charge, and Landlord shall be responsible
therefor.
B. From and after the Rent Commencement Date through the remainder of the Term, Tenant
shall pay, or cause to be paid, all such Taxes directly to the taxing authority or other payee
therefor. Such payment shall be completed at least thirty (30) days prior to the date on which
Taxes would become delinquent, subject to Section 7D. below. If any Taxes legally may be paid in
installments prior to delinquency, whether or not interest shall accrue on the unpaid balance
thereof, Tenant shall have the option to pay such Taxes in installments, and Tenant shall be
obligated to pay only such installments or portions thereof as shall be properly allocated to
periods within
4
the Term. Tenant shall furnish to Landlord, promptly upon receipt thereof, copies of all notices
of Taxes. At least thirty (30) days prior to the applicable due date for Taxes, Tenant shall
deliver to Landlord reasonable evidence of the payment thereof.
C. Notwithstanding anything to the contrary herein, (a) all Taxes with respect to the fiscal
year or tax year in which the Rent Commencement Date occurs shall be apportioned so that Tenant
shall pay only the portion of the Taxes that is applicable to the period after the Rent
Commencement Date and (b) all Taxes for the fiscal year or tax year in which the Expiration Date
occurs shall be apportioned so that Tenant shall pay only the portion of such Taxes that are
attributable to the period prior to the Expiration Date.
D. Tenant’s Right to Contest Taxes.
(i) Tenant shall have the right in its own name, and at its sole cost and expense,
to contest
the validity or amount, in whole or in part, of any Taxes, by appropriate proceedings
timely instituted in accordance with any protest procedures permitted by applicable
Governmental Authority (a “
Tax Proceeding
”);
provided
Tenant gives Landlord at least thirty
(30) days prior notice of its intention to contest and diligently prosecute such contest by
a Tax Proceeding and at all times effectively stays or prevents any non-judicial or
judicial sale of any part of the Leased Premises or the leasehold state created by this
Lease Agreement or any interest of Landlord in any of the foregoing, by reason of
non-payment of any Taxes. Tenant shall diligently pursue all such Tax Proceedings in good
faith. Further, Tenant shall, incident to any such Tax Proceeding, provide such bond or
other security as may be required by the applicable Governmental Authority. Tenant shall
indemnify, defend, and hold Landlord harmless from any and all such Taxes and all claims,
costs, fees, and expense related to any such Taxes or Tax Proceeding, including any and all
penalties and interest, and Tenant shall promptly pay any valid final adjudication
enforcing any Taxes and shall cause any such final adjudication to be timely satisfied
prior to any time period within which any non-judicial or judicial sale could occur to
collect any such Taxes. As used herein, the term
“Governmental Authority”
means any
federal, state, local or foreign governmental entity, authority or agency, court, tribunal,
regulatory commission or other body, whether legislative, judicial or executive (or a
combination or permutation thereof), including a local government corporation.
(ii) Upon the entry of any determination, ruling or judgment in any Tax Proceedings,
it shall
be the obligation of Tenant to pay the amount of such Tax or part thereof, as is finally
determined in such Tax Proceedings, the payment of which may have been deferred during the
prosecution thereof, together with any claims, costs, fees, interest, penalties, charges or
other liabilities in connection therewith. Nothing herein contained, however, shall be
construed so as to allow such Tax to remain unpaid for such length of time as shall permit
the Leased Premises or the leasehold estate created by this Lease Agreement, or any part
thereof, to be sold or taken by any Governmental Authority for the non-payment of any Tax.
Tenant shall promptly furnish Landlord with copies of all notices, filings and pleadings in
all such Tax Proceedings. If Landlord chooses to participate in any such Tax Proceedings,
then Landlord shall have the right, at its expense, to participate therein.
(iii) Tenant at its expense may, if it shall so desire, endeavor at any time or times
to obtain a reduction in assessed valuation of the Leased Premises for the purpose of
reducing Taxes thereon. Tenant shall be authorized to collect any tax refund payable as a
result of any proceeding Tenant may institute for any such reduction in assessed value and
any such tax refund shall be the property of Tenant (unless the same was paid by Landlord
and not reimbursed by Tenant).
(iv) Tenant is obligated to notify each Governmental Authority imposing Taxes that all
certificates, advices, bills or statements regarding Taxes should be sent directly to
Tenant. Landlord hereby grants and gives permission to Tenant to render the Leased Premises
from time to time during the Term.
(v)
Landlord shall not be required to join in any Tax Proceeding or other action or
proceeding referred to in this Section 7D. unless required by Laws in order to make such
action or proceeding effective, in which event any such action or proceeding may be taken
by Tenant in the name of but without expense to Landlord, and
TENANT HEREBY AGREES TO
INDEMNIFY, DEFEND AND HOLD LANDLORD HARMLESS FROM ALL COSTS, FEES, EXPENSES, CLAIMS, LOSSES
OR
5
DAMAGES BY REASON OF, RELATED TO OR IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING.
To
the extent such cooperation is required by applicable Governmental Authority for such Tax
Proceeding, Landlord shall cooperate in any such Tax Proceeding as reasonably requested by
Tenant, at Tenant’s sole cost and expense, whether or not Landlord is joined pursuant
thereto, and Landlord agrees to take no action that would be materially adverse to Tenant
in any such Tax Proceeding where Tenant seeks to reduce its obligation to pay Taxes.
(vi) The certificate, advice, bill or statement issued or given by any Governmental
Authority authorized by applicable Laws to issue the same or to receive payment of a Tax
shall be prima facie evidence of the existence, non-payment or amount of such Tax.
E. Notwithstanding anything to the contrary contained in this Lease and except as provided
in
Section 7D. above, in the event Tenant fails to pay any Tax payable by Tenant pursuant to the
provisions of this Lease at least thirty (30) days before the date the same becomes delinquent
and fails to deliver to Landlord reasonable evidence of such payment at least thirty (30) days
before the date the same becomes delinquent, Landlord may, after giving Tenant ten (10) days’
notice of its intention to do so, pay or cause to be paid any such Tax which is delinquent and
Tenant shall, within thirty (30) days following Landlord’s demand and notice, pay and reimburse
Landlord therefor with interest thereon at the rate described in Section 5C from the date of
payment by Landlord until repayment in full by Tenant.
SEC. 8 MAINTENANCE AND REPAIRS; UTILITIES:
A. LANDLORD’S MAINTENANCE AND REPAIRS.
(i) Landlord, at its sole cost and expense, without any reimbursement from Tenant
except as
set forth in Section 8.B. or elsewhere in this Lease Agreement, shall maintain the
foundation, load bearing walls, roof, exterior surface of the outside walls (except window
glass and signage) and other structural members of the Building (the
“Structural
Components”
) in good condition and repair and in compliance
with all Laws, unless the
damage is due to the negligence of Tenant or its agent.
(ii) Except as specifically provided in this Section 8A. or elsewhere in this Lease
Agreement,
Landlord shall not be responsible for maintaining all or any other portion of the Leased
Premises.
B. TENANT’S REPAIR AND MAINTENANCE.
(i) Tenant, at its own cost and expense, shall (i) maintain all parts of the Leased
Premises
(other than those for which Landlord is responsible pursuant to the terms and conditions
of Section 8A. above) in good condition and repair, and (ii) promptly make all necessary
repairs and replacements to the Leased Premises (other than those for which Landlord is
responsible pursuant to the terms and conditions of Section 8A. above), including, but not
limited to, windows, glass and plate glass, wiring, applicable, corridors, lobbies,
elevator foyers, restrooms, parking areas and similar areas of the Leased Premises,
Building sprinkler systems, exterior doors, any special office entry, interior walls and
finish work, interior doors and floor covering, utility connections, heating and air
conditioning systems, light bulbs, fire protection systems serving the Building, plumbing
work and fixtures, termite and pest extermination, and any damage due to vandalism or
malicious mischief, unless the damage is due to the negligence of the Landlord or its
agent.
(ii) Any and all security of any kind for Tenant, Tenant’s agents, employees or
invitees, the
Leased Premises, or any personal property thereon (including, without limitation, any
personal property of any sublessee) shall be the sole responsibility and obligation of
Tenant, and shall be provided by Tenant at Tenant’s sole cost and expense. Tenant
acknowledges and agrees that Landlord shall have no obligation or liability whatsoever with
respect to same. Landlord shall not be liable for any loss, cost, damage or other liability
arising directly or indirectly from security measures or the absence thereof with respect to
the Leased Premises unless caused by the negligence or willful misconduct of Landlord. Tenant
may, at Tenant’s sole cost and expense, install alarm systems in the Leased Premises provided
such installation
6
complies with the applicable terms of this Lease Agreement. Removal of such alarm systems
shall be Tenant’s sole responsibility and, at Tenant’s sole cost and expense, shall be
completed prior to lease termination and all affected areas of the Leased Premises shall
be repaired and/or restored in a good and workmanlike manner to the condition that existed
prior to such installation unless Landlord agrees that such system may remain.
(iii) Tenant agrees, at its own cost and expense, to repair or replace any damage or
injury done to the Leased Premises, or any part thereof, by Tenant or Tenant’s agents,
employees, invitees, or visitors. Tenant further agrees not to commit or allow any waste
or damage to be committed on any portion of the Leased Premises, and at the termination of
this Lease, by lapse of time or otherwise, Tenant shall deliver up said Premises to
Landlord in as good condition as at the Commencement Date, ordinary wear and tear
excepted.
C. It is hereby agreed by Landlord and Tenant that any repairs or replacements that are
necessary as a result of any casualty or condemnation, then the sections of this Lease Agreement
governing casualty and condemnation shall control the responsibility and obligations of Landlord
and Tenant.
D. Tenant shall maintain the hot water equipment, the heating, air condition, and ventilation
equipment and system (the
“HVAC System”
), the electrical system, the mechanical system and the
plumbing system of the Leased Premises in good repair and condition and in accordance with
applicable Laws and with such equipment manufacturers’ suggested operation/maintenance service
program; such obligation shall include replacement of all equipment necessary to maintain such
equipment and systems in good working order. Tenant shall enter into regularly scheduled preventive
maintenance/service contracts for such equipment and systems, each in compliance with Landlord’s
reasonable specifications and otherwise in form and substance and with a contractor reasonably
acceptable to Landlord, and deliver copies thereof to Landlord. Notwithstanding the foregoing,
if, throughout the Term, Tenant has maintained the HVAC System in a manner consistent with the
manufacturer’s maintenance and repair standards therefor and the HVAC System needs to be
replaced during the Term as determined by the contractor performing the preventive
maintenance on such system as required herein and as verified by an independent HVAC
contractor reasonably acceptable to Landlord and Tenant, then Landlord, at its sole cost and
expense, shall purchase and install a replacement HVAC System consistent in capacity and
quality to the HVAC System installed by Landlord as of the Commencement Date (the
“Replacement HVAC System”
). Landlord shall amortize the cost of the Replacement HVAC System
over a period directed by Generally Accepted Accounting Principles and Tenant shall reimburse
Landlord as Additional Rent for the annual amortization of such cost until the earlier of the
(i) expiration of the Term or (ii) expiration of such amortization period for the Replacement
HVAC System.
E. Tenant shall be responsible for all sanitation and pest control relating to the Leased
Premises.
F. Landlord shall be responsible for any sewer availability charges or water availability
charges payable for Tenant’s use of the Leased Premises. Tenant shall obtain and pay for all
water, gas, electricity, heat, telephone, sewer, and other utilities and services used at the
Leased Premises, together with any sales or use taxes, penalties, surcharges, and the like
pertaining to the Tenant’s use of the Leased Premises and shall indemnify, defend (with counsel
reasonably acceptable to Landlord) and hold harmless the Landlord Parties (as defined on
Exhibit E
)
from and against all costs (including attorneys’ fees and costs of suit),
losses, liabilities, or causes of action arising out of or relating to the provision of such
utilities to the Leased Premises. If Tenant fails to pay any such amounts when due (and such
failure continues for ten (10) days after receipt of written notice from Landlord of such
failure), Landlord may do so, in which case, Tenant shall reimburse Landlord for all amounts paid
by Landlord plus ten percent (10%) of such costs within ten (10) days after Landlord’s request
therefor. Landlord will have no responsibility or liability for the interruption or cessation of
any utility, service or amenity to the Leased Premises, nor shall any such interruption or
cessation entitle Tenant to any abatement of Rent or be deemed to constitute a constructive
eviction of Tenant. For greater certainty, Landlord and Tenant agree that nothing in this Section
8.F. shall relieve Landlord of its obligations set forth in Section 8.A. of this Lease Agreement.
SEC. 9 QUIET ENJOYMENT; RIGHTS RESERVED:
7
A. Landlord covenants, warrants and represents to Tenant that Tenant, on paying the said Rent
and performing the covenants herein agreed to be by it performed, shall and may peaceably and
quietly have, hold and enjoy the Leased Premises for the said Term.
B. Any diminution or shutting off of light, air or view by any structure which is now or may
hereafter be effected on lands adjacent to the Building shall in no way affect this Lease
Agreement or impose any liability on Landlord. Noise, dust or vibration or other incidents caused
by or arising out of any new construction of improvements on lands adjacent to the Leased
Premises, whether or not owned by Landlord, or on the Land shall in no way affect this Lease
Agreement or impose any liability on Landlord.
C. Landlord represents and warrants to Tenant that, as of the Effective Date, (i) the Leased
Premises are zoned appropriately for the Permitted Use, (ii) Landlord holds fee simple title to
the Land and (iii) Landlord will deliver the Leased Premises to Tenant free and clear of all other
tenancies and claims of rights to occupy the Leased Premises.
SEC. 10 ALTERATIONS:
A. Tenant shall not make or allow to be made (except as otherwise provided in this Lease
Agreement) any alterations or physical additions (including fixtures) in or to the Leased Premises,
or place safes, vaults or other heavy furniture or equipment within the Leased Premises, without
first obtaining the written consent of Landlord. In addition, Tenant shall not be permitted to take
x-rays or core drill or penetrate the floor of the Leased Premises without first obtaining the
Landlord’s consent. The reasonable cost of any third party consultant or engineer hired by Landlord
and approved by Tenant, such approval not to be unreasonably withheld, delayed or conditioned in
connection with such work undertaken by Tenant shall be paid for by Tenant as Additional Rent
hereunder. Tenant shall submit requests for consent to make alterations or physical additions
together with copies of the plans and specifications for such alterations. Subsequent to obtaining
Landlord’s consent and prior to commencement of construction of the alterations or physical
additions, Tenant shall deliver to Landlord the building permit (if a building permit is required
to complete such alterations or additions), a copy of the executed construction contract covering
the alterations and physical additions and evidence of contractor’s and subcontractor’s insurance,
such insurance being with such companies, for such periods and in such amounts as Landlord may
reasonably require, naming the Landlord Parties as additional insureds. Tenant shall pay to
Landlord upon demand a review fee in the amount of Landlord’s actual and reasonable costs (provided
that prior to incurring such costs, Landlord shall deliver to Tenant a good faith estimate thereof,
the parties acknowledging and agreeing, however, that Tenant’s reimbursement obligation with
respect thereto shall not be limited to such estimate) incurred to compensate Landlord for the
third party (such third party to be approved by Tenant in advance, such approval not to be
unreasonably withheld, conditioned or delayed) cost of review and approval of the plans and
specifications and for additional third party (such third party to be approved by Tenant in
advance, such approval not to be unreasonably withheld, conditioned or delayed) administrative
costs (provided that prior to incurring such costs, Landlord shall deliver to Tenant a good faith
estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s reimbursement
obligation with respect thereto shall not be limited to such estimate) incurred in monitoring the
construction of the alterations. If available, Tenant shall deliver to Landlord a copy of the
“as-built” plans and specifications for all alterations or physical additions so made in or to the
Leased Premises, and shall reimburse Landlord for the reasonable third party (such third party to
be approved by Tenant in advance, such approval not to be unreasonably withheld, conditioned or
delayed) cost (provided that prior to incurring such costs, Landlord shall deliver to Tenant a good
faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s
reimbursement obligation with respect thereto shall not be limited to such estimate) incurred by
Landlord to update its current architectural plans for the Building.
B. Notwithstanding the foregoing but subject to the other terms and conditions of this
Section 9, Tenant may from time to time at its sole cost and expense make such alterations,
additions, restorations, changes, replacements or installations
(
“Alterations”
) in, of or to the
interior of the Building as Tenant deems necessary or desirable; provided, however, Tenant shall
not make or allow to be made any structural alterations to the Building or any other portion of
the Leased Premises, without first obtaining the written consent of Landlord, which consent shall
not be unreasonably withheld, conditioned or delayed. For purposes of this Lease Agreement, the
term “structural alterations” means alterations that affect the structure or the structural
integrity of Building or any portion
8
thereof, or alter the exterior appearance of the Building or any other portion of the Leased
Premises, or affect the mechanical, electrical or plumbing systems of the Building.
C. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold
harmless the Landlord Parties from and against all costs (including reasonable attorneys’ fees and
costs of suit), losses, liabilities, or causes of action arising out of or relating to any
alterations, additions or improvements made by Tenant to the Leased Premises, including but not
limited to any mechanics’ or materialmen’s liens asserted in connection therewith.
D. Tenant shall not be deemed to be the agent or representative of Landlord in making any
such alterations, physical additions or improvements to the Leased Premises, and shall have no
right, power or authority to encumber any interest in the Leased Premises in connection therewith
other than Tenant’s leasehold estate under this Lease Agreement. However, should any mechanics’ or
other liens be filed against any portion of the Leased Premises or any interest therein (other
than Tenant’s leasehold estate hereunder) by reason of Tenant’s acts or omissions or because of a
claim against Tenant or its contractors, Tenant shall cause the same to be canceled or discharged
of record by bond or otherwise within thirty (30) days after notice by Landlord. If Tenant shall
fail to cancel or discharge said lien or liens, within said thirty (30) day period, which failure
shall be deemed to be an Event of Default hereunder without the necessity of any further notice or
cure period, Landlord may, at its sole option and in addition to any other remedy of Landlord
hereunder, cancel or discharge the same and upon Landlord’s demand, Tenant shall promptly
reimburse Landlord for all costs incurred in canceling or discharging such lien or liens.
E. Tenant shall cause all alterations, physical additions, and improvements (including
fixtures), constructed or installed in the Leased Premises by or on behalf of Tenant to comply
with all applicable Laws, excluding the Structural Components. Tenant acknowledges and agrees that
neither Landlord’s review and approval of Tenant’s plans and specifications nor its observation or
supervision of the construction or installation thereof shall constitute any warranty or agreement
by Landlord that same comply with Laws or release Tenant from its obligations under this Section
10D. The terms of this Section 10.E. shall not apply to Landlord’s initial construction of the
Improvements as set forth in
Exhibit D
and Sections 52, 53, 54 and 56 of this Lease
Agreement.
F. Tenant shall be wholly responsible for any accommodations or alterations that are required
by Laws to be made to the Leased Premises to accommodate disabled employees and customers of
Tenant, including, without limitation, compliance with the Americans with Disabilities Act (42
U.S.C. §§ 12101 et seq.) (collectively, the
“Accommodation Laws”
); provided, however, that Landlord
shall be wholly responsible for any accommodations or alterations that are required by Laws to be
made to Structural Components.
G. If (a) because of any act or omission of Landlord or anyone claiming by, through or under
Landlord, or (b) by reason of any construction, alteration, repair or restoration of any part of
the Leased Premises by Landlord, any mechanics’ or other lien, encumbrance, judgment lien or order
for the payment of money or the performance of any act or thing, shall be filed against
the Leased Premises or against Tenant (whether or not such lien or order is valid or enforceable
as such), Landlord shall, at Landlord’s own cost and expense, cause the same to be canceled and
discharged of record within thirty (30) days after Landlord’s receipt of notice thereof. In
connection with Landlord’s obligations set forth in
Exhibit D
and Sections 52, 53, 54 and
56 of this Lease Agreement with respect to initial construction of the Improvements, Landlord to
the extent not specifically prohibited by Laws, shall also indemnify and save harmless Tenant from
and against any and all costs, expenses, claims, losses or damages, including, but not limited to,
reasonable counsel fees charged by counsel of Landlord’s choice, resulting therefrom or by reason
thereof.
SEC. 11 FURNITURE, FIXTURES AND PERSONAL PROPERTY:
Tenant may remove its trade fixtures, office
supplies and movable office furniture and equipment not attached to the Building provided: (a) such
removal is made prior to the termination of this Lease Agreement (b) Tenant is not in default of
any obligation or covenant under this Lease Agreement at the time of such removal; and (c) Tenant
promptly repairs all damage caused by such removal. All other property at the Leased Premises and
any alterations or additions to the Leased Premises (including wall-to-wall carpeting, paneling or
other wall covering) and any other article attached or affixed to the floor, wall or ceiling of the
Leased Premises shall become the property of Landlord and shall remain upon and be surrendered with
the Leased Premises as a part thereof at the termination of the Lease Agreement by lapse of time or
otherwise, Tenant hereby waiving all rights to any payment or compensation therefor. If, however,
Landlord so
9
requests in writing within ten (10) business days after receipt of written notice from Tenant of
alterations to the Leased Premises that do not require Landlord’s consent (or if written consent is
required, then at the time Landlord grants its consent to such alteration), Tenant will, prior to
termination of this Lease Agreement, remove any and all alterations, additions, fixtures, equipment
and property placed or installed by Tenant in the Leased Premises and will repair any damage caused
by such removal. If Tenant does not complete all removals prior to the termination of this Lease
Agreement, Landlord may remove such items (or contract for the removal of such items), Tenant shall
reimburse Landlord upon demand for the costs incurred by Landlord in connection therewith and
Tenant shall be deemed to be holding over pursuant to Section 26 below until such time as such
items have been removed from the Leased Premises. This Section 11 shall survive the expiration or
termination of this Lease Agreement. For greater certainty, Landlord and Tenant agree that no
portion of the Building or the Improvements shall constitute Tenant’s trade fixtures, office
supplies or movable office furniture or equipment for purposes of this Section 11.
SEC. 12 SUBLETTING AND ASSIGNMENT:
A. In the event Tenant should desire to assign this Lease Agreement or sublet the Leased
Premises or
any part thereof or allow same to be used or occupied by others, Tenant shall give Landlord
written notice (which shall specify the duration of said desired sublease or assignment, the date
same is to occur, the exact location of the space affected thereby, the proposed rentals on a
square foot basis chargeable thereunder and reasonably sufficient information of the proposed
sublessee or assignee regarding its intended use, financial condition and business operations) of
such desire at least forty-five (45) days in advance of the date on which Tenant desires to make
such assignment or sublease or allow such a use or occupancy. Landlord shall then have a period of
fifteen (15) days following receipt of such notice within which to notify Tenant in writing that
Landlord elects:
|
|
(1)
|
|
in the event such assignee or sublessee fails to meet the
conditions set forth in subparagraph (3) below, to refuse to permit Tenant to
assign this Lease Agreement or sublet such space, and in such case this Lease
Agreement shall continue in full force and effect in accordance with the terms
and conditions hereof; or
|
|
|
|
|
(2)
|
|
to terminate this Lease Agreement as to the space so affected
as of the date so specified by Tenant in which event Tenant shall be relieved
of all obligations hereunder as to such space arising from and after such
date; or
|
|
|
|
|
(3)
|
|
to permit Tenant to assign this Lease Agreement or sublet such
space for the duration specified in such notice, such approval not to be
unreasonably withheld if (a) the nature and character of the proposed assignee
or sublessee and the principals thereof, their
business and activities and intended use of the
Leased Premises are in Landlord’s reasonable judgment consistent with
the current standards of the Building (b) the form and substance of the
proposed sublease or instrument of assignment are acceptable to Landlord
(which acceptance by Landlord shall not be unreasonably withheld) and is
expressly subject to all of the terms and provisions of this Lease
Agreement and to any matters to which this Lease Agreement is subject,
(c) Tenant enters into a written agreement with Landlord whereby it is
agreed that any rent realized by Tenant as a result of said sublease or
assignment in excess of the Base Rent and Additional Rent payable to
Landlord by Tenant under this Lease Agreement and any and all sums and
other considerations of whatsoever nature paid to Tenant by the assignee
or sublessee for or by reason of such assignment or sublease, including,
but not limited to, sums paid for the sale of Tenant’s fixtures,
leasehold improvements, equipment, furniture, furnishings or other
personal property in excess of the fair market value thereof (that is,
after deducting and giving Tenant credit for Tenant’s reasonable costs
directly associated therewith, including reasonable brokerage fees and
the reasonable cost of remodeling or otherwise improving the Leased
Premises for said assignee or sublessee but excluding any free rentals
or the like offered to any such sublessee or assignee) shall be payable
to Landlord as it accrues as Additional Rent hereunder, (d) the granting
of such consent will not constitute a default under any other agreement
to which Landlord is a party or by which Landlord is bound and (e) the
creditworthiness of the proposed assignee or sublessee and the
principals thereof is acceptable to Landlord, in Landlord’s reasonable
discretion.
|
10
B. No assignment or subletting by Tenant shall be effective unless Tenant shall execute,
have acknowledged and deliver to Landlord, and cause each sublessee or assignee to execute, have
acknowledged and deliver to Landlord, an instrument in form and substance reasonably acceptable
to Landlord in which (i) such sublessee or assignee adopts this Lease Agreement and assumes and
agrees to perform jointly and severally with Tenant (provided that if the entity succeeding as
Tenant hereunder shall have a tangible net worth equal to or greater than the tangible net worth
of Cardiovascular Systems, Inc. as of the Effective Date, Cardiovascular Systems, Inc. shall not
be required to be jointly and severally liable with respect to the performance of such
obligation) all of the obligations of Tenant under this Lease Agreement to the extent accruing
after the effective date of the assignment or subletting, as to the space transferred to it, (ii)
such sublessee or assignee agrees to use and occupy the transferred space solely for the purpose
specified in Section 3 and otherwise in accordance with this Lease Agreement, and (iii) Tenant
acknowledges and agrees that, notwithstanding such subletting or assignment, Tenant remains
directly and primarily liable for the performance of all the obligations of Tenant hereunder
(including, without limitation, the obligation to pay Rent), and Landlord shall be permitted to
enforce this Lease Agreement against Tenant or such sublessee or assignee, or both, without prior
demand upon or proceeding in any way against any other persons. Tenant shall, upon demand,
reimburse Landlord for all reasonable third party (such third party to be approved by Tenant in
advance, such approval not to be unreasonably withheld, conditioned or delayed) costs and
expenses (provided that prior to incurring such costs and expenses, Landlord shall deliver to Tenant
a good faith estimate thereof, the parties acknowledging and agreeing, however, that Tenant’s
reimbursement obligation with respect thereto shall not be limited to such estimate) incurred
by Landlord in connection with a request made by Tenant pursuant to this Section 12,
including, without limitation, any investigations as to the acceptability of the proposed
assignee or sublessee, all legal costs reasonably incurred in connection with the granting of
any requested consent and a charge reasonably determined by Landlord to cover in-house time
spent in respect of such request.
C. Any consent by Landlord to a particular assignment or sublease shall not constitute
Landlord’s consent to any other or subsequent assignment or sublease, and any proposed sublease
or assignment by any assignee or sublessee shall be subject to the provisions of this Section 12
as if it were a proposed sublease or assignment by Tenant. The prohibition against an assignment
or sublease described in this Section 12 shall be deemed to include a prohibition against (i)
Tenant’s mortgaging or otherwise encumbering its leasehold estate, (ii) an assignment or sublease
which may occur by merger or operation of law and (iii) permitting the use or occupancy of the
Leased Premises, or any part thereof, by anyone other than Tenant, each of which shall be
ineffective and void and shall constitute an Event of Default under this Lease Agreement unless
consented to by Landlord in writing in advance. For purposes hereof, the transfer of the
ownership or voting rights in a controlling interest of the voting stock of Tenant (if Tenant is
a corporation) or the membership interests of Tenant (if Tenant is a limited liability company)
or the transfer of a general partnership interest or a majority of the limited partnership
interest in Tenant (if Tenant is a partnership), at any time throughout the Term, shall be deemed
to be an assignment of this Lease Agreement; provided that the terms of the foregoing clause
shall be limited to periods in which the shares of Tenant are not traded on an exchange.
D. Notwithstanding anything to the contrary set forth herein, Tenant shall have the right to
enter into an assignment of this Lease or a sublease of the Leased Premises, without Landlord’s
consent, to any subsidiary corporation of Tenant that is owned and controlled by Tenant, any
entity succeeding to substantially all of the assets of Tenant as a result of a consolidation or
merger, or to an entity to which all or substantially all of the assets of Tenant have been sold;
provided, however, that, as conditions to such permitted assignments and subleases, (i) the entity
succeeding as Tenant hereunder shall have a tangible net worth equal to or greater than the
tangible net worth of Cardiovascular Systems, Inc. as of the date of the transfer and (ii)
Cardiovascular Systems, Inc. (to the extent Cardiovascular Systems, Inc. exists as an entity
following such a consolidation or merger) shall be jointly and severally liable with such assignee
or sublessee for all obligations of Tenant under this Lease Agreement.
SEC. 13 FIRE AND CASUALTY:
A. In the event of a fire or other casualty in the Leased Premises, Tenant shall
immediately give
notice thereof to Landlord. In the event such a fire or other casualty occurs during the last five
(5) years of the initial ten (10) year Term or during either of the Extended Terms and (i) results
in total or substantial damages to or destruction of the Improvements, or (ii) results in the
Leased Premises being untenantable in whole or in substantial part and the reasonable estimation of
a contractor reasonably approved by Landlord and Tenant as to the amount of time necessary to
rebuild or restore such destruction to the Leased Premises exceeds six (6) months from the time
11
such work is commenced, then in either event, Tenant shall have a right to terminate this Lease
Agreement effective as of the date of casualty or destruction, and upon such termination, all Rent
owed up to the time of such destruction or termination shall be paid by Tenant. Subject to
reasonable delays for insurance adjustments, Tenant shall give Landlord written notice of its
decisions, estimates or elections under this Section 13 within sixty (60) days after any such
damage or destruction.
B. Any net insurance proceeds payable with respect to the casualty shall be paid directly to
Tenant and may be used by Tenant only for the repair or reconstruction of the Improvements to a
like or better condition than existed prior to such damage or destruction; provided, however, that
if an Event of Default has occurred and is continuing at the time of such casualty or at any time
thereafter, all such insurance proceeds shall be paid directly to Landlord and disbursed, subject
to terms and conditions that Landlord in its sole discretion deems appropriate given the
circumstances, to Tenant for the repair or reconstruction of the Improvements. Notwithstanding
anything contained in this Section 13, Tenant shall not be required to expend more to reconstruct,
restore and repair the Improvements than the amount actually received (plus deductibles) from the
proceeds of the property insurance carried by Tenant, so long as (i) Tenant has maintained policies
of insurance consistent with the terms and conditions of this Lease and (ii) Tenant delivers to
Landlord written notice thereof at least thirty (30) days prior to commencing the reconstruction,
restoration and repair of the Improvements. In the event Tenant will not reconstruct, restore and
repair the Improvements to its condition prior to the casualty, Landlord shall have the right to
terminate this Lease Agreement upon delivery of written notice to Tenant, delivered within thirty
(30) days following the date Tenant delivers to Landlord written notice of the amount of available
insurance proceeds and the condition to which Tenant desires to reconstruct, restore and repair the
Improvements. If such proceeds are more than sufficient to reconstruct, restore and repair the
Improvements to its condition prior to the casualty, the surplus shall belong to and be returned
to Tenant; provided, however, that if a monetary Event of Default or Event of Default that could be
cured with the payment of money exists at such time, Landlord shall direct such surplus to cure
such Event(s) of Default and any surplus remaining after the cure thereof shall be delivered to
Tenant. Should Landlord or Tenant terminate this Lease Agreement in accordance with the terms of
this Section 13.B., the insurance proceeds shall belong to Landlord and Tenant shall have no claim
to such proceeds, except proceeds attributable to the trade fixtures, equipment and personal
property of Tenant, provided that in no event shall any portion of the Improvements be considered
the trade fixtures, equipment and personal property of Tenant for purposes of such an allocation of
proceeds. If Tenant desires any other additional repairs or restoration, and if Landlord consents
thereto which consent shall not be unreasonably withheld, it shall be done at Tenant’s sole cost
and expense subject to all of the applicable provisions of this Lease Agreement.
C. Tenant shall not have any right under this Lease Agreement, and hereby waives all rights
under applicable law, if any, to abate, reduce or offset Rent by reason of any damage or
destruction of the Leased Premises by reason of an insured or uninsured casualty.
SEC. 14 CONDEMNATION:
A. If all of the Leased Premises is taken or condemned, or acquired under threat of
condemnation, by
or at the direction of any Governmental Authority (a
“Taking”
or
“Taken”
, as the context requires)
during the last five (5) years of the initial ten (10) year Term or during either of the Extended
Terms, or if so much of the Leased Premises is Taken that, in Tenant’s reasonable opinion, the
remainder cannot be used for the Permitted Use, or if the awards payable to Landlord as a result of
any Taking are, in Tenant’s reasonable opinion, inadequate to restore the remainder to an
economically viable building, Tenant may, at its election, exercisable by the giving of written
notice to Landlord within sixty (60) days after the date of the Taking, terminate this Lease
Agreement as of the date of the Taking or the date Tenant is deprived of possession of the Leased
Premises (whichever is later). If this Lease Agreement is not terminated as a result of a Taking,
(i) Landlord shall restore the Leased Premises remaining after the Taking to a tenantable
condition; provided however that Landlord shall not be required to expend more to reconstruct,
restore and repair the Building than the amount of condemnation awards, proceeds, compensation or
other payments actually received by Landlord, and (ii) and the Base Rent shall be reduced
proportionately to the portion of the Improvements so taken. Unless covered by business
interruption policy of insurance required to be carried by Tenant pursuant to the terms of
Exhibit E
to this Lease Agreement, during the period of restoration, Base Rent shall be
abated to the extent the Leased Premises are rendered untenantable. All awards, proceeds,
compensation or other payments from or with respect to any Taking of the Leased Premises or any
portion thereof shall belong to Landlord, Tenant hereby assigning to Landlord all of its right,
title, interest and claim to same.
12
Tenant shall have the right to assert a separate claim for and recover from the condemning
authority, but not from Landlord, such compensation as may be awarded on account of Tenant’s
moving and relocation expenses, and depreciation to and loss of Tenant’s movable personal
property, trade fixtures and equipment.
SEC. 15 DEFAULT BY TENANT:
The occurrence of any one or more of the following shall constitute an
“Event of Default”
under this Lease Agreement:
A. The failure of Tenant to pay any Rent within ten (10) days after receipt of written notice
from Landlord of Tenant’s failure to pay such Rent on the due date therefor under this Lease
Agreement;
B. The failure of Tenant to perform, comply with or observe any of the other covenants or
conditions contained in this Lease Agreement and the continuance of such failure for the period of
time as may be specified elsewhere in this Lease Agreement for such specific covenant or
condition, or should no period of time be specified elsewhere in this Lease Agreement with respect
to such specific covenant or condition, a period of ten (10) days after written notice to Tenant;
or, if such failure cannot reasonably be cured within said ten (10) day period despite Tenant’s
diligent good faith efforts, the failure of Tenant to promptly commence its diligent good faith
efforts to cure such failure within said ten (10) day period and/or the continuance of such
failure for a period of one hundred twenty (120) days notwithstanding Tenant’s efforts to cure;
C. Tenant shall fail to execute and acknowledge or otherwise respond in good faith and in
writing within ten (10) days after submission to Tenant of a request for confirmation of the
subordination of this Lease Agreement pursuant to Section 24 or an estoppel certificate pursuant
to Section 35;
D. The failure of Tenant to occupy the Leased Premises during the entire Term for a period of
twelve (12) consecutive months (other than reasonable cessations of operations in connection with
fires or other casualties as described in Section 13 or a Taking as described in Section 14),
provided that intermittent operations not exceeding six (6) consecutive months in duration shall
not serve to interrupt the running of such twelve (12) month period;
E. The filing of a petition by or against Tenant of Tenant’s obligations under this Lease
Agreement (i) naming Tenant or as debtor in any bankruptcy or other insolvency proceeding, (ii)
for the appointment of a liquidator or receiver for all or substantially all of Tenant’s property
or for Tenant’s interest in this Lease Agreement, or (iii) to reorganize or modify Tenant’s
capital structure, to the extent such petition is not removed or rescinded within ninety (90) days
after the filing date;
F. The admission by Tenant in writing of its inability to meet its obligations as they become
due or the making by Tenant of an assignment for the benefit of its creditors;
G. The attempt by Tenant to assign this Lease Agreement or to sublet all or any part of the
Leased Premises without the prior written consent of Landlord in accordance with Section 12, to
the extent Landlord’s consent was required; or
H. The failure by Tenant to comply with the insurance requirements set forth in
Exhibit
E
.
SEC. 16 REMEDIES OF LANDLORD:
Upon any Event of Default, Landlord may exercise any one or more of
the following described remedies, in addition to all other rights and remedies provided under
applicable Laws or in equity:
A. Terminate this Lease Agreement by written notice to Tenant and forthwith repossess the
Leased
Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (i)
the cost of recovering the Leased Premises (including attorneys’ fees and costs of suit), (ii) the
cost of removing and storing any personal property, (iii) the unpaid Rent earned at the time of
termination, plus interest thereon at the rate described in Section 5C., (iv) the present value
(discounted at the rate of eight percent (8%) per annum) of the balance of the Rent for the
remainder of the Term less the present value (discounted at the same rate) of the fair market
rental value of the Leased Premises for said period, taking into account the period of time the
Leased
13
Premises will remain vacant until a new tenant is obtained, and the cost to prepare the Leased
Premises for occupancy and the other costs (such as leasing commissions, tenant improvement
allowances and attorneys’ fees) to be incurred by Landlord in connection therewith, and (v) any
other sum of money and damages owed by Tenant to Landlord under this Lease Agreement.
B. Terminate Tenant’s right of possession (but not this Lease Agreement) and may repossess
the Leased Premises by forcible detainer suit or otherwise, without thereby releasing Tenant from
any liability hereunder and without demand or notice of any kind to Tenant and without
terminating this Lease Agreement. Subject to Section 16E. below, Landlord shall use reasonable
efforts under the circumstances to relet the Leased Premises on such terms and conditions as
Landlord in its sole discretion may determine (including a term different than the Term, rental
concessions, alterations and repair of the Leased Premises). Landlord shall not be liable for,
nor shall Tenant’s obligations hereunder be diminished because of, Landlord’s failure or refusal
to relet the Leased Premises or collect rent due in respect of such reletting. For the purpose of
such reletting Landlord shall have the right to decorate or to make any repairs, changes,
alterations or additions in or to the Leased Premises as may be
reasonably necessary or desirable. In the event that (i) Landlord shall fail to relet the
Leased Premises, or (ii) the Leased Premises are relet and a sufficient sum shall not be
realized from such reletting (after first deducting therefrom, for retention by Landlord, the
unpaid Rent due hereunder earned but unpaid at the time of reletting plus interest thereon at
the rate specified in Section 5C., the cost of recovering possession (including attorneys’ fees
and costs of suit), all of the costs and expenses of such decorations, repairs, changes,
alterations and additions, the expense of such reletting and the cost of collection of the
rent accruing therefrom) to satisfy the Rent, then Tenant shall pay to Landlord as damages a
sum equal to the amount of such deficiency. Any such payments due Landlord shall be made upon
demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any
sums falling due under the terms of this Section 16 from time to time. No delivery to or
recovery by Landlord of any portion due Landlord hereunder shall be any defense in any action
to recover any amount not theretofore reduced to judgment in favor of Landlord, nor shall such
reletting be construed as an election on the part of Landlord to terminate this Lease
Agreement unless a written notice of such intention be given to Tenant by Landlord.
Notwithstanding any such termination of Tenant’s right of possession of the Leased Premises,
Landlord may at any time thereafter elect to terminate this Lease Agreement. In any
proceedings to enforce this Lease Agreement under this Section 16, Landlord shall be presumed
to have used its reasonable efforts to relet the Leased Premises, and Tenant shall bear the
burden of proof to establish that such reasonable efforts were not used.
C. Alter any and all locks and other security devices at the Leased Premises, and if it does
so Landlord shall not be required to provide a new key or other access right to Tenant unless
Tenant has cured all Events of Default; provided, however, that in any such instance, during
Landlord’s normal business hours and at the
convenience of Landlord, and upon the written request of Tenant accompanied by such written
waivers and releases as Landlord may require, Landlord will escort Tenant or its authorized
personnel to the Leased Premises to retrieve any personal belongings or other property of
Tenant. The provisions of this Section 16.C are intended to override and control any
conflicting provisions of the Texas Property Code.
D. Make any payment or perform any act on Tenant’s part to cure such Event of Default
without waiving or releasing Tenant from any obligations. All sums so paid by Landlord and all
costs incurred by Landlord in taking such action plus interest thereon at the lesser of ten
percent (10%) per annum or the highest rate then allowed under Laws shall be deemed Additional
Rent hereunder and shall be paid to Landlord on demand, and Landlord shall have (in addition to
all other rights and remedies of Landlord) the same rights and remedies in the event of the
non-payment thereof by Tenant as in the case of default by Tenant in the payment of Rent.
E. In connection with the exercise by Landlord of its rights and remedies in respect of any
Event of Default on the part of Tenant, to the extent (but no further) that Landlord is required
by applicable Laws to mitigate damages, or to use efforts to do so, Tenant agrees in favor of
Landlord that Landlord shall not be deemed to have failed to mitigate damages, or to have used the
efforts required by Laws to do so, because:
|
|
(1)
|
|
Landlord leases other property owned by Landlord prior to
re-letting the Leased Premises;
|
|
|
|
|
(2)
|
|
Landlord refuses to relet the Leased Premises to any
affiliate of Tenant, or any principal of Tenant, or any affiliate of such
principal (for purposes of this Lease Agreement,
|
14
|
|
|
|
“affiliate” shall mean and refer to any person or entity controlling,
under common control with, or controlled by, the party in question);
|
|
|
|
|
(3)
|
|
Landlord refuses to relet the Leased Premises to any person
or entity whose creditworthiness Landlord in good faith deems unacceptable;
|
|
|
|
|
(4)
|
|
Landlord refuses to relet the Leased Premises to any person
or entity because the use proposed to be made of the Leased Premises by such
prospective tenant is not of a type and nature reasonably deemed acceptable
by Landlord
|
|
|
|
|
(5)
|
|
Landlord refuses to relet the Leased Premises to any person
or entity, or any affiliate of such person or entity, who has been engaged in
litigation with, or who has threatened litigation against, Landlord or any of
its affiliates, or whom Landlord in good faith deems to be unreasonably or
excessively litigious;
|
|
|
|
|
(6)
|
|
Landlord refuses to relet the Leased Premises because the
tenant or the terms and provisions of the proposed lease are not approved by
the holders of any liens or security interests in the Leased Premises or any
part thereof, or would cause Landlord to breach or be in default of, or to be
unable to perform any of its covenants under, any agreements between Landlord
and any third party; or
|
|
|
|
|
(7)
|
|
Landlord refuses to relet the Leased Premises to a person or
entity whose character or reputation, or the nature of whose business,
Landlord in good faith deems unacceptable;
|
and it is further agreed that each and all of the grounds for refusal set forth in clauses (1)
through (7) above, both inclusive, of this sentence are reasonable grounds for Landlord’s refusal
to relet the Leased Premises, or (as to all other provisions of this Lease Agreement) for
Landlord’s refusal to issue any approval, or take any other action, of any nature whatsoever
under this Lease Agreement.
SEC. 17 WAIVER OF LANDLORD’S LIEN:
Landlord hereby expressly, unconditionally and irrevocably
waives any and all liens, express or implied, statutory, constitutional or contractual, that
would or might otherwise secure the performance by Tenant of its obligations under this Lease
Agreement.
SEC. 18 NON-WAIVER:
Neither acceptance of Rent by Landlord nor failure by Landlord to exercise
available rights and remedies, whether singular or repetitive, shall constitute a waiver of any
of Landlord’s rights hereunder. Waiver by Landlord of any right for any Event of Default of
Tenant shall not constitute a waiver of any right for either a subsequent Event of Default of
the same obligation or any other Event of Default. No act or thing done by Landlord or its agent
shall be deemed to be an acceptance or surrender of the Leased Premises and no agreement to
accept a surrender of the Leased Premises shall be valid unless it is in writing and signed by a
duly authorized officer or agent of Landlord.
SEC. 19 COMPLIANCE WITH LAWS:
Tenant shall comply with, and Tenant shall cause its visitors,
employees, contractors, agents, invitees and licensees to comply with, all Laws relating to the
use, condition or occupancy of the Leased Premises.
SEC. 20 ASSIGNMENT BY LANDLORD; LIMITATION OF LANDLORD’S LIABILITY:
Landlord shall have the right
to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the
Leased Premises, and in such event and upon such transfer no further liability or obligation
shall thereafter accrue against Landlord hereunder. Furthermore, Tenant specifically agrees to
look solely to Landlord’s interest in the Leased Premises, including, without limitation, all
rents and insurance proceeds, for the recovery of any judgment from Landlord, it being agreed
that the Landlord Parties shall never be personally liable for any such judgment.
SEC. 21 SEVERABILITY:
This Lease Agreement shall be construed in accordance with the laws of the
State of Texas. If any clause or provision of this Lease Agreement is illegal, invalid or
unenforceable, under present or future Laws effective during the Term hereof, then it is the
intention of the parties hereto that the remainder of this
15
Lease Agreement shall not be affected thereby, and it is also the intention of both parties that
in lieu of each clause or provision that is illegal, invalid or unenforceable, there be added as
part of this Lease Agreement a clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and enforceable.
SEC. 22 SIGNS:
Other than the signage expressly referred to in the Construction Drawings (as
defined in
Exhibit D)
, Tenant shall not place, install or attach any signage, window or
door lettering, decals, window or storefront stickers, advertising media of any type, exterior
lights, or exterior decorations, balloons, flags, pennants, banners, paintings, or bars on windows,
or security installations on or to the Leased Premises or the Building without Landlord’s prior
written approval, which shall not be unreasonably withheld. Other than the signage expressly
referred to in the Construction Drawings, or otherwise consented to by Landlord, Tenant shall
repair, paint, and/or replace any portion of the Leased Premises or the Building damaged or altered
as a result of its signage when it is removed (including, without limitation, any discoloration of
the Building). Landlord shall not be required to notify Tenant of whether it consents to any sign
until it has received detailed, to-scale drawings thereof specifying design, material composition,
color scheme, and method of installation, and has had a reasonable opportunity to review them.
SEC. 23 SUCCESSORS AND ASSIGNS:
Landlord and Tenant agree that all provisions hereof are to be
construed as covenants and agreements as though the words imparting such covenants were used in
each separate paragraph hereof, and that, except as restricted by the provisions of Section 12,
this Lease Agreement and all the covenants herein contained shall be binding upon the parties
hereto, their respective heirs, legal representatives, successors and assigns.
SEC. 24 SUBORDINATION; NONDISTURBANCE:
A. Tenant covenants and agrees with Landlord that this Lease Agreement is subject and
subordinate
to any mortgage, deed of trust, ground lease and/or security agreement which may now or hereafter
encumber the Leased Premises or any interest of Landlord therein, and to any advances made on the
security thereof and to any and all increases, renewals, modifications, consolidations,
replacements and extensions thereof. This clause shall be self-operative and no further instrument
of subordination need be required by any owner or holder of any such ground lease, mortgage, deed
of trust or security agreement. In confirmation of such subordination, however, at Landlord’s
request, Tenant shall execute promptly any appropriate certificate or instrument that Landlord may
request. In the event of the enforcement by the ground lessor, the trustee, the beneficiary or the
secured party under any such ground lease, mortgage, deed of trust or security agreement of the
remedies provided for by Laws or by such ground lease, mortgage, deed of trust or security
agreement, Tenant, upon request of the ground lessor or any person or party succeeding to the
interest of Landlord as a result of such enforcement, will automatically become the Tenant of such
ground lessor or successor in interest without any change in the terms or other provisions of this
Lease Agreement; provided, however, that the obligations of such ground lessor or successor in
interest shall be as set forth in a subordination, nondisturbance and attornment agreement
delivered pursuant to Section 24.C or 24.D below and in no event shall such ground lessor or
successor in interest be (a) bound by any payment of Rent for more than one month in advance except
prepayments in the nature of security for the performance by Tenant of its obligations under this
Lease Agreement, unless received by such ground lessor or successor, (b) bound by any amendment or
modification of this Lease Agreement made without the written consent of such ground lessor or such
successor in interest (c) liable for any previous act or omission of the Landlord unless such
ground lessor or successor in interest, after acquiring succeeding to the interest of Landlord
under this Lease Agreement, shall fail to cure any default by Landlord within the time periods set
forth in this section, (d) subject to any credit, demand, claim, counterclaim, offset or defense
which theretofore accrued to Tenant against the Landlord, unless such ground lessor or successor in
interest, after acquiring succeeding to the interest of Landlord under this Lease Agreement, shall
fail to cure any default by Landlord within the time periods set forth in this section, (e)
required to account for any security deposit of Tenant other than any security deposit actually
delivered to lender by Landlord and (f) responsible for any monies owing by Landlord to Tenant.
Upon request by such ground lessor or successor in interest, whether before or after the
enforcement of its remedies, Tenant shall execute and deliver an instrument or instruments
confirming and evidencing the attornment herein set forth. Notwithstanding anything contained in
this Lease Agreement to the contrary, in the event of any default by Landlord in performing its
covenants or obligations hereunder which would give Tenant the right to terminate this Lease
Agreement, Tenant shall not exercise such right unless and until (a) Tenant gives written notice of
such default (which notice shall specify the exact nature of said
16
default and how the same may be cured) to the lessor under any such land or ground lease and
the holder(s) of any such mortgage or deed of trust or security agreement who has theretofore
notified Tenant in writing of its interest and the address to which notices are to be sent, and
(b) said lessor and holder(s) fail to cure or cause to be cured said default within thirty (30)
days from the receipt of such notice from Tenant.
B. Notwithstanding anything to the contrary set forth above, any beneficiary under any deed
of trust may at any time subordinate its deed of trust to this Lease Agreement in whole or in
part, without any need to obtain Tenant’s consent, by execution of a written document
subordinating such deed of trust to the Lease Agreement to the extent set forth in such document
and thereupon the Lease Agreement shall be deemed prior to such deed of trust to the extent set
forth in such document without regard to their respective dates of execution, delivery and/or
recording. In that event, to the extent set forth in such document, such deed of trust shall have
the same rights with respect to this Lease Agreement as would have existed if this Lease
Agreement had been executed, and a memorandum thereof, recorded prior to the execution, delivery
and recording of the deed of trust.
C. It shall be a condition precedent to Tenant’s obligation to subordinate this Lease
Agreement to any current or future lien, encumbrance, easement, deed of trust or ground lease of
any ground lessor or mortgagee that such ground lessor or mortgagee enter into a subordination,
non-disturbance and attornment agreement in a reasonable and customary form with Tenant which
includes and recognizes the terms of this Lease Agreement and provides that: (a) so long as
Tenant is not in default after the expiration of any applicable
notice and grace period, this
Lease Agreement shall not be terminated nor shall the rights or remedies of Tenant hereunder or
its use or occupancy of the Leased Premises be disturbed or interfered with or otherwise affected
in any manner as a result of any breach of or default under the mortgage; (b) all condemnation
awards and proceeds of insurance shall be applied in the manner reasonably acceptable to Tenant
and such ground lessor or mortgagee and (c) neither such holder nor any other holder of such
mortgage shall name or join Tenant as a party defendant or otherwise in any suit, action or
proceeding to enforce, nor will this Lease Agreement be terminated (except as permitted by the
provisions of this Lease Agreement) or otherwise affected by foreclosure or enforcement of, any
rights given to any holder of said mortgage pursuant to the terms, covenants or conditions
contained therein or in any other documents held by any such holder or otherwise given to any
holder as a matter of law or equity.
D. Prior to the Commencement Date, Landlord, Tenant and any existing mortgagee or ground
lessor of the Leased Premises shall enter into a reasonable and customary subordination,
non-disturbance and attornment agreement consistent with the terms of this Section 24, including,
without limitation, provisions for the application of casualty and condemnation awards.
SEC. 25 RESERVED:
SEC. 26 HOLDING OVER:
In the event of holding over by Tenant with respect to all or any portion of
the Leased Premises after the expiration or termination of the Lease Agreement, such holding over
shall constitute a tenancy at sufferance relationship between Landlord and Tenant and all of the
terms and provisions of this Lease Agreement shall be applicable during such period, except that as
monthly rental, Tenant shall pay to Landlord for each month (or any portion thereof) during the
period of such hold over an amount equal to one hundred fifty percent (150%) of the Rent payable by
Tenant for the month immediately preceding the holdover period. The rental payable during such hold
over period shall be payable to Landlord on demand. No holding over by Tenant, whether with or
without consent of Landlord, shall operate to extend this Lease Agreement except as herein
provided. In the event of any unauthorized holding over, Tenant shall also indemnify, defend (with
counsel reasonably acceptable to Landlord) and hold harmless the Landlord Parties against all
claims for damages against the Landlord Parties as a result of Tenant’s possession of the Leased
Premises, including, without limitation, claims for damages by any other party to which Landlord
may have leased, or entered into an agreement to lease, all or any part of the Leased Premises
effective upon the termination of this Lease Agreement. IN NO EVENT SHALL THE TENANT PARTIES BE
LIABLE FOR, AND LANDLORD HEREBY WAIVES ANY CLAIM FOR, ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR
PUNITIVE DAMAGES, INCLUDING LOSS OF PROFITS OR BUSINESS OPPORTUNITY, ARISING UNDER OR IN CONNECTION
WITH THIS SECTION 26.
SEC. 27 INDEPENDENT OBLIGATION TO PAY RENT:
17
A. Subject to the terms and conditions of Sections 54 and 14 of this Lease Agreement, it is
the intention of the parties hereto that the obligations of Landlord and Tenant hereunder shall be
separate and independent covenants and agreements, that the Rent and all other sums payable by
Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant
hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have
been terminated pursuant to an express provision of this Lease Agreement.
B. Except as otherwise expressly provided herein, Tenant waives the right (a) to quit,
terminate or surrender this Lease Agreement or the Leased Premises or any part thereof, or (b) to
any abatement, suspension, deferment or reduction of the Rent or any other sums payable under this
Lease Agreement.
SEC. 28 RELEASE AND WAIVER: INDEMNITY:
A. Except to the extent caused by the negligence or willful misconduct of the Landlord
Parties, Tenant hereby agrees to indemnify, protect, defend and hold the Landlord Parties harmless
from and against any and all liabilities, claims, causes of action, fines, damages, suits and
expenses, including attorneys’ fees and necessary litigation expenses (collectively, the
“Claims”
), arising from use, occupancy or enjoyment by the Tenant Parties and its servants,
customers, licensees and invitees of the Leased Premises and its facilities for the conduct of its
business or from any activity, work or thing done, permitted, omitted or suffered by the Tenant
Parties and its servants, customers, licensees and invitees in or about the Leased Premises, and
Tenant further agrees to indemnify, protect, defend and hold the Landlord Parties harmless from
and against any and all Claims arising from any breach or default in the performance of any
obligation on Tenant’s part to be performed under the terms of this Lease Agreement or arising
from any negligence or willful misconduct of the Tenant Parties or any of its servants, customers,
licensees and invitees. In case any action or proceeding shall be brought against the Landlord
Parties by reason of any such Claim, Tenant, upon notice from Landlord, shall provide a separate
defense to same at Tenant’s sole cost and expense by counsel reasonably satisfactory to Landlord.
The indemnity obligations of Tenant under this Section 28 shall survive the expiration or earlier
termination of this Lease Agreement.
B. Except to the extent caused by the negligence or willful misconduct of the Tenant Parties,
and to the extent not specifically prohibited by Laws, Landlord hereby agrees to indemnify,
protect, defend and hold the Tenant Parties harmless from and against any and all Claims arising
from any activity, work or thing done, permitted, omitted or suffered by the Landlord Parties and
its servants, customers, licenses and invitees in or about the Leased Premises, and Landlord
further agrees, to the extent not specifically prohibited by Laws, to indemnify, protect, defend
and hold the Tenant Parties harmless from and against any and all Claims arising from any breach or
default in the performance of any obligation on Landlord’s part to be performed under the terms of
this Lease Agreement or arising from any negligence or willful misconduct of the Landlord Parties
or any of its servants, customers, licensees and invitees. In case any action or proceeding shall
be brought against the Tenant by reason of any such Claim, Landlord, upon notice from Tenant, shall
provide a separate defense to same at Landlord’s sole cost and expense by counsel reasonably
satisfactory to Tenant. The indemnity obligations of Landlord under this Section 28 shall survive
the expiration or earlier termination of this Lease Agreement.
C. Except as otherwise set forth herein, Landlord shall not be liable or responsible to
Tenant for (a) any loss or damage to any property or person occasioned by theft, criminal act,
fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition or order of governmental body or authority, or any cause beyond Landlord’s control, or
(b) any damage or inconvenience which may arise through repair or alteration of any part of the
Building made necessary by virtue of any such cause; provided, however Landlord shall use
commercially reasonable efforts to minimize such damage or inconvenience to Tenant.
As used herein, the term
“Tenant Parties”
means (a) Tenant, (b) any lender whose loan is secured
by a lien against Tenant’s interest in the Leased Premises or the property of Tenant therein, (c)
their respective shareholders, members, partners, affiliates and subsidiaries, successors and
assigns, and (d) any directors, officers, employees, agents, or contractors of such persons or
entities are named as additional insureds.
SEC. 29 INSURANCE:
Landlord and Tenant shall satisfy the insurance requirements as more
particularly described on
Exhibit E
attached hereto and made a part hereof for all
purposes. In no event shall Tenant’s liability under this Lease Agreement be limited by the amount
of insurance required to be carried under
Exhibit E
.
18
SEC. 30 ENTIRE AGREEMENT:
This instrument and any attached addenda or exhibits signed by the
parties constitute the entire agreement between Landlord and Tenant; no prior written or prior or
contemporaneous oral promises or representations shall be binding. This Lease Agreement shall not
be amended, changed or extended except by written instrument signed by both parties hereto.
Section captions herein are for Landlord’s and Tenant’s convenience only, and neither limit nor
amplify the provisions of this instrument. Tenant agrees, at Landlord’s request, to execute a
recordable memorandum of this Lease Agreement.
SEC. 31 NOTICES:
Whenever in this Lease Agreement it shall be required or permitted that notice,
notification or demand be given or served by either party to this Lease Agreement to or on the
other, such notice or demand shall be given or served and shall not be deemed to have been given
or served unless in writing and (i) delivered personally, (ii) sent by Certified or Registered
Mail, postage prepaid, with a copy also sent by facsimile or (iii) sent by a reputable common
carrier guaranteeing next-day delivery, addressed as follows:
|
|
|
|
|
To the Landlord:
|
|
Pearland Economic Development Corporation
|
|
|
|
3519 Liberty Drive
|
|
|
|
Pearland, Texas 77581
|
|
|
|
Attention: Executive Director
|
|
|
|
Telephone: (281) 652-1627
|
|
|
|
Facsimile: (281) 412-2659
|
|
|
|
|
|
To the Tenant:
|
|
At the address noted for Tenant on the signature page hereof and
from and after
the Commencement Date, at the address of the Leased Premises.
|
Such addresses may be changed from time to time by either party by serving written notice as above
provided. Any such notice or demand shall be deemed to have been given on the date of receipted
delivery, refusal to accept delivery or when delivery is first attempted but cannot be made due to
a change of address for which no notice is given, five (5) business days after it shall have been
mailed as provided in this Section 31 or if sent by facsimile, upon electronic or telephonic
confirmation of receipt from the receiving facsimile machine, whichever is earlier.
SEC. 32 MEMORANDUM OF COMMENCEMENT DATE:
Tenant shall, if requested by Landlord, execute and
deliver to Landlord within ten (10) days after Landlord’s request an Acceptance of Leased Premises
Memorandum of the Leased Premises, the form of which is attached as
Exhibit B
attached
hereto and made a part hereof for all purposes.
SEC. 33 INSPECTION:
Landlord and Landlord’s agents and representatives may enter the Leased
Premises during normal business hours and upon 24 hours’ notice (except in an emergency, in which
case only reasonable notice considering the type of emergency shall be required) to inspect the
Leased Premises; to make such repairs as may be required or permitted under this Lease Agreement;
to perform, at its election and subject to the terms of this Lease Agreement, any unperformed
obligations of Tenant hereunder; and to show the Leased Premises to prospective purchasers,
mortgagees, ground lessors, and (during the last 12 months of the Term) tenants. During the last
twelve (12) months of the Term, Landlord may erect a sign on the Leased Premises indicating that
the Leased Premises are available. In connection with its exercise of such rights, Landlord shall
use commercially reasonable efforts to minimize interference with Tenant’s business operation in
the Leased Premises, including, but not limited to, evaluating whether to schedule such
maintenance and repair work after Tenant’s normal business hours if the performance thereof could
be reasonably expected to interrupt Tenant’s manufacturing operations within the Leased Premises.
SEC. 34 BROKERS:
Each party warrants to the other party that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease Agreement and that it
knows of no real estate broker(s) or agent(s) who is(are) or might be entitled to a commission in
connection with this Lease Agreement. To the extent not specifically prohibited by Laws, each
party agrees to indemnify, defend (with counsel reasonably acceptable to the other party) and hold
harmless the other party from and against any liability from all claims for commissions, finder’s
fee or other compensation by brokers or agents acting by or through the indemnifying party and
arising from the negotiation of this Lease Agreement.
SEC. 35 ESTOPPEL CERTIFICATES:
From time to time after Tenant accepts the Leased Premises, within
ten (10) days after request in writing therefor from Landlord, Tenant agrees to execute and
deliver to Landlord, or to
19
such other addressee or addresses as Landlord may designate (and Landlord and any such addressee
may rely thereon), a statement in writing in the form of
Exhibit C
or in such other form
and substance satisfactory to Landlord (herein called
“Tenant’s Estoppel Certificate”)
, certifying
to all or any part of the information provided for in
Exhibit C
as is requested by
Landlord and any other information reasonably requested by Landlord.
SEC. 36 ANTI-TERRORISM LAWS:
Tenant represents and warrants to and covenants with Landlord that
(i) neither Tenant nor any of its owners or affiliates currently are, or shall be at any time
during the Term, in violation of any Laws relating to terrorism or money laundering (collectively,
the “Anti-Terrorism Laws”), including without limitation Executive Order No. 13224 on Terrorist
Financing, effective September 24, 2001, and regulations of the U.S. Treasury Department’s Office
of Foreign Assets Control (OFAC) related to Specially Designated Nationals and Blocked Persons
(SDN’s OFAC Regulations), and/or the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56) (the “USA
Patriot Act”); (ii) neither Tenant nor any of its owners, affiliates, investors, officers,
directors, employees, vendors, subcontractors or agents is or shall be during the term hereof a
“Prohibited Person” which is defined as follows: (1) a person or entity owned or controlled by,
affiliated with, or acting for or on behalf of, any person or entity that is identified as a
Specially Designated National and Blocked Person on the then-most current list published by OFAC
at its official website,
http://www.treas.gov/offices/eotffc/ofac/sdn/t11sdn.pdf
, or at
any replacement website or other replacement official publication of such list, and (2) a person
or entity who is identified as or affiliated with a person or entity designated as a terrorist, or
associated with terrorism or money laundering pursuant to regulations promulgated in connection
with the USA Patriot Act; and (iii) Tenant has taken appropriate steps to understand its legal
obligations under the Anti-Terrorism Laws and has implemented appropriate procedures to assure its
continued compliance with such laws. Tenant hereby agrees to defend, indemnify, and hold harmless
Landlord, its officers, directors, agents and employees, from and against any and all claims,
damages, losses, risks, liabilities and expenses (including attorney’s fees and costs) arising
from or related to any breach of the foregoing representations, warranties and covenants. At any
time and from time-to-time during the Term, Tenant shall deliver to Landlord within ten (10) days
after receipt of a written request therefor, a written certification or such other evidence
reasonably acceptable to Landlord evidencing and confirming Tenant’s compliance with this Section
51.
SEC. 37 BANKRUPTCY:
If a petition is filed by or against Tenant for relief under Title 11 of the
United States Code, as amended (the
“Bankruptcy Code”
), and Tenant (including for purposes of this
Section Tenant’s successor in bankruptcy, whether a trustee or Tenant as debtor in possession)
assumes and proposes to assign, or proposes to assume and assign, this Lease Agreement pursuant to
the provisions of the Bankruptcy Code to any person or entity who has made or accepted a bona fide
offer to accept an assignment of this Lease Agreement on terms acceptable to Tenant, then notice of
the proposed assignment setting forth (a) the name and address of the proposed assignee, (b) all of
the terms and conditions of the offer and proposed assignment, and (c) the adequate assurance to be
furnished by the proposed assignee of its future performance under the Lease Agreement, shall be
given to Landlord by Tenant no later than twenty (20) days after Tenant has made or received such
offer, but in no event later than ten (10) days prior to the date on which Tenant applies to a
court of competent jurisdiction for authority and approval to enter into the proposed assignment.
Landlord shall have the prior right and option, to be exercised by notice to Tenant given at any
time prior to the date on which the court order authorizing such assignment becomes final and
non-appealable, to receive an assignment of this Lease Agreement upon the same terms and
conditions, and for the same consideration, if any, as the proposed assignee, less any brokerage
commissions which may otherwise be payable out of the consideration to be paid by the proposed
assignee for the assignment of this Lease Agreement. If this Lease Agreement is assigned pursuant
to the provisions of the Bankruptcy Code, Landlord: (i) may require from the assignee a deposit or
other security for the performance of its obligations under the Lease Agreement in an amount
substantially the same as would have been required by Landlord upon the initial leasing to a tenant
similar to the assignee; and (ii) shall receive, as Additional Rent, the sums and economic
consideration described in 12A. Any person or entity to which this Lease Agreement is assigned
pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or
documentation, to have assumed all of the Tenant’s obligations
arising under this Lease Agreement
on and after the date of such assignment. Any such assignee shall, upon demand, execute and deliver
to Landlord an instrument confirming such assumption. No provision of
this Lease Agreement shall be
deemed a waiver of Landlord’s rights or remedies under the Bankruptcy Code to oppose any assumption
and/or assignment of this Lease Agreement, to require a timely performance of Tenant’s obligations
under this Lease Agreement, or to regain possession of the Leased Premises if this Lease Agreement
has neither been assumed or rejected within sixty (60) days after the date of the order for relief
or within such additional time as a court of competent jurisdiction may have fixed.
Notwithstanding anything in this Lease Agreement to the contrary, all
20
amounts payable by Tenant to or on behalf of Landlord under this Lease Agreement, whether or not
expressly denominated as rent, shall constitute Rent for the purposes of Section 502(b)(6) of the
Bankruptcy Code.
SEC. 38 RESERVED:
SEC. 39 HAZARDOUS SUBSTANCES:
A. Tenant shall not cause or permit any Hazardous Substance (as hereinafter defined) to be
used, stored, generated, contained or disposed of on or in the Leased Premises by Tenant, Tenant’s
agents, employees, contractors or invitees in violation of Environmental Laws (as hereinafter
defined). Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold
the Landlord Parties harmless from any and all claims, damages, fines, judgments, penalties,
costs, liabilities and losses (including, without limitation, a decrease in value of the Leased
Premises, damages caused by loss or restriction of rentable or usable space or any damages caused
by adverse impact on marketing of the space and any and all sums paid for settlement of claims,
attorneys’ fees, consultant and expert fees) from or in connection with the presence of any
Hazardous Substance on or under the Leased Premises (i) attributable to periods from and after the
Commencement Date, unless the Hazardous Substance is present solely as a result of the acts of
Landlord, its officers, employees or agents or (ii) attributable to periods prior to the
Commencement Date if such Hazardous Substance is present solely as a result of the acts of Tenant,
its officers, employees or agents. This indemnification includes, without limitation, any and all
costs incurred because of any investigation of the Leased Premises or any cleanup, removal or
restoration mandated by a federal, state or local agency or political subdivision. Without
limitation of the foregoing, if Tenant causes or permits the presence of any Hazardous Substance
on the Leased Premises in Violation of Environmental Laws that results in contamination, Tenant
shall promptly, at its sole expense, take any and all necessary actions to address such violation
in compliance, and cause the Leased Premises to comply, with Environmental Laws; provided,
however, Tenant must obtain Landlord’s prior written approval for any such remedial action which
approval shall not be unreasonably withheld. Tenant shall be responsible for the application for
and maintenance of all required permits, the submittal of all notices and reports, proper
labeling, training and record keeping, and timely and appropriate response to any release or other
discharge by Tenant of a Hazardous Substance under Environmental Laws. The indemnity obligations
of Tenant under this Section 39 shall survive the expiration or earlier termination of this Lease
Agreement.
B. As used herein,
“Hazardous Substance”
means any substance (i) that is toxic, ignitable,
reactive or corrosive or that is regulated by any local, state or federal Laws, and includes any
and all material or substances that are defined as “hazardous waste”, “extremely hazardous waste”,
“hazardous substance” or a “hazardous material” pursuant to any such Laws and includes, but is not
limited to, asbestos, polychlorobiphenyls and petroleum and any fractions thereof, (ii) any
substance which is now or hereafter considered a biological contaminant or which could adversely
impact air quality, including mold, fungi and other bacterial agents and (iii) all biohazardous,
infectious and medical waste. Notwithstanding anything in this Section 39 to the contrary,
“Hazardous Substances” shall not include materials commonly used in the ordinary operations of a
comparable building, including, without limitation, the use of an acid wash to sterilize
materials, provided that (1) such materials are used and properly stored in the Leased Premises in
quantities ordinarily used and stored in comparable office space, (2) such materials are not
introduced into the Building’s plumbing systems or are not otherwise released or discharged in
the Leased Premises or the Building and (3) such materials are in strict compliance with Laws. As
used herein,
“Environmental Laws”
means all applicable federal, state or local laws, regulations,
orders, judgments and decrees regarding health, safety or the environment.
C. Tenant hereby acknowledges that it has received and reviewed the Phase I Environmental Site
Assessment dated August, 2003 prepared by Terra-Mar, Inc. as TMI Project Number HN 03-056 (the
“Environmental Report”
). Landlord represents and warrant to Tenant that, to Landlord’s knowledge as
of the Effective Date, no Hazardous Substances have been used, stored, generated, contained or
disposed of on or in the Leased Premises except as set forth in the Environmental Reports. To the
extent not specifically prohibited by Laws, Landlord agrees to indemnify, defend and hold Tenant
and its officers, employees, and agents harmless from any claim, judgments, damages, penalties,
fines, costs, liabilities or losses from or in connection with the presence of
any Hazardous Substance on or under the Leased Premises (i) attributable to periods prior to the
Commencement Date, unless the Hazardous Substance is present solely as a result of the acts of
Tenant, its officers, employees or
agents or (ii) attributable to periods from and after the Commencement Date if the Hazardous
Substance is present
21
solely as a result of the acts of Landlord, its officers, employees or agents. The indemnity
obligations of Landlord under this Section 39 shall survive the expiration or earlier
termination of this Lease Agreement.
SEC. 40 NO MONEY DAMAGES FOR FAILURE TO CONSENT; WAIVER OF CERTAIN DAMAGES:
Wherever in this Lease Agreement Landlord’s consent or approval is required, if Landlord refuses
to grant such consent or approval, whether or not Landlord expressly agreed that such consent or
approval would not be unreasonably withheld, Tenant shall not make, and Tenant hereby waives,
any claim for money damages (including any claim by way of set-off, counterclaim or defense)
based upon Tenant’s claim or assertion that Landlord unreasonably withheld or delayed its
consent or approval. Tenant’s sole remedy shall be an action or proceeding to enforce such
provision, by specific performance, injunction or declaratory judgment.
IN NO EVENT SHALL THE
LANDLORD PARTIES BE LIABLE FOR, AND TENANT HEREBY WAIVES ANY CLAIM
FOR, ANY INDIRECT,
CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING LOSS OF PROFITS OR BUSINESS OPPORTUNITY,
ARISING UNDER OR IN CONNECTION WITH THIS LEASE AGREEMENT.
SEC. 41 ACKNOWLEDGMENT OF NON-APPLICABILITY OF DTPA:
It is the understanding and intention of
the parties that Tenant’s rights and remedies with respect to the transactions provided for and
contemplated in this Lease Agreement (collectively, this
“Transaction”
) and with respect to all
acts or practices of Landlord, past, present or future, in connection with this Transaction, are
and shall be governed by legal principles other than the Texas Deceptive Trade Practices -
Consumer Protection Act (the
“DTPA”
). Accordingly, Tenant hereby (a) agrees that under Section
17.49(f) of the DTPA this Transaction is not governed by the DTPA and (b) certifies, represents
and warrants to Landlord that (i) Tenant has been represented by legal counsel in connection
with this Transaction who has not been directly or indirectly identified, suggested or selected
by the Landlord and Tenant has conferred with Tenant’s counsel concerning all elements of this
Lease Agreement (including, without limitation, this Section 41) and this Transaction and (ii)
the Leased Premises will not be occupied by Tenant as Tenant’s family residence. Tenant
expressly recognizes that the total consideration as agreed to by Landlord has been predicated
upon the inapplicability of the DTPA to this Transaction and that Landlord, in determining to
proceed with the entering into of this Lease Agreement, has expressly relied on the
inapplicability of the DTPA to this Transaction.
SEC. 42 ATTORNEYS’ FEES:
In the event either party defaults in the performance of any of the
terms, agreements or conditions contained in this Lease Agreement and the other party places the
enforcement of this Lease Agreement, or any part thereof, or the collection of any Rent due or
to become due hereunder, or recovery of the possession of the Leased Premises, in the hands of
an attorney who files suit upon the same, and should such non-defaulting party prevail in such
suit, the defaulting party agrees to pay the other party’s reasonable attorneys’ fees.
SEC. 43 AUTHORITY OF PARTIES:
If Tenant is a corporation, partnership or other entity, Tenant
warrants and represents unto Landlord that (i) Tenant is a duly organized and existing legal
entity, in good standing in the State of Texas, (ii) Tenant has full right and authority to
execute, deliver and perform this Lease Agreement, (iii) the person executing this Lease
Agreement was authorized to do so and (iv) upon request of Landlord, such person will deliver to
Landlord satisfactory evidence of his or her authority to execute this Lease Agreement on behalf
of Tenant.
B. Landlord represents and warrant to Tenant that (i) Landlord is a corporation operating
under
Chapter 505 of the Texas Local Government Code, (ii) Landlord has full right and authority to
execute, deliver and perform this Lease Agreement, (iii) the person executing this Lease
Agreement was authorized to do so and (iv) upon request of Tenant, such person will deliver to
Tenant satisfactory evidence of his or her authority to execute this Lease Agreement on behalf of
Landlord (the Parties agreeing that a copy of minutes from meetings of the City Council of the
City of Pearland, Texas approving this Lease Agreement will be sufficient to satisfy the
obligation set forth in this subsection (iv)).
SEC. 44 INABILITY TO PERFORM:
Whenever a period of time is prescribed for the taking of an action
by Landlord or Tenant, the period of time for the performance of such action shall be extended by
the number of days that the performance is actually delayed due to strikes, acts of God, shortages
of labor or materials, war, terrorist attacks (including bio-chemical attacks), civil disturbances
and other causes beyond the reasonable control of such party (Tenant’s or Landlord’s financial
inability, such as inability to obtain financing or lack of capital, excepted)
(“Force Majeure”
);
provided, however, nothing in this Section 44 shall excuse Tenant from the prompt payment of any
Rent or other charge required of Tenant hereunder. In addition, any party asserting that an
event of Force
22
Majeure has occurred must deliver to the other party written notice of such an event within
fifteen (15) days after the commencement of the event. Such notice must include a reasonably
detailed description of the event together with the anticipated period of delay.
SEC. 45 JOINT AND SEVERAL TENANCY:
If more than one person executes this Lease Agreement as
Tenant, their obligations hereunder are joint and several, and any act or notice of or to, or
refund to, or the signature of, any one or more of them, in relation to the renewal or termination
of this Lease Agreement, or under or with respect to any of the terms hereof shall be fully
binding on each and all of the persons executing this Lease Agreement as a Tenant.
SEC. 46 EXECUTION OF THIS LEASE AGREEMENT:
The submission of an unsigned copy of this Lease
Agreement to Tenant for Tenant’s consideration does not constitute an offer to lease the Leased
Premises or an option to or for the Leased Premises. This Lease Agreement shall become effective
and binding only upon the execution and delivery of this Lease Agreement by both Landlord and
Tenant.
SEC. 47 WAIVER OF TRIAL BY JURY; COUNTERCLAIM:
Landlord and Tenant hereby waive trial by jury in
any action, proceeding or counterclaim brought by either party against the other on any matters in
any way arising out of or connected with this Lease Agreement, the relationship of Landlord and
Tenant, Tenant’s use or occupancy of the Leased Premises, or the enforcement of any remedy under
any applicable Laws. If Landlord commences any summary proceeding against Tenant, Tenant shall not
interpose any counterclaim of any nature or description in any such proceeding (unless failure to
impose such counterclaim would preclude Tenant from asserting in a separate action the claim which
is the subject of the counterclaim), and will not seek to consolidate any such proceeding with any
other action which may have been or will be brought in any other court by Tenant.
SEC. 48 CALCULATION OF TIME PERIODS:
Should the calculation of any of the various time periods
provided for herein result in an obligation becoming due on a Saturday, Sunday or legal holiday,
then the due date of such obligation or scheduled time of occurrence of such event shall be delayed
until the next business day.
SEC. 49 RENEWAL OPTIONS:
Tenant shall have, and is hereby granted, the options (the
“Renewal
Options”
) to extend the Term of this Lease Agreement for two (2) additional periods of five (5) years each
(as applicable, the
“Extended Term”
) upon and subject to the following terms, conditions and
provisions:
A. The Renewal Options may only be exercised by Tenant giving irrevocable written notice
thereof to Landlord no earlier than fourteen (14) months nor later than nine (9) months prior to
the expiration of the then current Term of this Lease Agreement. If Tenant fails to give Landlord
such written notice of exercise of such Renewal Option within such specified time period, Tenant
shall be deemed to have elected not to exercise, and to have waived, such Renewal Option and the
Renewal Option shall automatically terminate and expire and be of no further force and effect. It
is expressly agreed that Tenant shall not have the option to extend the Term of this Lease
Agreement beyond the Extended Term. If Tenant exercises either of the Renewal Options, such
Extended Term shall commence immediately upon the expiration of the then current Term of this Lease
Agreement (as applicable, the
“Extended Term Commencement Date”
).
B. If Tenant exercises either of the Renewal Options (in accordance with and subject to the
provisions of this Section 49), the Extended Term shall be upon, and subject to, all of the terms,
covenants and conditions provided in this Lease Agreement except for any terms, covenants and
conditions that are expressly or by their nature inapplicable to the Extended Term (including,
without limitation, the right to renew the Term of this Lease Agreement beyond the Extended Term)
and except that (i) the annual Base Rent during the applicable Extended Term shall be equal to the
Prevailing Market Rental Rate (as defined and determined in accordance with Section 50 below) at
the time Tenant exercises such Renewal Option, and (ii) the Leased Premises and all leasehold
improvements relating thereto will be provided in the condition they exist (i.e.,
“AS IS”
and
“WITH
ALL FAULTS”
) on the Extended Term Commencement Date, and this Lease Agreement shall be deemed to
have been automatically amended as of the Extended Term Commencement Date in accordance with this
Section 49. Tenant and Landlord shall promptly (but in no event longer than fifteen (15) days after
Landlord’s submission of the amendment to Tenant) execute and deliver an appropriate amendment of
this Lease Agreement to evidence such terms following commencement of the Extended Term.
23
C. Notwithstanding any provision herein to the contrary, Tenant shall not have the right to
extend the Term of this Lease Agreement pursuant to this Section 49 and such right shall automatically
terminate and be of no further force and effect if, at the time Tenant exercises such Renewal
Option or on the Extended Term Commencement Date, Tenant is in default under this Lease Agreement
beyond any applicable grace period.
SEC. 50 PREVAILING MARKET RENTAL RATE DETERMINATION:
A. As used in this Lease Agreement, the term
“Prevailing Market Rental Rate”
means, as to
any space subject to this Lease Agreement for which it is being determined (the
“Subject
Premises”
), the annual amount of “gross” rental that a willing tenant would pay in a similar type
transaction (i.e., renewal) and a willing landlord would accept in arm’s length, bona fide
negotiations for lease of the subject premises to be executed at the time of determination and to
commence on the commencement of the subject lease term, based upon other lease transactions made
in the Building and other comparable buildings in the Houston, Texas metropolitan area, taking
into consideration all relevant terms and conditions of any comparable leasing transactions,
including, without limitation: (i) location, quality and age of the building (taking into
consideration renovations); (ii) use and size of the space in question; (iii) extent of leasehold
improvement allowances (considering existing improvements); (iv) the amount of any abatement of
rental or other charges; (v) lease takeovers/assumptions; (vi) refurbishment and repainting
allowances; (vii) any and all other concessions or inducements; (viii) extent of services
provided or to be provided; (ix) distinction between “gross” and “net” lease; (x) any other
adjustments (including by way of indexes) to base rental; (xi) credit standing and financial
stature of the tenant or subtenant; and (xii) length of term.
B. Within fifteen (15) days after receipt of Tenant’s notice of exercise of the Renewal
Option, Landlord will notify Tenant in writing of its determination of the Prevailing Market
Rental Rate for the Subject Premises. Tenant shall deliver written notice to Landlord within
fifteen (15) days after receipt of Landlord’s Prevailing Market Rental Rate determination that it either (i) accepts Landlord’s
determination of the Prevailing Market Rental Rate or (ii) rejects Landlord’s determination of
Prevailing Market Rental Rate. In the event Tenant rejects the Landlord’s determination of the
Prevailing Market Rental Rate for the Renewal Option in accordance with the preceding
sentence, Tenant and Landlord shall negotiate in good faith for the ensuing thirty (30) days
in order to reach agreement on the Prevailing Market Rental Rate for the Renewal Option. If at
the end of this thirty (30) day period, Tenant and Landlord are unable to mutually agree with
respect to the Prevailing Market Rental Rate for the Extended Term, then (i) the parties shall
proceed with the arbitration process described in Section 50C. below to determine the
Prevailing Market Rental Rate with respect to the Subject Premises or (ii) Tenant may choose
to terminate negotiations of the Prevailing Market Rental Rate by delivery of written notice
to Landlord within five (5) days after the expiration of such thirty (30) day period and the
Expiration Date shall be the last day of the initial ten year Term or the last day of the
first Extended Term, as applicable.
C. If at the end of the thirty (30) day period described above Tenant and Landlord are
unable to mutually agree with respect to the Prevailing Market Rental Rate for the Extended Term
and Tenant does not exercise its right to terminate negotiations as set forth in Section 50B,
then Landlord and Tenant shall each nominate and appoint a Qualified Broker (as defined below) to
determine the Prevailing Market Rental Rate for the Subject Premises. Upon the appointment of the
two (2) Qualified Brokers, they shall be instructed to separately, fairly and impartially
determine the Prevailing Market Rental Rate for the Subject Premises. The two (2) Qualified
Brokers shall afford to Landlord and Tenant the right to submit evidence with respect to such
rate and each Qualified Broker shall, with all possible speed, make his determinations and
deliver a written report thereof to Landlord and Tenant within thirty (30) days after his
appointment. If the higher of the two (2) Prevailing Market Rental Rate determinations is not
more than one hundred five percent (105%) of the lower determination, the average of the rates so
determined shall be binding upon Landlord and Tenant and shall be the Prevailing Market Rental
Rate for purposes of the Subject Premises. If the higher determination is more than one hundred
five percent (105%) of the lower determination, the two (2) Qualified Brokers shall within five
(5) days after both of such Qualified Brokers have submitted their written reports to Landlord
and Tenant select by mutual agreement a third (3rd) Qualified Broker and give written notice of
such appointment to Landlord and Tenant. If the two (2) Qualified Brokers fail to agree upon the
third Qualified Broker within said five (5) day period, a third (3rd) Qualified Broker shall be
selected by mutual agreement of Landlord and Tenant within a further period of five (5) days. If
Landlord and Tenant cannot so agree on the third (3rd) Qualified Broker, then either Landlord or
Tenant may elect to have the third Qualified Broker appointed by any Federal District Judge for
the Southern District of Texas. The third (3rd) Qualified Broker shall be instructed to fairly
and impartially determine which of the two (2) original Qualified Broker’s determination
24
of the Prevailing Market Rental Rate most closely approximates his determination thereof, and the
original Qualified Broker’s determination so selected shall be binding upon Landlord and Tenant and
shall be the Prevailing Market Rental Rate for purposes of the Subject Premises. The fees and
expenses of all of the Qualified Brokers shall be divided equally between Landlord and Tenant. If
any Qualified Broker appointed as aforesaid shall thereafter become unable or unwilling to act,
such Qualified Broker’s successor shall be appointed in the same manner as provided in this Section
50C. for the appointment of that Qualified Broker.
D. As used herein, the term
“Qualified Broker”
means a real estate broker who (i) is
licensed in the State of Texas, (ii) has been actively and continuously engaged in leasing space in other
comparable buildings in Southeast Texas for not less than the previous ten (10) year period,
(iii) during the preceding three (3) year period has individually represented a party to a
comparable space lease of at least 50,000 square feet; and (iv) has not represented Landlord or
Tenant during the preceding five (5) year period.
SEC. 51 PURCHASE OPTION:
A. Tenant shall have the right (the
“Purchase Option”
) to purchase, subject to the terms and
conditions contained herein, all, but not less than all, of the Leased Premises, together with
all of Landlord’s right, title and interest appurtenant thereto (the Leased Premises and rights
described above in this Section 51 being herein referred to as the
“Purchase Option Property”
).
The Purchase Option shall be in effect from the Commencement Date until the sixty-first (61st)
day preceding the tenth (10th) anniversary of the Commencement Date (the
“Purchase Option
Period”
). Provided Tenant is not in default hereunder (after the expiration of any applicable
notice and cure periods), Tenant may exercise the Purchase Option by execution and delivery to
Landlord of a Purchase and Sale Agreement (the
“Purchase Agreement”
) in form and substance
reasonably acceptable to Landlord and Tenant, not later than the last day of the Purchase Option
Period.
If Tenant fails to exercise the Purchase Option in accordance with the terms of this Lease
Agreement within the Purchase Option Period, then the Purchase Option and the rights thereunder
of Tenant shall automatically and immediately terminate without notice.
B. The conveyance of the Purchase Option Property shall occur on the first business day that
is sixty (60) calendar days after Landlord and Tenant execute and deliver to one another the
Purchase Agreement as required by Section 52A hereof at 1:00 p.m. local time at the office of
Andrews Kurth LLP, 600 Travis Street, Suite 4200, Houston, Texas 77002. At the closing, Tenant
shall pay to Landlord the Purchase Price (defined below), and the Purchase Option Property shall
be conveyed by Landlord by special warranty deed on an
“AS-IS,” “WHERE-IS,” “WITH ALL FAULTS”
basis. Landlord shall have the obligation to deliver a title insurance policy to Tenant, the cost
of which shall be borne by Landlord; provided, however, that during the periods in which the
Pearland Economic Development Corporation is the Landlord hereunder, the cost of such a title
insurance policy shall be borne by Tenant.
C. The
“Purchase Price”
shall mean an amount equal the fair market value of the Purchase
Option Property agreed upon in writing between Landlord and Tenant within thirty (30) days
following Tenant’s exercise of
the Purchase Option. Landlord and Tenant agree to act in good faith to determine the Purchase
Price and that the factors used to determine the Purchase Price of the Purchase Option Property
shall include, among other things, the size of the Purchase Option Property, the improvements
located thereon and the location of the Purchase Option Property. If, however, Landlord and Tenant
have not agreed upon the Purchase Price within such thirty (30) day period, then Tenant may
choose to terminate negotiations and rescind its exercise of the purchase option by delivery of
written notice to Landlord within five (5) days after the expiration of such thirty (30) day
period, and in such event, Tenant’s exercise of the purchase option shall be deemed rescinded
without any further action required by Landlord or Tenant. If at the end of the thirty (30) day
period described above Tenant and Landlord are unable to mutually agree with respect to the
Purchase Price and Tenant has not exercised the right to terminate negotiations as set forth in
the preceding sentence, the Fair Market Value will be determined by averaging two (2) current
appraisals from licensed real estate appraisers with at least five (5) years experience appraising
similar property in the Houston, Texas metropolitan area, one (1) obtained by Landlord and one (1)
obtained by Tenant. The parties shall obtain such appraisals within thirty (30) days. If the value
determined by one (1) appraiser exceeds the value determined by the other appraiser by more than
ten percent (10%) of the lower appraisal, then the two (2) appraisers shall select a third
independent, qualified, licensed, real estate appraiser with at least five (5) years experience
appraising similar
25
property in the Houston, Texas metropolitan area. Such third appraiser shall select the one (1) of
the two (2) appraisals which the third appraiser determines is closest to the value of the
Purchase Option Property determined by the third appraiser, provide written notice of such
decision to the parties and such appraisal shall be the Purchase Price of the Purchase Option
Property. Landlord and Tenant shall each bear the cost of their own appraisers, and the cost of
the third appraiser shall be shared equally between Landlord and Tenant.
D. If Tenant elects to exercise the Purchase Option and, for any reason other than a default
by Landlord, as seller, under the Purchase and Sale Agreement, Tenant shall fail to purchase the
Property as provided for herein and in the Purchase and Sale Agreement, then such Purchase Option
shall no longer be available to Tenant and the terms of this Lease Agreement shall otherwise
remain in full force and effect as if such Purchase Option were never exercised.
SEC. 52 FIRST EXPANSION OPTION:
A. Subject to and upon the terms, provisions and conditions set forth in this Section 52,
Tenant shall have, and is hereby granted, the one-time option (the
“First Expansion Option”
) to
cause Landlord to construct on the land identified as “Phase 2” in
Exhibit I
attached
hereto (the
“First Expansion Option Land”
), and to lease from Landlord, certain new improvements
to contain not more than thirty-four thousand (34,000) square feet, which
improvements may be additions to or expansions of the Building and/or the Improvements (such
First Expansion Option Land and improvements, the
“First Expansion Option Premises”
). Tenant may
exercise the First Expansion Option by written notice delivered to Landlord at any time prior to
the sixth (6th) anniversary of the Commencement Date; provided, however, that if Tenant exercises
the First Expansion Option at any time after the third (3
rd
) anniversary of the
Commencement Date, it shall be a condition to the effectiveness of such exercise that Tenant
simultaneously exercise the first Renewal Option and extend the term for an additional five (5)
year period. If Tenant does not exercise the First Expansion Option by the required time period,
the First Expansion Option shall be waived.
B. The First Expansion Options may be exercised only if, at the time of such exercise and at
the time of Landlord’s delivery of the First Expansion Option Premises to Tenant (a) no Event of
Default exists and (b) Tenant is in possession of and operating from the entire Leased Premises
(unless Landlord, in its sole discretion, elects to waive such condition(s)). If such condition(s)
are not satisfied or waived by Landlord, any purported exercise of the First Expansion Option
shall be null and void.
C. If Tenant elects to exercise the First Expansion Option, the First Expansion Premises shall
be subject to all of the terms, covenants and conditions of this Lease, except that Base Rent for
the First Expansion Premises shall be determined in accordance with the terms of Section 50 above
for the Prevailing Market Rental Rate applied,
mutatis mutandis
, for the determination of such Base
Rent; provided, however, that in no event shall the Prevailing Market Rental Rate be less than an
amount that will cause Landlord to recover its costs and expenses to acquire the First Expansion
Option Land (including, but not limited to, closing and other typical acquisition costs such as
title insurance and environmental studies), to construct the First Expansion Option Premises
(including, but not limited to, hard costs, soft costs, contractor’s fees and costs and fees paid
or incurred for architect, engineering, permitting, and other related and similar costs), to
finance one hundred percent of each of the foregoing (including, but not limited to, interest and
fees) and to recover costs which were, in the reasonable judgment of Landlord, necessary for the
efficient and proper development of the project and to protect Landlord’s interests therein.
Tenant’s obligation to pay the rent for the First Expansion Premises shall commence on the date
(the
“First Expansion Rental Commencement Date”
) that is the earlier to occur of (i) the date that
is thirty (30) days after the date on which Tenant commences operations from any portion of the
First Expansion Premises or (ii) the date that is thirty (30) days after the date on which
Substantial Completion with respect to the First Expansion Option Premises occurs.
D. If Tenant exercises the First Expansion Option, Landlord and Tenant agree that the terms
and conditions of this Lease Agreement governing the development, construction and acceptance of
the Improvements, including, without limitation,
Exhibit D
, will apply, mutatis mutandis,
to the development, construction and acceptance of the First Expansion Premises; provided,
however, that, with respect to the First Expansion Option, the Target
Date shall be the date that
is a reasonable outside date for completion of the proposed improvements given
26
the scope of work and the Tenant shall have no right to terminate this Lease Agreement for the
failure by Landlord to cause Substantial Completion of the First Expansion Option Premises to
occur on or before a certain date.
E. In the event Tenant timely exercises the First Expansion Option, pursuant to the
provisions of this Section 52, Landlord and Tenant shall execute and deliver an amendment to this Lease Agreement (in
a form provided by Landlord) specifying (a) the First Expansion Rental Commencement Date, (b) the
Base Rent schedule for the First Expansion Premises, (c) a description of the First Expansion
Option Premises, and (d) that the First Expansion Option Premises shall be included in the Leased
Premises.
SEC. 53 SECOND EXPANSION OPTION:
A. Subject to and upon the terms, provisions and conditions set forth in this Section 53 and
only if Tenant shall have exercised the First Expansion Option, Tenant shall have, and is hereby
granted, the one-time option (the
“Second Expansion Option”
) to cause Landlord to construct on the
land identified as “Phase 3” in
Exhibit I
attached hereto (the
“Second Expansion Option
Land”
), and to lease from Landlord, certain new improvements to contain not more than forty-five
thousand (45,000) square feet, which improvements may be additions to or expansions of the Building
and/or the Improvements (such Second Expansion Option Land and improvements, the
“Second Expansion
Option Premises”
). Tenant may exercise the Second Expansion Option by written notice delivered to
Landlord at any time prior to the sixth (6th) anniversary of the Commencement Date; provided,
however, that if Tenant exercises the Second Expansion Option at any time after the third
(3
rd
) anniversary of the Commencement Date, it shall be a condition to the effectiveness
of such exercise that Tenant simultaneously exercise the first Renewal Option and extend the Term
for an additional five (5) year period. If Tenant does not exercise the Second Expansion Option by
the required time period, the Second Expansion Option shall be waived.
B. The Second Expansion Options may be exercised only if, at the time of such exercise and at
the time of Landlord’s delivery of the Second Expansion Option Premises to Tenant (a) no Event of
Default exists, (b) Tenant is in possession of and operating from the entire Leased Premises,
including the First Expansion Option Premises and (c) Tenant has exercised the first Renewal
Option (unless Landlord, in its sole discretion, elects to waive such condition(s)). If such
condition(s) are not satisfied or waived by Landlord, any purported exercise of the Second
Expansion Option shall be null and void.
C. If Tenant elects to exercise the Second Expansion Option, the Second Expansion Premises
shall be subject to all of the terms, covenants and conditions of this Lease, except that Base
Rent for the Second Expansion Premises shall be determined in accordance with the terms of Section
50 above for the Prevailing Market Rental Rate applied,
mutatis mutandis
, for the determination of
such Base Rent; provided, however, that in no event shall the Prevailing Market Rental Rate be
less than an amount that will cause Landlord to recover its costs and expenses to acquire the
Second Expansion Option Land (including, but not limited to, closing and other typical acquisition
costs such as title insurance and environmental studies), to construct the Second Expansion Option
Premises (including, but not limited to, hard costs, soft costs, contractor’s fees and costs and
fees paid or incurred for architect, engineering, permitting, and other related and similar
costs), to finance one hundred percent of each of the foregoing (including, but not limited to,
interest and fees) and to recover costs which were, in the reasonable judgment of Landlord,
necessary for the efficient and proper development of the project and to protect Landlord’s
interests therein. Tenant’s obligation to pay the rent for the Second Expansion Premises shall
commence on the date (the
“Second Expansion Rental Commencement Date”
) that is the earlier to
occur of (i) the date that is thirty (30) days after the date on which Tenant commences operations
from any portion of the Second Expansion Premises or (ii) the date that is thirty (30) days after
the date on which Substantial Completion with respect to the Second Expansion Option Premises
occurs.
D. If Tenant exercises the Second Expansion Option, Landlord and Tenant agree that the terms
and conditions of this Lease Agreement governing the development, construction and acceptance of
the Improvements, including, without limitation,
Exhibit D
, will apply, mutatis mutandis,
to the development, construction and acceptance of the Second Expansion Premises; provided,
however, that, with respect to the Second Expansion Option, the Target Date shall be the date that
is a reasonable outside date for completion of the proposed improvements given the Scope of Work
and the Tenant shall have no right to terminate this Lease Agreement for the failure by Landlord
to cause Substantial Completion of the Second Expansion Option Premises to occur on or before a
certain date.
27
E. In the event Tenant timely exercises the Second Expansion Option, pursuant to the
provisions of this Section 53, Landlord and Tenant shall execute and deliver an amendment to this Lease
Agreement (in a form provided by Landlord) specifying (a) the Second Expansion Rental
Commencement Date, (b) the Base Rent schedule for the Second Expansion Premises, (c) a
description of the Second Expansion Option Premises, and (d) that the Second Expansion Option
Premises shall be included in the Leased Premises.
SEC. 54 TENANT’S RIGHT OF FIRST REFUSAL:
A. In the event Tenant (a) fails to exercise the First Expansion Option prior to the sixth
(6th) anniversary of the Commencement Date or (b) exercises the First Expansion Option prior to
the sixth (6th) anniversary of the Commencement Date but does not occupy the First Expansion
Option Premises (unless Landlord is then constructing the First Expansion Option Premises or the
parties are then negotiating the terms to govern the First Expansion Option Premises in
accordance with the terms of Section 52 of this Lease Agreement, such as determination of the
Prevailing Market Rental Rate) as of the sixth (6th) anniversary of the Commencement Date,
Landlord shall have the right to terminate this Lease Agreement with respect to the First
Expansion Option Land, Tenant’s interest in the First Expansion Option Land will automatically
revert to Landlord without any further action required by Tenant and except as otherwise set
forth in this Section 54, the Tenant shall have no further rights with respect thereto. In such
event, Landlord may construct additional building improvements on the First Expansion Option
Land, which additional building improvements may be additions to or expansions of the Building
and/or the Improvements (the
“FEO Improvements”
), and in connection with any bona fide offer
Landlord receives to rent all or any portion of the FEO Improvements, before or after the
construction thereof, which offer Landlord shall be ready and willing to accept, then Tenant
shall have the right to rent such portion of the FEO Improvements at the
same rent, and upon the same terms and conditions as shall be offered by the prospective
tenant. Landlord shall give Tenant notice of the rent and all material terms and conditions
of such offer by such prospective tenant within ten (10) days after receipt; and Tenant shall
have a period of thirty (30) days after such notice from Landlord in which to elect to rent
such portion of the FEO Improvements at the same rent and on the same terms and conditions as
offered by such prospective tenant. If Tenant so notifies Landlord within said thirty (30)
days, this Lease Agreement shall be amended appropriately thereafter to reflect the addition
of such portion of the FEO Improvements; provided that the terms of this Lease Agreement, as
amended, with respect to the FEO Improvements shall be consistent with the terms set forth in
the bona fide offer.
B. If Tenant elects not to lease such portion of the FEO Improvements or shall fail to give
Landlord appropriate notice within the time provided for herein, then Landlord may lease such
portion of the FEO Improvements to another tenant, but only at the same rent, and on the same
terms and conditions of such offer; provided, however, that if the lease of such portion of the
FEO Improvements to such other tenant is not executed within one hundred twenty (120) days
following Landlord’s delivery of the offer to Tenant, then Landlord shall again offer to lease
such portion of the FEO Improvements to Tenant pursuant to the terms and conditions of such offer
before proceeding to lease such portion of the FEO Improvements to such other tenant.
C. In the event Tenant (a) fails to exercise the Second Expansion Option prior to the sixth
(6th) anniversary of the Commencement Date or (b) exercises the Second Expansion Option prior to
the sixth (6th) anniversary of the Commencement Date but does not occupy the Second Expansion
Option Premises (unless Landlord is then constructing the Second Expansion Option Premises or the
parties are then negotiating the terms to govern the Second Expansion Option Premises in
accordance with the terms of Section 53 of this Lease Agreement, such as determination of the
Prevailing Market Rental Rate) as of the sixth (6th) anniversary of the Commencement Date,
Landlord shall have the right to terminate this Lease Agreement with respect to the Second
Expansion Option Land, Tenant’s interest in the Second Expansion Option Land will automatically
revert to Landlord without any further action required by Tenant, and except as otherwise set
forth in this Section 54, the Tenant shall have no further with respect thereto. In such event,
Landlord may construct additional building improvements on the Second Expansion Option Land,
which additional building improvements may be additions to or expansions of the Building and/or
the Improvements (the
“SEO Improvements”
), and in connection with any bona fide offer Landlord
receives to rent all or any portion of the SEO Improvements, before or after the construction
thereof, which offer Landlord shall be ready and willing to accept, then Tenant shall have the
right to rent such portion of the SEO Improvements at the same rent, and upon the same terms and
conditions as shall be offered by the prospective tenant. Landlord shall give Tenant notice of
the rent and all material terms and conditions of such offer by such prospective tenant within
ten (10) days after receipt; and Tenant shall have a period of thirty (30) days after such notice
from Landlord
28
in which to elect to rent such portion of the SEO Improvements at the same rent and on the same
terms and conditions as offered by such prospective tenant. If Tenant so notifies Landlord within
said thirty (30) days, this Lease Agreement shall be amended appropriately thereafter to reflect
the addition of such portion of the SEO Improvements; provided that the terms of this Lease
Agreement, as amended, with respect to the SEO Improvements shall be consistent with the terms
set forth in the bona fide offer.
D. If Tenant elects not to lease such portion of the SEO Improvements or shall fail to give
Landlord appropriate notice within the time provided for herein, then Landlord may lease such
portion of the SEO Improvements to another tenant, but only at the same rent, and on the same
terms and conditions of such offer; provided, however, that if the lease of such portion of the
SEO Improvements to such other tenant is not executed within one hundred twenty (120) days
following Landlord’s delivery of the offer to Tenant, then Landlord shall again offer to lease
such portion of the SEO Improvements to Tenant pursuant to the terms and conditions of such offer
before proceeding to lease such portion of the SEO Improvements to such other tenant.
E. In the event Landlord terminates this Lease Agreement with respect to the First Expansion
Option Land or the Second Expansion Option Land pursuant to the terms and conditions of this
Section 54, Tenant hereby agrees to provide, grant and permit easements requested by Landlord over
and across the remaining portions of the Leased Premises for vehicular and pedestrian ingress and
egress to and from the First Expansion Option Land, the FEO Improvements, the Second Expansion
Option Land and/or the SEO Improvements, as appropriate, utility services, and easements therefor
over and across the remaining portions of the Leased Premises, and all other easements and rights
(including, without limitation, creating common areas between the premises for shared use, such as
shared walls, drives and loading docks) as may be necessary for the use thereof and for the
construction of improvements and operations from such improvements located on the First Expansion
Option Land and/or the Second Expansion Option Land, as appropriate. Notwithstanding the foregoing,
Landlord and Tenant agree that Tenant will not be obligated to provide, grant or permit any
easements that could reasonably be expected to (i) cause Tenant to cease its manufacturing
operations within Building, (ii) unreasonably interfere with Tenant’s operations in the Leased
Premises or (iii) prohibit Tenant’s use of the Leased Premises for the Permitted Use; provided,
however, Tenant acknowledges that the shared use between Tenant and the proposed owners and/or
tenants of the First Expansion Option Land, the FEO Improvements, the Second Expansion Option Land
and/or the SEO Improvements of certain portions of the Leased Premises will, by its nature, cause a
certain amount of interference with Tenant’s operations at the Leased Premises, and Tenant agrees
that the mere sharing of certain portions of the Leased Premises will not alone constitute a
breach of subsections (i), (ii) or (iii) of this sentence.
SEC. 55 TENANT’S SELF-HELP REMEDY:
In the event (i) Landlord fails to timely keep, observe or
perform any of Landlord’s obligations under Section 8A. of this Lease Agreement on Landlord’s
part to be kept, performed or observed and (ii) such failure has a material adverse affect on
Tenant’s ability to use and operate the Leased Premises in accordance with the terms of this
Lease Agreement, then (any such event, circumstance or failure by Landlord being herein referred
to as a
“Landlord Failure”
), Tenant shall have the right, but not the obligation, upon
satisfaction of the requirements and conditions set forth in this Section 55, to take all
commercially reasonable efforts and measures to remedy and cure such Landlord Failure (such
rights of Tenant being herein referred to as
“Tenant’s Self-Help Rights”
). Prior to exercising
Tenant’s Self-Help Rights, Tenant shall deliver written notice to Landlord of the relevant
Landlord Failure and Tenant’s intention to exercise Tenant’s Self-Help Rights with respect to
such Landlord Failure (a
“Tenant’s Notice of Intent”
). Each Tenant’s Notice of Intent shall
describe, in reasonable detail, the particular Landlord Failure for which Tenant intends to
exercise Tenant’s Self-Help Rights. In the event all of the matters set forth in subsections (i)
and (ii) below do not occur on or before twenty (20) calendar days after the date Tenant delivers
Tenant’s Notice of Intent to Landlord and provided a Landlord Failure has occurred, Tenant shall
have the right to exercise Tenant’s Self-Help Rights with respect to the particular Landlord
Failure described in Tenant’s Notice of Intent:
(i) Landlord has (a) fully remedied or cured the Landlord Failure described in Tenant’s
Notice of Intent or (b) delivered to Tenant a commercially reasonable remedial plan to
fully remedy and cure the Landlord Failure described in Tenant’s Notice of Intent in
accordance with the terms of this Lease Agreement on or before the earliest reasonably
possible date (a
“Remedial Plan”
); and
(ii) Only if Landlord has delivered a Remedial Plan to Tenant pursuant to the above
clause (i), Landlord has (a) commenced commercially reasonable efforts to fully cure and remedy the
Landlord
29
Failure described in Tenant’s Notice of Intent in accordance with the Remedial Plan so that
such failure may be fully cured and remedied in accordance with the terms of this Lease
Agreement at the earliest reasonably possible date without regard to Landlord’s access to,
or the availability of, funds for same and (b) thereafter continuously and diligently
prosecutes the full cure and remedy of such Landlord Failure.
B. In the event Landlord timely delivers a Remedial Plan to Tenant pursuant to the above
clause (i) but thereafter fails to continuously and diligently prosecute the full cure and remedy
of the Landlord Failure described in Tenant’s Notice of Intent so that such Landlord Failure may
be fully cured and remedied at the earliest reasonably possible date, without regard to Landlord’s
access to, or the availability of any funds for the same, Tenant shall have the right to exercise
Tenant’s Self-Help Rights with respect to the particular Landlord Failure described in Tenant’s
Notice of Intent in question upon the delivery of a second Notice to Landlord stating that such
failure has occurred.
C. Notwithstanding the foregoing, in the event of an Emergency (as defined below) that is
either created or perpetuated by Landlord’s failure to timely keep, observe or perform any of
Landlord’s obligations under Section 8A. of this Lease Agreement on its part to be kept,
performed or observed (in such circumstance, also being a
“Landlord Failure”
hereunder), Tenant’s
Self-Help Rights with respect to such Landlord Failure shall not be conditioned upon satisfaction
of the above requirements or conditions, except that in such circumstances Tenant shall (i) use
reasonable efforts to notify Landlord by telephone of any such Landlord Failure prior to Tenant
exercising Tenant’s Self-Help Rights with respect to the same and (ii) as soon as reasonably
possible, but in no event later than two (2) calendar days after Tenant commences to exercise
Tenant’s Self-Help Rights, deliver written notice to Landlord of such Landlord Failure and
Tenant’s exercise of Tenant’s Self-Help Rights with respect to the same. Such written notice shall
also describe, in reasonable detail, the particular Landlord Failure and the steps Tenant has
taken to cure or remedy the same. As used herein, the term
“Emergency”
means any circumstance in
which (i) Tenant in good faith believes that immediate action is required in order to safeguard
lives or the Leased Premises against the likelihood of injury, damage or destruction due to an
identified threat, or (ii) Laws require that immediate action is taken in order to safeguard lives
or the Leased Premises.
D. In the event Tenant is entitled to exercise Tenant’s Self-Help Rights pursuant to this
Lease Agreement with respect to a particular Landlord Failure and thereafter commences to exercise
Tenant’s Self-Help Rights, (i) Tenant shall continuously and diligently prosecute the full cure
and remedy of such Landlord Failure and perform all related additional work in accordance with the
requirements of this Lease, and (ii) provided Tenant first delivers Notice to Landlord of Tenant’s
intention to receive a credit pursuant to this Section 54, specifying the amount of such credit,
and within thirty (30) days after Landlord’s receipt of such notice, Landlord fails to deliver
Notice to Tenant that Landlord disputes Tenant’s right to receive the claimed credit, Tenant shall
be entitled to receive a credit against the next occurring installments of Base Rent for the
documented, actual, reasonable, out-of-pocket costs incurred by Tenant in taking commercially
reasonable efforts and measures to remedy and cure the relevant Landlord Failure.
E. Dispute Resolution.
(i) With respect to any dispute or controversy regarding Tenant’s right to receive a
credit against Base Rent pursuant to this Section 54 or to the existence of a Landlord Failure under
this Section 55 (such dispute or controversy being herein referred to as a
“Rent Credit
Dispute or Controversy”
), Landlord and Tenant shall first attempt in good faith to settle and
resolve such Rent Dispute or Controversy by mutual agreement in accordance with the terms of
this Section 55E. In the event a Rent Credit Dispute or Controversy arises, either Landlord
or Tenant shall have the right to notify the other party that it has elected to implement the
procedures set forth in this Section 55E. Within fifteen (15) days after delivery of any such
written notice by one party to the other party regarding a Rent Credit Dispute or
Controversy, Landlord and Tenant shall meet at a mutually agreed time and place to attempt,
with diligence and in good faith, to resolve and settle the Rent Credit Dispute or
Controversy. If a mutual resolution and settlement is not obtained within thirty (30) days
after the first meeting, then such Rent Credit Dispute or Controversy shall be finally
settled and resolved by binding arbitration in accordance with the provisions set forth in
this 55E. Notwithstanding the foregoing or anything herein to the contrary, (i) nothing shall
prohibit or limit either Party from seeking injunctive relief or another form of ancillary
relief at any time from any court of competent jurisdiction in Harris County, Texas,
including during the pendency of meetings between
30
Landlord and Tenant pursuant to this Section 55E. and (ii) nothing shall prohibit or limit
Landlord or Tenant from exercising its rights or remedies under this Lease Agreement. Only
Rent Credit Disputes or Controversies are subject to arbitration and all other disputes or
controversies are subject to the terms of this Lease Agreement.
(ii) Landlord and Tenant each agree that any Rent Credit Dispute or Controversy which
is not resolved by mutual agreement pursuant to the provisions of Section 55E.(i) shall be submitted
to binding arbitration hereunder and if submitted shall be resolved exclusively and finally
through such binding arbitration in accordance with the Arbitration Procedures set forth in
Exhibit G
attached hereto. This Section 55E and
Exhibit G
constitute a
written agreement by Landlord and Tenant to submit to arbitration any Rent Credit Dispute or
Controversy arising after the Commencement Date within the meaning of Section 171.001 of the
Texas Civil Practice and Remedies Code. With respect to any Rent Credit Dispute or
Controversy under which Tenant claims it has a right to offset, reduce or fail to pay any
Rent, Tenant shall not exercise such claimed right to offset, reduce or fail to pay such Rent
until such Rent Credit Dispute or Controversy is finally resolved or settled in accordance
with Section 55E. and then only in accordance with the result of such resolution or
settlement.
SEC. 56 CONSTRUCTION OF IMPROVEMENTS:
A. Landlord and Tenant have approved the build-to-suit building plans and construction
drawings for the Improvements described in
Exhibit J
attached hereto and agree that,
notwithstanding anything to the contrary contained in this Lease Agreement, the terms
“Building
Plans”
and
“Construction Drawings”
, as used in this Lease Agreement, including, without
limitation,
Exhibit D
, shall mean the building plans and construction drawings,
respectively, for the Improvements described in
Exhibit
J
, as amended pursuant to the
terms and conditions of this Lease Agreement. From and after the Effective Date, Tenant may make
written requests for modifications to the Construction Drawings, specifying in detail the
requested modification (each, a
“Tenant Request”
). Subject to Section 56B. below, Landlord shall
provide Tenant with a written response (a
“Landlord Response”
) within five (5) business days after
Landlord’s receipt of the Tenant Request indicating:
(i) the estimate of any increase in cost associated with the Tenant Request;
(ii)
the number of days of Tenant Delay (defined in
Exhibit D
) associated with the Tenant
Request; and
(iii) any additional requirements necessary to accommodate the Tenant Request.
Landlord’s indication in the Landlord Response as to the foregoing shall be based upon the
reasonable determination of the architect, contractors and/or
subcontractors of Landlord who are
constructing the Improvements.
B. Notwithstanding anything to the contrary in Section 56A. above, Tenant and Landlord hereby
agree that Landlord shall not be required to accommodate any Tenant Request that would increase
the total project costs beyond those which Landlord would otherwise be obligated to spend based on
the Building Plans and Construction Drawings approved by Landlord and Tenant as of the Effective
Date (after giving effect to any cost savings realized by Landlord at the time of such request or
as a result of such request) unless Tenant pays to Landlord immediately upon Tenant’s delivery of
the Amendment (defined below) associated with such Tenant Request, the amount of such increase.
Landlord hereby covenants and agrees to apply any funds deposited with it pursuant to this Section
56B. to the payment of Building costs as and when due. Subject to Landlord’s receipt of written
confirmation from Tenant, after Tenant’s receipt of the Landlord Response, that Tenant desires
Landlord to implement a Tenant Request, Landlord will accommodate such Tenant Request if it does
not increase the total project costs beyond those which Landlord would otherwise be obligated to
spend based on the Building Plans and Construction Drawings approved by Landlord and Tenant as of
the Effective Date (after giving effect to any cost savings realized by Landlord at the time of
such request or as a result of such request).
31
C. After receiving the Landlord Response, should Tenant desire to make the modifications
described
in the Tenant Request, Tenant shall execute an Amendment to Lease Agreement (an
“Amendment”
) in
the form attached hereto as
Exhibit F
and deliver such Amendment to Landlord. If the
Amendment is delivered to Landlord, along with any payment, if necessary, pursuant to Section 56B.
and the Amendment (i) accurately depicts the modification described in the Tenant Request, and
(ii) contains the number of days of Tenant Delay that was included in Landlord’s Response (along
with the aggregate number of Tenant Delays as of the date of such Amendment inclusive of the
number of Tenant delays in connection with such Amendment), Landlord shall execute the Amendment
within five (5) days from Landlord’s receipt thereof.
D. Landlord shall construct the Improvements in accordance with the Construction Drawings
pursuant to the terms and conditions of this Lease, including, without limitation,
Exhibit D
; provided, however, Landlord and Tenant agree that Tenant shall be responsible for the
construction and delivery of the following items set forth on the Construction Drawings, and that
Landlord shall have no responsibility therefor: clocks, laboratory casework, fume hoods, ovens for
production area, flammable storage cabinets, warehouse rack system, audio-visual (AV) equipment
and projection screens, televisions and video conference equipment, lunchroom appliances,
markerboards and tackboards, sharps disposals, paging system, phone switch and phone equipment,
computers and servers, compressor for lab air, systems furniture, furniture (interior and
exterior), building signage, interior graphics, vending machines, crash rails, clean room
(workstations and storage shelving), clean room (gowning, PPE storage shelving, etc.), and
production room (workstations and storage shelving).
SEC. 57 PERMITTED ENCUMBRANCES:
As of the Effective Date, the Lease Agreement is subject and
subordinate only to those encumbrances described on attached
Exhibit K
.
SEC. 58 RELATIONSHIP OF THE PARTIES; NO PARTNERSHIP.
The relationship of Tenant and Landlord under
this Lease Agreement is that of independent parties, each acting in its own best interests, and
notwithstanding anything in this Lease Agreement to the contrary, no aspect of this Lease
Agreement shall create or evidence, nor is it intended to create or evidence, a partnership, joint
venture or other business relationship or enterprise between Tenant and Landlord.
SEC. 59 CONSENT TO REMOVAL OF PERSONAL PROPERTY.
In the event Tenant grants to any bank or lending
institution related to or affiliated with Silicon Valley Bank or its successors or assigns
(“Permitted Lender”
), a security interest in all or any portion of Tenant’s personal property
located at or in the Leased Premises, within thirty (30) days after Tenant’s written request
therefor, Landlord will enter into an agreement with such Permitted Lender on reasonable and
customary terms whereby Landlord will grant to such Permitted Lender the right to enter upon the
Leased Premises for the purpose of exercising any right such Permitted Lender may have under the
terms of the agreements between Tenant and such Permitted Lender granting such security interest
and establishing the debt secured thereby.
SEC. 60
EXHIBITS:
Schedule 1
and
Exhibits A
through
K
are attached hereto and made
a part of this Lease Agreement for all purposes.
[END OF TEXT]
32
IN WITNESS WHEREOF, Landlord and Tenant, acting herein by duly authorized individuals, have
caused these presents to be executed in multiple counterparts, each of which shall have the force
and effect of an original on this
9
th
day
of September, 2009 (the
“Effective Date”
).
|
|
|
|
|
|
|
|
|
|
|
LANDLORD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEARLAND ECONOMIC DEVELOPMENT
|
|
|
|
|
|
CORPORATION, a corporation operating under Chapter 505
|
|
|
|
|
|
of the Texas Local Government Code
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Ramon Lozano
|
|
|
|
|
|
Name:
|
|
Ramon Lozano
|
|
|
|
|
|
Title:
|
|
Assistant Director of Economic Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TENANT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARDIOVASCULAR SYSTEMS, INC.,
|
|
|
|
|
|
a Delaware corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ James E. Flaherty
|
|
|
|
|
|
Name:
|
|
James E. Flaherty
|
|
|
|
|
|
Title:
|
|
CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDRESS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Systems, Inc.
|
|
|
|
|
|
651 Campus Drive
|
|
|
|
|
|
St. Paul, Minnesota 55112
|
|
|
|
|
|
Attention: James E. Flaherty
|
|
|
|
|
|
Telephone: (651) 259-1611
|
|
|
|
|
|
Facsimile: (651) 259-1696
|
|
|
Signature Page to Lease Agreement
SCHEDULE 1 TO LEASE AGREEMENT
BASE RENT
Base Rent (without regard to Tenant’s exercise, if any, of the First Expansion Option or the Second
Expansion Option):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Following the Rent
|
|
|
|
|
|
|
|
Commencement Date
|
|
Base Rent
|
|
Annual Base Rent*
|
|
Monthly Base Rent
|
|
1–5
|
|
$9.00/square foot
|
|
$
|
414,000.00
|
|
|
1/12 of Annual Base Rent
|
|
6–10
|
|
$10.00/square foot
|
|
$
|
460,000.00
|
|
|
1/12 of Annual Base Rent
|
“Rent Commencement Date”
means the date that is the thirty (30) days after the date on which the
Commencement Date occurs.
*
Annual Base Rent assumes that the Leased Premises shall consist of 46,000 square feet. The
Annual Base Rent shall be adjusted appropriately if the final square footage of the Leased
Premises after construction does not equal 46,000 square feet.
Schedule 1
- 1
EXHIBIT A
DEPICTION OF THE LAND
(see attached)
A-1
EXHIBIT B
ACCEPTANCE OF PREMISES MEMORANDUM
This Memorandum is an amendment to the Lease Agreement
(the
“Lease Agreement”)
executed on the
day
of
, 200
between the Pearland Economic Development Corporation, a corporation operating
under Section 505 of the Texas Local Government Code, as Landlord and Cardiovascular Systems,
Inc., a Delaware corporation, as Tenant for that certain leased premises more particularly
described in the Lease Agreement.
Landlord and Tenant hereby agree that:
|
1.
|
|
The Commencement Date of the Lease Agreement is hereby agreed to be the
day of
, 200___.
|
|
|
|
2.
|
|
The Rent Commencement Date of the Lease Agreement is hereby agreed to be the
day of
, 200___.
|
|
|
|
3.
|
|
The Expiration Date of the Lease Agreement is hereby agreed to be the
day of
, 20___.
|
All other terms and conditions of the Lease Agreement are hereby
ratified and acknowledged to be unchanged.
Agreed and Executed this
day of
, 200___.
|
|
|
|
|
|
|
|
|
|
|
Landlord:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEARLAND ECONOMIC DEVELOPMENT CORPORATION, a corporation
operating under Section 505 of the Texas Local Government
Code
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARDIOVASCULAR SYSTEMS, INC.,
a Delaware
corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
B-1
EXHIBIT C
TENANT’S ESTOPPEL CERTIFICATE
(Addressee)
RE: Lease Agreement by and between Pearland Economic Development Corporation and Cardiovascular Systems, Inc.
Gentlemen:
The undersigned
(“Tenant”)
has executed and entered into that certain lease agreement
(“Lease
Agreement”)
attached hereto as Exhibit
“A”
and made a part hereof for all purposes with respect to
those certain premises
(“Leased Premises”)
more fully described in the Lease Agreement. Tenant
understands that the entity to whom this letter is addressed
(“Addressee”)
has committed to loan
or invest a substantial sum of money in reliance upon this certification by the undersigned, which
certification is a condition precedent to making such loan or investment, or that Addressee
intends to take some other action in reliance upon this certification.
With respect to the Lease Agreement, Tenant certifies to you the following, with the intention
that you may rely fully thereon:
|
1.
|
|
A true and correct copy of the Lease Agreement, including any and all amendments and
modifications thereto, is attached hereto as Exhibit “A”;
|
|
|
|
2.
|
|
The original Lease Agreement is dated
,
200___, and has been assigned, modified, supplemented
or
amended only in the following respects:
|
|
|
|
|
|
(Please write “None” above or, on a separate sheet of paper, state the effective date of and
describe any oral or written modifications, supplements or amendments to the Lease Agreement
and attach a copy of such modifications, supplements or amendments, with the Lease Agreement
as
Exhibit A)
;
|
|
|
|
3.
|
|
Tenant is in actual occupancy of the Leased Premises under the Lease Agreement;
|
|
|
|
4.
|
|
The initial term of the Lease Agreement commenced on
, 200___, and ends at 11:59 p.m. on
, 200___. The current monthly base rent is $
, and no rentals or other payments in advance
of the current calendar month have been paid by Tenant, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such payments on a separate sheet of paper);
|
|
|
|
5.
|
|
Base Rent with respect to the Lease Agreement has been paid by Tenant through
, 200___; all
Additional Rent and other charges have been paid for the current periods;
|
|
|
|
6.
|
|
There are no unpaid concessions, bonuses, free months’ rent, rebates or other matters
affecting the rent for Tenant, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such matters on a separate sheet of paper);
|
|
|
|
7.
|
|
No security or other deposit has been paid by Tenant with respect to the Lease
Agreement, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such deposits on
a separate sheet of paper);
|
C-1
|
8.
|
|
The Lease Agreement is in full force and effect and there are no events or conditions
existing which, with notice or the lapse of time or both, could constitute a monetary or
other default of the Landlord under the Lease Agreement, or entitle Tenant to any offset or
defense against the prompt current payment of rent or constitute a default by Tenant under
the Lease Agreement, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such default on a separate sheet of paper);
|
|
|
|
9.
|
|
All improvements required to be made by Landlord under the terms of the Lease Agreement have
been satisfactorily completed and accepted by Tenant as being in conformity with the Lease
Agreement, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such improvements on a separate sheet of paper);
|
|
|
|
10.
|
|
Tenant has no option to expand or rent additional space or any right of first refusal with
regard to any additional space, under the Lease Agreement other than the Leased Premises,
except as set forth in Sections 52 and 53 of the Lease:
|
|
|
|
|
|
(Please write “None” above or describe such right or option on a separate sheet of paper);
|
|
|
|
11.
|
|
Tenant has no right or option to renew the Lease Agreement for any period of time after the
expiration of the initial term of the Lease Agreement, except as set forth in Section 49 of
the Lease:
|
|
|
|
|
|
(Please write “None” above or describe such right on a separate sheet of paper);
|
|
|
|
12.
|
|
To Tenant’s knowledge, any and all broker’s leasing and other commissions relating to and/or
resulting from Tenant’s execution of the Lease Agreement and occupancy of the Leased Premises
have been paid in full and no broker’s leasing or other commissions will be or become due or
payable in connection with or as a result of either Tenant’s execution of a new Lease
Agreement covering all or any portion of the Leased Premises or any other space within the
Project or Tenant’s renewal of the Lease Agreement, except as follows:
|
|
|
|
|
|
(Please write “None” above or describe such right on a separate sheet of paper);
|
|
|
|
13.
|
|
To Tenant’s knowledge, the use, maintenance or operation of the Leased Premises complies
with, and will at all times comply with, all applicable federal, state, county or local
statutes, laws, rules and regulations of any governmental authorities relating to
environmental, health or safety matters (being hereinafter collectively referred to as the
“Environmental Laws”);
|
|
|
|
14.
|
|
The Leased Premises have not been used and Tenant does not plan to use the Leased Premises
for any activities which, directly or indirectly, involve the use, generation, treatment,
storage, transportation or disposal of any petroleum
product or any toxic or hazardous chemical, material, substance, pollutant or waste;
|
|
|
|
15.
|
|
Tenant has not received any notices, written or oral, of violation of any Environmental Law
or of any allegation which, if true, would contradict anything contained herein and there are
not writs, injunctions, decrees, orders or judgments outstanding, no lawsuits, claims,
proceedings or investigations pending or threatened, relating to the use, maintenance or
operation of the Leased Premises, nor is Tenant aware of a basis for any such proceeding;
|
|
|
|
16.
|
|
There are no actions, whether voluntary or otherwise, pending against Tenant under the
bankruptcy or insolvency laws of the United States or of any state;
|
|
|
|
|
|
(Please write “None” above or describe such default on a separate sheet of paper);
|
|
|
|
17.
|
|
Tenant has no right of refusal or option to purchase the Leased Premises or any portion
thereof except as set forth in Sections 51, 52, 53 and 54 of the Lease:
|
|
|
|
|
|
(Please write “None” above or describe such default on a separate sheet of paper); *
|
|
|
|
18.
|
|
Tenant understands that the Lease Agreement may be assigned to Addressee and Tenant agrees
to attorn to Addressee in all respects in accordance with, and subject to, the conditions of
the Lease Agreement.
|
C-2
Dated:
, 200__.
Very truly yours,
C-3
EXHIBIT D
IMPROVEMENTS
SEC.1 PLANS.
A.
Building Plans
. Landlord will cause its architect and mechanical,
structural and electrical engineer (the
“Design Professionals”
) to prepare a set of build
to suit Building plans (the
“Proposed Building Plans”
) for the construction of all
improvements to the Building (collectively, the
“Improvements”
). Within ten (10) business
days after delivery of the Proposed Building Plans to Tenant, Tenant shall either approve
(which approval shall not be unreasonably withheld, conditioned or delayed) the Proposed
Building Plans or notify Landlord of the item(s) of the Proposed Building Plans that Tenant
disapproves and the reason(s) therefor. If Tenant disapproves the Proposed Building Plans,
Landlord shall cause the Design Professionals to revise and resubmit same to Tenant for
approval (the
“Revised Building Plans”
). Within seven (7) business days after delivery of
the Revised Building Plans to Tenant, Tenant shall either approve the Revised Building
Plans or notify Landlord of the item(s) of the Revised Building Plans which Tenant
disapproves and the reason(s) therefor. If Tenant disapproves the Revised Building Plans,
Landlord shall cause the Design Professionals to further revise and resubmit same to Tenant
for approval, which process shall continue until the plans are approved. Tenant shall have
seven (7) business days after delivery
of the each set of Revised Building Plans to either approve the Revised Building Plans
or notify Landlord of the item(s) of the Revised Building Plans which Tenant
disapproves and the reason(s) therefor. Should Tenant fail to respond to Landlord’s
request for approval within the time periods allotted above, Landlord shall deliver to
Tenant notice of such failure, and Tenant shall have an additional five (5) business
day period in which to respond to Landlord’s request for approval. Should Tenant fail
to respond to Landlord’s request for approval within such five (5) business day period,
Tenant shall have been deemed to have approved such Proposed Building Plans or Revised
Building Plans, as applicable. Provided, however, that Landlord’s notice must
specifically include a statement providing that Tenant’s approval shall be deemed
granted if Tenant fails to respond within such five (5) business day period. The
Proposed Building Plans or Revised Building Plans, as approved (or deemed approved) by
Tenant, are hereinafter referred to as the
“Building Plans”
. Landlord shall instruct
and use commercially reasonable efforts to cause its architects and/or engineers to
design the Improvements and prepare the Building Plans in full compliance with Laws.
The terms of the preceding sentence shall not waive or otherwise restrict the
warranties of Landlord set forth in Section 5 of this Exhibit D.
B.
Construction Drawings
. Landlord shall cause the Design Professionals to prepare
construction drawings (in accordance with the Building Plans) and specifications including complete
sets of detailed architectural, structural, mechanical, electrical and plumbing working drawings
(the
“Proposed Construction Drawings”
) for the Improvements and shall deliver the Proposed
Construction Drawings to Tenant for approval (which approval shall not be unreasonably withheld,
conditioned or delayed). Within ten (10) business days after delivery of the Proposed Construction
Drawings to Tenant, Tenant shall either approve the Proposed Construction Drawings or notify
Landlord of the item(s) of the Proposed Construction Drawings that Tenant disapproves and the
reason(s) therefor. If Tenant disapproves the Proposed Construction Drawings, Landlord shall cause
the Design Professionals to revise and resubmit same to Tenant for approval (the
“Revised
Construction Drawings”
). Within five (5) business days after delivery of the Revised Construction
Drawings to Tenant, Tenant shall either approve the Revised Construction Drawings or notify
Landlord of the item(s) of the Revised Construction Drawings which Tenant disapproves and the
reason(s) therefor. If Tenant disapproves the Revised Construction Drawings, Landlord shall cause
the Design Professionals to further revise and resubmit same to Tenant for approval, which process
shall continue until the plans are approved. Tenant shall have five (5) business days after
delivery of each set of Revised Construction Drawings to either approve the Revised Construction
Drawings or notify Landlord of the item(s) of the Revised Construction Drawings which Landlord
disapproves and the reason(s) therefor. Should Tenant fail to respond to Landlord’s request for
approval within the time periods allotted above, Landlord shall deliver to Tenant notice of such
failure, and Tenant shall have an additional five (5) business day period in which to respond to
Landlord’s request for approval. Should Tenant fail to respond to Landlord’s request for approval
within such five (5) business day period, Tenant shall have been deemed to have approved such
Proposed Construction Drawings or Revised Construction Drawings, as
applicable. Provided, however,
that Landlord’s notice must specifically include a statement providing that Tenant’s approval
shall be deemed granted if Tenant fails to respond within such five (5) business day period. The
Proposed Construction Drawings or Revised Construction Drawings, as approved (or deemed approved)
by Tenant, are hereinafter referred to as the
“Construction Drawings”
.
D-1
C.
Changes
. Tenant may from time to time make requests for modifications to the
Construction
Drawings by delivering written notice to Landlord in accordance with Section 56A. of the Lease
Agreement. No delays in designing and constructing the Improvements caused by such Tenant requests
shall delay the Commencement Date. Landlord may make requests for modifications to the
Construction Drawings in accordance with Section 56A. of the Lease Agreement.
SEC 2. CONSTRUCTION OF IMPROVEMENTS.
Subject to Tenant Delays, Landlord shall diligently construct
or cause to be constructed the Improvements in accordance with the Construction Drawings in a good
and workmanlike manner using materials specified in the Construction Drawings and in compliance
with Laws and so as to attain Substantial Completion by not later than the target date (the
“Target Date”)
for Substantial Completion set forth in the Build-out Notice, which Target Date
shall be the date that is one hundred five (105) days after the date on which Landlord receives
the Build-out Notice. Landlord assumes no liability for special or consequential damages of any
kind whatsoever in connection with the design or construction of the Improvements. EXCEPT AS SET
FORTH IN THE SECOND TO LAST SENTENCE OF SECTION 1A. OF THIS
EXHIBIT D
, THE FIRST SENTENCE
OF THIS SECTION 2 (SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 5 OF THIS
EXHIBIT D
)
AND SECTION 5 OF THIS
EXHIBIT D
, LANDLORD MAKES NO REPRESENTATIONS, WARRANTIES, OR
GUARANTIES REGARDING THE IMPROVEMENTS, EXPRESSED OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR OF HABITABILITY. Further,
Landlord agrees to assign to Tenant its rights, if any, to pursue special and consequential
damages against the architect and general contractor providing services under this
Exhibit
D
in connection with the design and/or construction of the Improvement for damages incurred by
Tenant; provided, however, that, as a condition to such assignment, Tenant will not seek to
recover special or consequential damages from or against Landlord.
SEC 3. SUBSTANTIAL COMPLETION. “Substantial Completion”
shall occur when: (i) the project architect
has issued a certificate in the form of AIA Document G-704 indicating that the Improvements are
substantially complete in accordance with the Construction Drawings and such certificate has been
confirmed by Tenant, (ii) all systems and portions of the Improvements are operational as designed
and the only remaining work is so minor in nature that Tenant could commence its installation of
equipment and move-in process (the
“Tenant Improvements Work”
) and the completion of the remainder
of the work by Landlord would not materially interfere with the Tenant Improvements Work and (iii)
Landlord has obtained and delivered to Tenant a permanent certificate of occupancy for the
Improvements. When Landlord believes that Substantial Completion has been achieved, Tenant and
Landlord shall conduct an inspection of the Leased Premises within five (5) days after such date in
order to develop a punch-list of incomplete, minor detail items (the
“Punch-List Items”
) to be
completed by Landlord. In the event any items other than Punch-List Items remain to be completed,
Substantial Completion shall be deemed not to have occurred. Landlord shall use all reasonable
efforts to complete all Punch-List Items within thirty (30) days after Substantial Completion.
Landlord shall use reasonable efforts to minimize interference with the use of the Leased Premises
by Tenant in the completion of such Punch-List Items. If Substantial Completion is delayed because
of (a) any acts or omissions of Tenant or its agents, representatives, employees or contractors, or
(b) Tenant requested changes in the approved Construction Drawings (collectively,
“Tenant Delay”
),
then the Commencement Date shall not be extended, but rather shall start on the date on which it
would have occurred but for such event. This Lease Agreement shall remain in full effect
notwithstanding any delay in Substantial Completion and Landlord shall have no liability to Tenant
if Substantial Completion has not occurred on or prior to the Target Date for any reason. In the
event Landlord does not cause Substantial Completion to occur within sixty (60) days from the
Target Date, as such date may be extended in connection with delays related to (a) events of Force
Majeure or (b) a Tenant Delay, Tenant shall have the right, following Landlord’s failure to satisfy
such deadline but before Substantial Completion shall occur, to terminate this Lease Agreement upon
delivery of written notice thereof to Landlord and reimbursement to Landlord of all amounts paid to
Tenant by Landlord prior to such date pursuant to the terms of that certain Corporate Job Creation
Agreement of even date herewith by and between Landlord and Tenant, and, except as otherwise set
forth in this Lease Agreement, the parties shall have no further rights or obligations hereunder.
SEC. 4 EARLY ENTRY BY TENANT.
Upon delivery to Landlord of not less than forty-eight (48) hours’
written notice thereof, Tenant may enter the Leased Premises before Substantial Completion to
conduct the Tenant Improvements Work, provided that such entry shall be coordinated with Landlord
and shall not materially interfere with the construction of the Improvements contemplated in this
Exhibit D
. Prior to such entry, Tenant shall deliver
D-2
to Landlord evidence that the insurance required under this Lease Agreement has been obtained, and
Tenant shall pay all utility charges reasonably allocable to Tenant by Landlord in connection with
such early entry. Any such entry shall be on the terms of this Lease Agreement, but, prior to the
Rent Commencement Date, no Rent shall accrue during the period that Tenant so enters the Leased
Premises. Tenant shall conduct its activities therein so as not to materially interfere with
Landlord’s construction activities, and shall do so at its risk and expense. If, in Landlord’s
judgment, Tenant’s activities therein materially interfere with Landlord’s construction
activities, Landlord may terminate Tenant’s right to enter the Leased Premises before the
Commencement Date.
SEC. 5 WARRANTY.
Landlord will cause the Improvements, when completed, to comply with all Laws, as
enforced and interpreted as of the Effective Date. For a period of one (1) year after Substantial
Completion of the Improvements, Landlord shall cause to be repaired, replaced and re-executed any
defective materials, equipment and work which was initially prepared or supplied or performed in
connection with this
Exhibit D
, including latent defects and work performed not in
accordance with the approved Construction Drawings. Upon the expiration of this warranty, Landlord
will assign to Tenant all manufacturers’, suppliers’, contractors’ and subcontractors’ warranties
on materials, equipment and fixtures and labor incorporated into the Improvements (other than those
components of the Improvements that Landlord is obligated to maintain pursuant to the Lease
Agreement) or that it otherwise obtains to the extent necessary for Tenant to fulfill its
maintenance and repair obligations as set out in this Lease Agreement. Further, Landlord shall
furnish to Tenant all printed service and maintenance instructions and manuals issued by the
manufacturer of each item of equipment furnished in accordance with
this
Exhibit D
.
D-3
EXHIBIT E
INSURANCE REQUIREMENTS
SEC.1 TENANT’S INSURANCE.
A. Tenant, at its expense, shall obtain and keep in full force and effect during the Term:
(i) a policy of commercial general liability insurance on an occurrence basis against
claims
for personal injury, bodily injury, death and/or property damage occurring in or about the
Leased Premises, under which Tenant is named as the insured and (a) Landlord, (b) any
lender whose loan is secured by a lien against the Leased Premises, (c) their respective
shareholders, members, partners, affiliates and subsidiaries, successors and assigns, and
(d) any directors, officers, employees, agents, or contractors of such persons or entities
(collectively, the
“Landlord Parties”
) are named as additional insureds. Such insurance
shall provide primary coverage without contribution from any other insurance carried by or
for the benefit of the Landlord Parties, and Tenant shall obtain blanket broad-form
contractual liability coverage to insure its indemnity obligations set forth in Section 28
of the Lease Agreement. The minimum limits of liability applying exclusively to the Leased
Premises shall be a combined single limit with respect to each occurrence in an amount of
not less than $5,000,000; provided, however, that Landlord shall retain the right to
require Tenant to increase such coverage from time to time to that amount of insurance
which in Landlord’s reasonable judgment is then being customarily required by landlords for
buildings comparable to the Building. The deductible or self insured retention amount for
such policy shall not exceed $10,000;
(ii) insurance against loss or damage by fire, and such other risks and hazards as are
insurable
under then available standard forms of “Special Form Causes of Loss” or “All Risk” property
insurance policies with extended coverage, insuring Tenant’s movable fixtures and movable
partitions, telephone and other equipment, computer systems, trade fixtures, furniture,
furnishings, and other items of personal property which are removable without material
damage to the Building
(“Tenant’s Property”
) for the full insurable value thereof or
replacement cost thereof, having a deductible amount (or self-insured retention amount),
not in excess of $25,000;
(iii) during the performance of any alteration by or on behalf of Tenant, until
completion thereof, Builder’s Risk insurance on an “all risk” basis and on a completed
value form including a Permission to Complete and Occupy endorsement, for full replacement
value covering the interest of Landlord and Tenant (and their respective contractors and
subcontractors) in all work incorporated in the Building and all materials and equipment in
or about the Leased Premises; and
(iv) Workers’ Compensation Insurance, as required by Laws;
(v) Business Interruption Insurance in an amount equal to at least one year’s Rent;
and
(vi) such other insurance in such amounts as Landlord’s lender or other beneficiary
under a deed of trust encumbering all or any portion of Landlord’s interest in the Leased
Premises may require from time to time.
B. All insurance required to be carried by Tenant (i) shall contain a provision that (x) no
act or omission of Tenant shall affect or limit the obligation of the insurance company to pay
the amount of any loss sustained, and (y) it shall be noncancellable and/or no material change in
coverage shall be made thereto unless the Landlord Parties receive thirty (30) days’ prior notice
of the same, by certified mail, return receipt requested, and (ii) shall be effected under valid
and enforceable policies issued by reputable insurers permitted to do business in the State of
Texas and rated in Best’s Insurance Guide, or any successor thereto as having a “Best’s Rating”
of at least “A-” and a “Financial Size Category”
of at least “
X
” or, if such ratings are not then
in effect, the equivalent thereof or such other financial rating as Landlord may at any time
consider appropriate.
E-1
C. On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate
policies or
certificates of insurance, including evidence of waivers of subrogation required to be carried
pursuant to this
Exhibit E
and that the Landlord Parties are named as additional insureds
(the
“Policies”)
. Evidence of each renewal or replacement of the Policies shall be delivered by
Tenant to Landlord at least ten (10) days prior to the expiration of the Policies. In lieu of the
Policies, Tenant may deliver to Landlord a certification from Tenant’s insurance company (on the
form currently designated “Acord 27” (Evidence of Property Insurance) and “Acord 25-S”
(Certificate of Liability Insurance), or the equivalent, provided that attached thereto is an
endorsement to Tenant’s commercial general liability policy naming the Landlord Parties as
additional insureds) which shall be binding on Tenant’s insurance company, and which shall
expressly provide that such certification (i) conveys to the Landlord Parties all the rights and
privileges afforded under the Policies as primary insurance, and (ii) contains an obligation of
the insurance company to advise all Landlord Parties in writing by certified mail, return receipt
requested, at least thirty (30) days in advance of any termination or change to the Policies that
would affect the interest of any of the Landlord Parties.
SEC. 2 LANDLORD’S INSURANCE.
A. Landlord, at its sole cost and expense but subject to the terms and conditions of the Lease
Agreement, shall obtain and keep (or cause to be maintained and kept on its behalf) in full force
and effect during the Term a policy (which policy may be a blanket policy) of commercial general
liability insurance on an occurrence basis against claims for personal injury, bodily injury, death
and/or property damage, with minimum limits in an amount of not less than $2,000,000 with respect
to each occurrence and $4,000,000 with respect to annual aggregate occurrences. On or prior to the
Commencement Date, Landlord shall deliver to Tenant appropriate policies or certificates of
insurance evidencing such coverage, including evidence of waivers of subrogation required to be
carried pursuant to this
Exhibit E
(the
“Landlord Policies”
) and that (i) Tenant, (ii) any
lender whose loan is secured by a lien against the Tenant’s interest in the Leased Premises, (iii)
their respective shareholders, members, partners, affiliates and subsidiaries, successors and
assigns, and (iv) any directors, officers, employees, agents, or contractors of such persons or
entities (collectively, the
“Tenant Parties”
) are named as additional insureds. Evidence of each
renewal or replacement of the Landlord Policies shall be delivered by Landlord to Tenant at least
ten (10) days prior to the expiration of the Landlord Policies. In lieu of the Landlord Policies,
Landlord may deliver to Tenant a certification from Landlord’s insurance company (on the form
currently designated “Acord 25-S” (Certificate of Liability Insurance), or the equivalent, provided
that attached thereto is an endorsement to Landlord’s commercial general liability policy naming
the Tenant Parties as additional insureds) which shall be binding on Landlord’s insurance company,
and which shall expressly provide that such certification (i) conveys to the Tenant Parties all the
rights and privileges afforded under the Landlord Policies as primary insurance, and (ii) contains
an obligation of the insurance company to advise all Tenant Parties in writing by certified mail,
return receipt requested, at least thirty (30) days in advance of any termination or change to the
Landlord Policies that would affect the interest of any of the Tenant Parties.
B. During the performance of the initial construction of the Improvements contemplated in
Exhibit D of this Lease Agreement until completion thereof, Landlord will obtain or cause to be
obtained a Builder’s Risk insurance on an “all risk” basis for full replacement value of all work
incorporated in the Improvements and all materials and equipment in or about the Leased Premises.
On or prior to the Effective Date, Landlord shall deliver to Tenant appropriate policies or
certificates of insurance evidencing such coverage, including evidence of waivers of subrogation
required to be carried pursuant to this
Exhibit E
.
SEC. 3 WAIVER OF SUBROGATION.
Landlord and Tenant shall each procure an appropriate clause in or
endorsement to any property insurance covering the Leased Premises and personal property, fixtures
and equipment located therein, wherein the insurer waives subrogation or consents to a waiver of
right of recovery, and Landlord and Tenant agree not to make any claim against, or seek to recover
from, the other for any loss or damage to its property or the property of others resulting from
fire or other hazards to the extent covered by the property insurance that was required to be
carried by that party under the terms of the Lease Agreement or is otherwise carried by either
party in excess of the amounts required to be carried under the terms of the Lease Agreement.
E-2
EXHIBIT F
FORM OF AMENDMENT TO LEASE AGREEMENT
AMENDMENT TO LEASE AGREEMENT
This Amendment No.
to Lease Agreement (this
“Amendment No.
”
) is entered into as of
, 200
by Pearland Economic Development Corporation, a corporation operating under
Section 505 of the Texas Local Government Code
(“Landlord”
), and Cardiovascular Systems, Inc., a
Delaware corporation
(“Tenant”
). All capitalized terms used herein but not defined herein shall
have the meaning ascribed thereto in the Lease Agreement (defined below).
RECITALS
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement,
dated as of
, 2009 (as amended from time to time, the
“Lease Agreement”
), whereby Landlord agreed to
Lease Agreement the Leased Premises to Tenant.
WHEREAS, the Building being constructed by Landlord pursuant to the Lease Agreement is
being completed based upon the Building Plans and Construction Drawings as described on
Exhibit D
attached to the Lease Agreement.
AGREEMENTS
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
Definitions
.
All capitalized terms used herein but not defined herein shall have
the meaning ascribed thereto in the Lease Agreement.
2.
Amendment to Exhibit B-2
.
Exhibit B
-2
to the Lease Agreement is hereby
amended as follows:
3.
Amendment to Schedule 1
.
Schedule 1
to the Lease Agreement is hereby
amended by deleting such
Schedule 1
in its entirety and replacing with the
Schedule
1
attached hereto.
4.
Tenant Delay
.
The number of days of Tenant Delay in connection with Tenant’s
Request that
necessitated this Amendment No. ___ is
and the sum of all Tenant Delay days caused
by Tenant’s
Request (inclusive of the number of days of Tenant Delay set forth immediately above) as of the
date of this Amendment No. ___ is
.
5.
No Other Amendments
.
Except as specifically provided in this Amendment No. ___, no
other amendments, revisions or changes are made or permitted hereby to the Lease Agreement. All
other terms and conditions of the Lease Agreement remain in full force and effect and apply fully
to this Amendment No.
.
6.
Conforming References
.
Upon the effectiveness of this Amendment No. , each
reference in
the Lease Agreement to
“this Lease Agreement,” “thereunder,” “hereto,” “herein,”
or words of like
import, shall mean and be a reference to the Lease Agreement as amended hereby.
7.
Counterparts
.
This Amendment No.
may be executed in one or more counterparts,
each of
which shall be considered an original instrument, but all of which shall be considered one and
the same agreement,
and shall become binding when one or more counterparts have been signed by Landlord and Tenant
and delivered to each of them.
8.
Applicable Law
.
This Amendment No.
and all rights and liabilities of the parties
hereto with
respect to the Lease Agreement shall be governed by the laws of the State of Texas.
F-1
WITNESS THE EXECUTION hereof as of the date first above written.
|
|
|
|
|
|
|
|
|
|
|
Landlord:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEARLAND ECONOMIC DEVELOPMENT CORPORATION, a corporation operating
under Section 505 of the Texas Local Government Code
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARDIOVASCULAR SYSTEMS, INC.,
a Delaware corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
EXHIBIT G
ARBITRATION PROCEDURES
1.
Arbitration
. Binding arbitration of Rent Credit Disputes and Controversies shall
be conducted in
accordance with the following procedures:
(a) The party seeking arbitration hereunder shall request such arbitration by
delivering written notice to the opposing party which written notice shall include a clear
statement of the Rent Credit Dispute and Controversy. If a legal proceeding relating to the
matter(s) in dispute has previously been filed in a court of competent jurisdiction (other
than a proceeding for injunctive or ancillary relief) then such written notice of election
under this
Section 1(a)
shall be delivered within ninety (90) calendar days after
the date the electing party receives service of process in such legal proceeding. Except to
the extent provided in this
Exhibit G
, the arbitration shall be conducted in
accordance with the Commercial Rules of the American Arbitration Association (as
supplemented and modified by the Expedited Procedures of the Commercial Arbitration Rules
(the
“Expedited Procedures”
) and provided that the procedures for large, complex, commercial
disputes shall not apply) by a single arbitrator to be appointed upon the mutual agreement
of the parties within twenty (20) calendar days after the date the written request for
arbitration was delivered to the opposing party. In order to facilitate any such
appointment, the party seeking arbitration shall submit a brief description (no longer than
two (2) pages) of the Rent Credit Dispute or Controversy to the opposing party. In the event
the parties are unable to agree on a single arbitrator, then the arbitrator shall be
appointed pursuant to the Expedited Procedures. The party seeking arbitration shall make the
parties’ request for appointment of an arbitrator and furnish a copy of the aforesaid
description of the Rent Credit Dispute or Controversy.
(b) Within ten (10) calendar days of the date the arbitrator is appointed, the
arbitrator shall notify the parties in writing of the date of the arbitration hearing,
which hearing date shall be not less than thirty (30) calendar days from the date of the
arbitrator’s appointment. The arbitration hearing shall be held in Harris County, Texas.
There shall be no evidence by affidavit allowed and each party shall disclose a list of
all documentary evidence to be used and a list of all witnesses and experts to be called by
the party in the arbitration hearing at least ten (10) calendar days prior to the
arbitration hearing. The arbitrator shall issue a final ruling within ten (10) calendar
days after the conclusion of the arbitration hearing. Any decision of the arbitrator shall
state the basis of the award and shall include both findings of fact and conclusions of
law. Any award rendered pursuant to the foregoing, which may include an award or decree of
specific performance hereunder, shall be final and binding on, and nonappealable by, the
parties (except as provided by Laws as grounds for the vacating of an arbitration award)
and judgment thereon may be entered or enforcement thereof sought by either party in a
court of competent jurisdiction. The foregoing deadlines shall be tolled during the period
that no arbitrator is serving until a replacement is appointed in accordance with this
Exhibit G
.
(c) Notwithstanding the foregoing, nothing contained herein shall be deemed to give
the arbitrator appointed hereunder any authority, power or right to alter, change, amend,
modify, waive, add to or delete from any of the provisions of this Lease Agreement.
2.
Further Qualifications of Arbitrators: Conduct
. Every person nominated or
recommended to serve
as an arbitrator shall be and remain at all times neutral and wholly impartial, shall be
experienced and knowledgeable in the substantive Laws applicable to the subject matter of the Rent
Credit Dispute or Controversy. All arbitrators shall, upon written request by either party,
provide the parties with a statement that they can and shall decide any Rent Credit Dispute or
Controversy referred to them impartially. No arbitrator shall currently be employed by either
party or a related party or affiliate of either party or currently have, or in the preceding two
(2) calendar years had, any material financial dependence upon a party or any related party or
affiliate of a party, nor shall any arbitrator have any material financial interest in the Rent
Credit Dispute or Controversy. Further, all arbitrators must meet the qualifications and adhere to
the standards of Sections 154.052 and 154.053 of Chapter 154, Texas Civil Practice And Remedies
Code.
G-1
3.
Applicable Law and Arbitration Act
. The agreement to arbitrate set forth in this
Exhibit G
shall be enforceable in either federal or state court. The enforcement of such
agreement and all procedural aspects thereof, including the construction and interpretation of
this agreement to arbitrate, the scope of the arbitrable issues, allegations of waiver, delay or
defenses as to arbitrability and the rules (except as otherwise expressly provided herein)
governing the conduct of the arbitration, shall be governed by and construed pursuant to the Texas
General Arbitration Act, Tex. Civ. Prac. & Remedies Code §§ 171.001 et seq. and any successor
statute. In deciding the substance of any such Rent Credit Dispute or Controversy, the arbitrator
shall apply the substantive Laws of the State of Texas. Except for an award of a credit against
Base Rent, the arbitrator shall not have authority, power and right to award damages or provide
for any other remedies of any kind, at law, in equity or otherwise.
4.
Consolidation
. If the parties initiate multiple arbitration proceedings, the
subject matters of which are related by common questions of Laws or fact and which could result in
conflicting awards or obligations, then the parties hereby agree that all such proceedings may be
consolidated into a single arbitral proceeding.
5.
Pendency of Dispute; Interim Measures
. The existence of any Rent Credit Dispute or
Controversy
eligible for referral or referred to arbitration hereunder, or the pendency of the dispute
settlement or resolution procedures set forth herein, shall not in and of themselves relieve or
excuse either party from its ongoing duties and obligations under this Lease Agreement or any
right, duty or obligation arising herefrom; provided, however, that during the pendency of
arbitration proceedings and prior to a final award, upon written request by a party, the
arbitrator may issue interim measures for preservation or protection of the status quo.
6.
Complete Defense
. The parties agree that compliance by a party with the provisions
of this
Exhibit G
shall be a complete defense to any suit, action or proceeding instituted
in any federal or state court, or before any administrative tribunal by the other party with
respect to any Rent Credit Dispute or Controversy which is subject to arbitration as set forth
herein, other than a suit or action alleging non-compliance with a final and binding arbitration
award rendered hereunder and other than a suit or action to vacate the arbitration award as
permitted by Laws.
7.
Costs of Arbitration
. The arbitrator may award attorneys’ fees and the cost of the
arbitration to the prevailing party. Except as otherwise provided herein, the cost of the
arbitration shall be shared equally among the participants to the arbitration.
G-2
EXHIBIT H
INTENTIONALLY DELETED
H-1
EXHIBIT I
DEPICTION OF THE FIRST EXPANSION OPTION LAND AND SECOND EXPANSION OPTION LAND
(see attached)
I-1
EXHIBIT J
BUILDING PLANS AND CONSTRUCTION DRAWINGS
(see attached)
J-1
08/27/09
The following list of drawings will be used for the completion of the building.
Phase I Core and Shell:
Cover Page — Addendum #1 05/06/09
G-100 — Addendum #1 05/06/09
A-100 — PR #3 08/25/09
A-110 — PR #1 07/16/09
A-111 — ASI #4 06/30/09
A-200 — PR #1 07/16/09
A-201 — PR #1 07/16/09
A-320 — Issued For Construction 04/24/09
A-321 — PR #1 07/16/09
A-500 — Issued For Construction 04/24/09
A-501 — Addendum #3 05/15/09
S-101 — Addendum #3 05/15/09
S-201 — Addendum #2 05/12/09
S-202 — Addendum #3 05/15/09
S-203 — Addendum #3 05/15/09
S-301 — Addendum #3 05/15/09
S-401 — Addendum #3 05/15/09
S-501 — Addendum #3 05/15/09
S-501 detail 15 — PR #1 07/16/09
S-502 — Addendum #3 05/15/09
S-601 — Issued For Construction 04/24/09
S-701 — Addendum #3 05/15/09
S-702 — Addendum #5 06/01/09
S-703 — Issued For Construction 05/26/09
S-704 — Addendum #5 06/01/09
S-705 — Issued For Construction 05/26/09
C1.0 — Issued For Construction 04/24/09
C1.1 — Addendum #1 05/06/09
C2.0 — Addendum #3 05/15/09
C2.1 — Addendum #3 05/15/09
C3.0 — Addendum #3 05/15/09
C3.1 — Addendum #3 05/15/09
C4.0 — Addendum #3 05/15/09
C4.1 — Addendum #3 05/15/09
C5.0 — Issued For Construction 04/24/09
C5.1 — Addendum #1 05/06/09
EXHIBIT K
PERMITTED ENCUMBRANCES
|
A.
|
|
An easement five (5) feet wide along portion of the south property line and an aerial
easement five (5) feet wide from a plane of twenty (20) feet above the ground upward, located
adjacent thereto for the use of public utilities as reflected by instrument recorded under
Clerk’s File No. H537616 of the Real Property Records of Harris County, Texas.
|
|
|
|
B.
|
|
½
Interest of all oil, gas and other minerals, royalties, bonuses, rentals and all other
rights in connection with same, all of which are expressly excepted herefrom and not insured
hereunder, as set forth in instrument recorded in Volume 2579 page 509 of the Deed records of
Harris County, Texas.
|
|
|
|
C.
|
|
All oil, gas and other minerals, royalties, bonuses, rentals and all other rights in
connection with same, all of which are expressly excepted herefrom and not insured hereunder,
as set forth in instrument filed under Harris County Clerk’s File No. 20060169567.
|
|
|
|
D.
|
|
Boundary Line and monument agreement as set forth in instrument recorded under Clerk’s File
No. J077627 of the Real Property Records of Harris County, Texas.
|
|
|
|
E.
|
|
Right-of-way dedications, easements, restrictions and other encumbrances set forth in that
certain Subdivision Plat
recorded under Harris County Clerk’s File No. 20090190246.
|
K-1
