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Cardiovascular Systems Inc - Quarter Report: 2022 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________
 FORM 10-Q
 _____________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 000-52082
 ____________________________________________________
CARDIOVASCULAR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________
Delaware 41-1698056
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1225 Old Highway 8 Northwest
St. Paul, Minnesota 55112-6416
(Address of principal executive offices, including 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 classTrading SymbolName of each exchange on which registered
Common Stock, One-tenth of One Cent ($0.001) Par Value Per ShareCSIIThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of May 2, 2022 was: 40,785,123 shares.



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Cardiovascular Systems, Inc.
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PART I. — FINANCIAL INFORMATION
 
ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cardiovascular Systems, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share and share amounts)
(Unaudited)
 
March 31,
2022
June 30,
2021
ASSETS
Current assets
Cash and cash equivalents$66,953 $71,070 
Marketable securities105,098 135,968 
Accounts receivable, net34,666 40,033 
Inventories32,854 32,313 
Prepaid expenses and other current assets5,742 5,285 
Total current assets245,313 284,669 
Property and equipment, net29,097 28,894 
Intangible assets, net16,080 15,376 
Strategic investments30,733 20,657 
Other assets2,768 2,971 
Total assets$323,991 $352,567 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$13,598 $14,061 
Accrued expenses30,011 38,189 
Deferred revenue2,812 2,400 
Total current liabilities46,421 54,650 
Long-term liabilities
Financing obligation20,385 20,596 
Deferred revenue— 2,194 
Other liabilities3,687 4,169 
Total liabilities70,493 81,609 
Commitments and contingencies (see Note 10)
Common stock, $0.001 par value; authorized 100,000,000 common shares; issued and outstanding 40,784,179 at March 31, 2022 and 40,215,554 at June 30, 2021, respectively
39 39 
Additional paid in capital667,552 652,288 
Accumulated other comprehensive income(212)11 
Accumulated deficit(413,881)(381,380)
Total stockholders’ equity253,498 270,958 
Total liabilities and stockholders’ equity$323,991 $352,567 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Cardiovascular Systems, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share and share amounts)
(Unaudited)
 
 Three Months EndedNine Months Ended
March 31,March 31,
 2022202120222021
Net revenues$56,221 $63,273 $173,726 $187,986 
Cost of goods sold14,790 14,013 47,171 40,497 
Gross profit41,431 49,260 126,555 147,489 
Expenses:
Selling, general and administrative41,680 41,442 123,933 121,785 
Research and development9,052 13,163 27,947 31,816 
Amortization of intangible assets346 304 996 912 
Total expenses51,078 54,909 152,876 154,513 
Loss from operations(9,647)(5,649)(26,321)(7,024)
Other (income) expense, net:
Interest expense408 412 1,227 1,323 
Interest income and other, net(460)(120)(567)(400)
Total other (income) expense, net(52)292 660 923 
Loss before income taxes(9,595)(5,941)(26,981)(7,947)
Provision for income taxes63 63 262 189 
Net loss$(9,658)$(6,004)$(27,243)$(8,136)
Basic and diluted earnings per share$(0.25)$(0.15)$(0.70)$(0.21)
Basic and diluted weighted average shares outstanding39,287,632 38,911,454 39,190,865 38,800,622 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Cardiovascular Systems, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
Three Months EndedNine Months Ended
March 31,March 31,
2022202120222021
Net loss$(9,658)$(6,004)$(27,243)$(8,136)
Other comprehensive loss:
Unrealized loss on available-for-sale debt securities(154)(72)(223)(226)
Comprehensive loss$(9,812)$(6,076)$(27,466)$(8,362)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Cardiovascular Systems, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except per share amounts)
(Unaudited)
 Common StockAdditional
Paid  In
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
 
Balances at June 30, 2021$39 $652,288 $11 $(381,380)$270,958 
Stock-based compensation related to restricted stock awards, net— 5,523 — — 5,523 
Shares withheld for payroll taxes— — — (4,990)(4,990)
Employee stock purchase plan activity— 324 — — 324 
Unrealized loss on available-for-sale debt securities— — (17)— (17)
Exercise of stock options— 12 — — 12 
Net loss— — — (8,618)(8,618)
Balances at September 30, 2021$39 $658,147 $(6)$(394,988)$263,192 
Stock-based compensation related to restricted stock awards, net— 3,659 — — 3,659 
Shares withheld for payroll taxes— — — (161)(161)
Employee stock purchase plan activity— 1,854 — — 1,854 
Unrealized loss on available-for-sale debt securities— — (52)— (52)
Net loss— — — (8,967)(8,967)
Balances at December 31, 2021$39 $663,660 $(58)$(404,116)$259,525 
Stock-based compensation related to restricted stock awards, net— 3,538 — — 3,538 
Shares withheld for payroll taxes— — — (107)(107)
Employee stock purchase plan activity— 354 — — 354 
Unrealized loss on available-for-sale debt securities— — (154)— (154)
Net loss— — — (9,658)(9,658)
Balances at March 31, 2022$39 $667,552 $(212)$(413,881)$253,498 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Cardiovascular Systems, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except per share amounts)
(Unaudited)
 Common StockAdditional
Paid  In
Capital
Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
Total
 
Balances at June 30, 2020$39 $631,559 $269 $(363,075)$268,792 
Stock-based compensation related to restricted stock awards, net— 4,836 — — 4,836 
Shares withheld for payroll taxes— — — (3,410)(3,410)
Employee stock purchase plan activity— 332 — — 332 
Unrealized loss on available-for-sale debt securities— — (69)— (69)
Net loss— — — (2,076)(2,076)
Balances at September 30, 2020$39 $636,727 $200 $(368,561)$268,405 
Stock-based compensation related to restricted stock awards, net— 3,545 — — 3,545 
Shares withheld for payroll taxes— — — (407)(407)
Employee stock purchase plan activity— 2,430 — — 2,430 
Unrealized loss on available-for-sale debt securities— — (85)— (85)
Net loss— — — (56)(56)
Balances at December 31, 2020$39 $642,702 $115 $(369,024)$273,832 
Stock-based compensation related to restricted stock awards, net— 3,332 — — 3,332 
Shares withheld for payroll taxes— — — (1,009)(1,009)
Employee stock purchase plan activity— 372 — — 372 
Unrealized loss on available-for-sale debt securities— — (72)— (72)
Net loss— — — (6,004)(6,004)
Balances at March 31, 2021$39 $646,406 $43 $(376,037)$270,451 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Cardiovascular Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
 Nine Months Ended
March 31,
 20222021
Cash flows from operating activities
Net loss$(27,243)$(8,136)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation of property and equipment2,835 2,231 
Amortization of intangible assets996 912 
Stock-based compensation13,804 12,488 
Charges incurred in connection with acquired IPR&D— 3,353 
Provision for doubtful accounts50 — 
(Gain) loss on disposal of equipment(15)138 
Amortization of premium (accretion of discount) on marketable securities1,106 1,026 
Other(402)— 
Changes in assets and liabilities
Accounts receivable5,317 (12,844)
Inventories(541)(5,661)
Prepaid expenses and other assets467 425 
Accounts payable(266)1,147 
Accrued expenses and other liabilities(8,769)3,910 
Deferred revenue(1,782)(1,409)
Net cash used in operating activities(14,443)(2,420)
Cash flows from investing activities
Purchases of property and equipment(3,220)(2,758)
Acquisitions(1,700)(3,353)
Investments in strategic ventures(9,674)(8,374)
Purchases of marketable securities(85,076)(156,628)
Sales of marketable securities13,692 4,885 
Maturities of marketable securities100,462 61,350 
Net cash provided by (used in) investing activities14,484 (104,878)
Cash flows from financing activities
Proceeds from employee stock purchase plan1,242 2,098 
Payments of employee taxes related to vested restricted stock(5,258)(4,826)
Exercise of stock options 12 — 
Principal payments made on financing obligation(154)(104)
Net cash used in financing activities(4,158)(2,832)
Net change in cash and cash equivalents(4,117)(110,130)
Cash and cash equivalents
Beginning of period71,070 185,463 
End of period$66,953 $75,333 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the Nine Months Ended March 31, 2022 and 2021)
(Dollars in thousands, except per share and share amounts)
(Unaudited)

1. Basis of Presentation

Cardiovascular Systems, Inc. (the “Company”), based in St. Paul, Minnesota, is a medical device company focused on developing and commercializing innovative solutions for treating vascular and coronary disease. The Company’s Orbital Atherectomy Systems (“OAS”) treat calcified and fibrotic plaque in arterial vessels throughout the leg and heart in a few minutes of treatment time, and address many of the limitations associated with existing surgical, catheter and pharmacological treatment alternatives. 

The Company prepared the unaudited interim consolidated financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. The year-end consolidated balance sheet was derived from the Company’s audited consolidated financial statements, but does not include all disclosures as required by GAAP. These interim consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the Company’s consolidated financial position, the results of its operations, its changes in stockholders’ equity, and its cash flows for the interim periods. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation. These interim consolidated financial statements should be read in conjunction with the consolidated annual financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2021. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

The preparation of the Company’s consolidated financial statements in conformity with GAAP 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. The Company has been impacted by the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on the Company's customers and markets. The Company has made estimates of the impact of COVID-19 within these consolidated financial statements and there may be changes to those estimates in future periods. Actual results could differ from those estimates.

2. Selected Consolidated Financial Statement Information

Accounts Receivable, Net

Accounts receivable consists of the following:
March 31,June 30,
20222021
Accounts receivable$35,871 $41,634 
Less: Allowance for doubtful accounts(1,205)(1,601)
   Accounts receivable, net$34,666 $40,033 


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Inventories

Inventories consist of the following:
March 31,June 30,
20222021
Raw materials$12,337 $11,621 
Work in process3,781 3,469 
Finished goods16,736 17,223 
   Inventories$32,854 $32,313 

WIRION Recall

In November 2021, the Company initiated a voluntary recall of unused WIRION embolic protection systems. In connection with the recall, the Company recorded a reserve for approximately $2,849 during the nine months ended March 31, 2022, which amount represents inventory that has no future intended use.

Property and Equipment, Net

Property and equipment consists of the following:
March 31,June 30,
20222021
Land$572 $572 
Building22,420 22,420 
Equipment24,045 21,203 
Furniture3,376 3,376 
Leasehold improvements812 804 
Construction in progress2,175 2,848 
53,400 51,223 
Less: Accumulated depreciation(24,303)(22,329)
Property and equipment, net$29,097 $28,894 

Accrued Expenses

Accrued expenses consist of the following:
March 31,June 30,
20222021
Acquisition consideration$10,000 $10,000 
Commissions4,784 7,869 
Salaries and bonus6,726 11,699 
Accrued vacation2,349 3,011 
Clinical Studies1,255 1,478 
Accrued excise, sales and other taxes960 1,464 
Other accrued expenses3,937 2,668 
Accrued expenses$30,011 $38,189 


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WIRION Acquisition Consideration

Following the successful completion of the manufacturing transfer of the WIRION system to the Company, the Company has agreed to pay an additional consideration of $10,000, half of which may be paid by the Company through an issuance of shares of its common stock. The Company reviewed this liability in response to the voluntary recall of the WIRION system referred to above and determined that it remains probable and appropriately recorded in accrued liabilities as of March 31, 2022, although this payment will be made at a later date than originally anticipated due to the recall.

3. Revenue

The following table disaggregates the Company’s net revenues by product category and geography for the following periods:
Three Months EndedNine Months Ended
March 31,March 31,
Product Category2022202120222021
Peripheral$37,370 $42,295 $115,282 $129,183 
Coronary18,851 20,978 58,444 58,803 
Total net revenues$56,221 $63,273 $173,726 $187,986 
Geography
United States$51,843 $59,593 $162,356 $180,331 
International 4,378 3,680 11,370 7,655 
Total net revenues$56,221 $63,273 $173,726 $187,986 

Revenue of $1,782 was recognized in the nine months ended March 31, 2022 that was deferred as of June 30, 2021. As of March 31, 2022 and June 30, 2021, the Company had a liability of $1,254 and $1,985, respectively, related to estimates of variable consideration which are recorded within accounts payable on the consolidated balance sheet.

4. Acquisitions

Peripheral Support Catheters

During fiscal 2021, the Company acquired a line of peripheral support catheters from WavePoint Medical, LLC (“WavePoint”) and also engaged WavePoint to develop a portfolio of specialty catheters.

The acquisition of peripheral support catheters was accounted for as an asset acquisition. As consideration in this transaction, the Company made an upfront payment of $3,353 to WavePoint, which was accounted for as a charge incurred in connection with acquired in process research and development ("IPR&D"). During the nine months ended March 31, 2022, the peripheral support catheters received 510(k) clearance and the Company made an additional $1,700 payment to WavePoint pursuant to the terms of the parties' agreement, which amount was capitalized as developed technology.

5. Intangible Assets

The Company’s finite-lived intangible assets are stated at cost less accumulated amortization and include developed technology and trade name assets acquired in asset acquisitions, as well as costs incurred to obtain patents. Developed technology and trade name assets are amortized over 10 to 15 years. Patent costs are amortized beginning at the time of patent approval over a useful life not exceeding 20 years.

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The components of intangible assets, net are as follows:
March 31, 2022June 30, 2021
Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Developed technology$17,324 $(2,863)$14,461 $15,624 $(1,997)$13,627 
Patents1,866 (872)994 1,866 (780)1,086 
Trade name760 (135)625 760 (97)663 
Total intangible assets, net$19,950 $(3,870)$16,080 $18,250 $(2,874)$15,376 


Amortization expense expected for the next five years and thereafter is as follows:
Remainder of fiscal 2022$345 
Fiscal 20231,381 
Fiscal 20241,377 
Fiscal 20251,374 
Fiscal 20261,373 
Thereafter10,230 
$16,080 

6. Debt

Revolving Credit Facility

In March 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). In March 2020, the Company entered into the First Amendment to the Loan Agreement (the "Amendment"). The Amendment extended the maturity date of the Loan Agreement by two years, to March 31, 2022, and increased the maximum amount available under the senior, secured revolving credit facility (the “Revolver”) to $50,000 (the “Maximum Dollar Amount”). In March 2022, the Company entered into the Second Amendment to the Loan Agreement (the "Second Amendment"). The Second Amendment extended the maturity date of the Loan Agreement by one year, to March 31, 2023.

Advances under the Revolver may be made from time to time up to the Maximum Dollar Amount, subject to certain borrowing limitations. The Revolver bears interest at a floating per annum rate equal to the Wall Street Journal prime rate, less 0.75%. Interest on borrowings is due monthly and the principal balance is due at maturity. Upon the Revolver’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolver will be due and payable. The Company will incur a fee equal to 1.5% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the Second Amendment (the "Amended Loan Agreement"), or the Revolver for any reason prior to the date that is fifteen days prior to the maturity date, unless refinanced with SVB.

The Company’s obligations under the Amended Loan Agreement are secured by certain of the Company’s assets, including, among other things, accounts receivable, deposit accounts, inventory, equipment, general intangibles and records pertaining to the foregoing. The collateral does not include the Company’s intellectual property, but the Company has agreed not to encumber its intellectual property without the consent of SVB. The Amended Loan Agreement contains customary covenants limiting the Company’s ability to, among other things, incur debt or liens, make certain investments and loans, enter into transactions with affiliates, undergo certain fundamental changes, dispose of assets, or change the nature of its business. In addition, the Amended Loan Agreement contains financial covenants requiring the Company to maintain, at all times when any amounts are outstanding under the Revolver, either (i) minimum unrestricted cash at SVB and unused availability on the Revolver of at least $10,000 or (ii) minimum trailing three-month Adjusted EBITDA of $1,000. If the Company does not comply with the various covenants under the Amended Loan Agreement or an event of default under the Amended Loan Agreement occurs, such as a material adverse change, the interest rate on outstanding amounts will increase by 5% and SVB may, subject to various customary cure rights and the other terms and conditions of the Amended Loan Agreement, decline to provide additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Revolver, and foreclose on all collateral.

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The Company is required to pay a fee equal to 0.15% per annum on the unused portion of the Revolver, payable quarterly in arrears. The Company is not obligated to draw any funds under the Revolver and has not done so under the Revolver since entering into the Loan Agreement. No amounts are outstanding as of March 31, 2022.

Financing Obligation

In March 2017, in connection with the sale of the Company’s headquarters facility in St. Paul, Minnesota (the “Facility”), the Company entered into a Lease Agreement to lease the Facility. The Lease Agreement has an initial term of 15 years, with four consecutive renewal options of 5 years each at the Company’s option, with a base annual rent in the first year of $1,638 and annual escalations of 3% thereafter. Rent during subsequent renewal terms will be at the then fair market rental rate. As the lease terms resulted in a capital lease classification, the Company accounted for the sale and leaseback of the Facility as a financing transaction where the assets remain on the Company’s balance sheet and a financing obligation was recorded for $20,944. As lease payments are made, they will be allocated between interest expense and a reduction of the financing obligation, resulting in a value of the financing obligation that is equivalent to the net book value of the assets at the end of the lease term. The effective interest rate is 7.89%. At the end of the lease (including any renewal option terms), the Company will remove the assets and financing obligation from its balance sheet.

Payments under the initial term of the Lease Agreement as of March 31, 2022 are as follows:
Remainder of fiscal 2022$475 
Fiscal 20231,913 
Fiscal 20241,970 
Fiscal 20252,029 
Fiscal 20262,090 
Thereafter13,286 
$21,763 

7. Marketable Securities & Fair Value Measurements

The Company’s marketable securities are classified on the consolidated balance sheet as follows:
March 31,June 30,
20222021
Short-term available-for-sale debt securities$94,236 $129,908 
Long-term available-for-sale debt securities10,621 5,748 
Available-for-sale debt securities104,857 135,656 
Mutual funds241 312 
Total marketable securities$105,098 $135,968 

Available-for-sale debt securities are invested in the following financial instruments:
As of March 31, 2022
Amortized CostUnrealized GainsUnrealized LossesFair Value
Commercial paper$37,450 $— $— $37,450 
Corporate debt44,982 (117)44,866 
Asset backed securities16,665 — (79)16,586 
U.S. government securities5,972 — (17)5,955 
  Total available-for-sale debt securities$105,069 $$(213)$104,857 

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As of June 30, 2021
Amortized CostUnrealized GainsUnrealized LossesFair Value
Commercial paper$47,361 $— $— $47,361 
U.S. government securities20,229 — 20,230 
Corporate debt57,134 12 (12)57,134 
Asset backed securities10,922 10 (1)10,931 
Total available-for-sale debt securities$135,646 $23 $(13)$135,656 


The following table provides information by level for the Company’s marketable securities that were measured at fair value on a recurring basis:
Fair Value Measurements as of March 31, 2022
Using Inputs Considered as
Fair ValueLevel 1Level 2Level 3
Commercial paper$37,450 $— $37,450 $— 
U.S. government securities5,955 — 5,955 — 
Corporate debt44,866 — 44,866 — 
Asset backed securities16,586 — 16,586 — 
Mutual funds241 124 117 — 
  Total marketable securities$105,098 $124 $104,974 $— 

Fair Value Measurements as of June 30, 2021
Using Inputs Considered as
Fair ValueLevel 1Level 2Level 3
Commercial paper$47,361 $— $47,361 $— 
U.S. government securities20,230 — 20,230 — 
Corporate debt57,134 — 57,134 — 
Asset backed securities10,931 — 10,931 — 
Mutual funds312 136 176 — 
  Total marketable securities$135,968 $136 $135,832 $— 

The Company’s marketable securities classified within Level 1 are valued using real-time quotes for transactions in active exchange markets. Marketable securities within Level 2 are valued using readily available pricing sources. There were no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended March 31, 2022. Any transfers between levels would be recognized on the date of the event or when a change in circumstances causes a transfer.

Strategic Investments

The Company holds equity investments that do not have readily determined fair values. The Company has elected to measure these investments at cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is reviewed each reporting period by performing a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired.

As of March 31, 2022 and June 30, 2021, the carrying value of these investments was $12,353 and $11,706, respectively. During the nine months ended March 31, 2022, no impairment indicators were noted. The Company is committed to funding an additional $1,410 into these investments in the future. The Company holds options to acquire all outstanding equity or certain developed technologies with respect to some of these strategic investments.

The Company also holds strategic investments accounted for as available-for-sale debt securities, which had carrying values and approximated fair values of $18,380 and $8,951 as of March 31, 2022 and June 30, 2021, respectively. The fair values of these investments are measured using Level 3 inputs and are not included in the tables above. Impairment is assessed similar to
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the Company's other strategic investments and no impairment indicators were noted during the nine months ended March 31, 2022.

8. Stock-Based Compensation

On November 15, 2017, the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”) for the purpose of granting equity awards to employees, directors and consultants. On March 12, 2020, the Company’s Board of Directors approved the Amended and Restated 2017 Equity Incentive Plan, which amends the 2017 Plan. On August 19, 2021, the Company's Board of Directors adopted an amendment to the 2017 Plan, which was approved by the Company's stockholders on November 11, 2021, that increased the number of shares available for issuance under the 2017 Plan by 1,700,000 shares.

Equity awards classified as restricted stock and performance-based restricted stock are treated as issued shares when granted; however, these shares are not included in the computation of basic weighted average shares outstanding. When shares vest, unless the holder elects to pay the payroll tax liability in cash or through a sale of shares, the Company withholds the appropriate amount of shares to settle the payroll tax liability, on behalf of the individual receiving the shares, as an adjustment to accumulated deficit.

Restricted Stock

The value of each restricted stock award is equal to the fair market value of the Company’s common stock at the date of grant. Vesting of time-based restricted stock awards ranges from one year 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 for the nine months ended March 31, 2022 is as follows:
Number of
Shares
Weighted
Average Fair
Value
Outstanding at June 30, 2021467,942 $35.61 
Granted556,934 $28.16 
Forfeited(97,041)$33.89 
Vested(227,219)$36.44 
Outstanding at March 31, 2022
700,616 $29.68 

Performance-Based Restricted Stock

The Company also grants performance-based restricted stock awards to certain executives and other management. In August 2021, the Company granted an aggregate maximum of 306,550 shares that vest based on the Company’s total shareholder return relative to total shareholder return of the Company’s peer group (a market condition), as measured by the closing prices of the stock of the Company and the peer group members for the 90 trading days preceding July 1, 2021 compared to the closing prices of the stock of the Company and the peer group members for the 90 trading days preceding July 1, 2024. Vesting of these awards will be determined on the date that the Company’s Annual Report on Form 10-K for the fiscal year ending June 30, 2024 is filed.

To calculate the estimated fair value of these restricted stock awards with market conditions, the Company uses a Monte Carlo simulation, which uses the expected average stock prices to estimate the expected number of shares that will vest. The Monte Carlo simulation resulted in an aggregate fair value of approximately $6,090, which the Company will recognize as expense using the straight-line method over the period that the awards are expected to vest. Stock-based compensation expense related to an award with a market condition will be recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

Performance-based restricted stock awards granted in fiscal 2021 and 2020 that are outstanding vest based on the Company’s total shareholder return relative to total shareholder return of the Company’s peer group (a market condition), as measured by the closing prices of the stock of the Company and the peer group members for the 90 trading days preceding July 1, 2020 and July 1, 2019, respectively, compared to the closing prices of the stock of the Company and the peer group members for the 90 trading days preceding July 1, 2023 and July 1, 2022, respectively.
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Performance-based restricted stock award activity for the nine months ended March 31, 2022 is as follows:
Number of
Shares
Weighted
Average Fair
Value
Outstanding at June 30, 2021760,584 $20.26 
Granted306,550 $19.87 
Forfeited(130,739)$22.73 
Vested(147,001)$22.32 
Outstanding at March 31, 2022
789,394 $19.52 

Unrecognized stock compensation related to unvested stock awards outstanding as of March 31, 2022 was $20,014.

9. Leases

The Company leases its Texas manufacturing facility under an operating lease agreement which expires in April 2026. The Company also leases office equipment under lease agreements that expire at various dates through December 2026. As discussed in Note 6, the Company also leases its Minnesota headquarters facility which is accounted for as a financing obligation.

Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement dates. The Company considers fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company uses its incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments unless the lease provides an implicit interest rate.

Operating lease cost is classified within the consolidated statement of operations based on the nature of the leased asset. The Company's operating lease cost was $387 and $377 for the nine months ended March 31, 2022 and 2021, respectively. Cash paid for operating lease liabilities approximated operating lease cost for the nine months ended March 31, 2022. There were $103 and $2,238 of operating lease right-of-use assets obtained in exchange for new lease liabilities during the nine months ended March 31, 2022 and 2021, respectively.
March 31,June 30,
20222021
Right-of-use assets
Other assets$1,936 $2,212 
Operating lease liabilities
Accrued expenses510 487 
Other liabilities1,426 1,725 
Total operating lease liabilities$1,936 $2,212 

Future minimum lease payments under the agreements as of March 31, 2022 are as follows:
Remainder of fiscal 2022$134 
Fiscal 2023528 
Fiscal 2024503 
Fiscal 2025494 
Fiscal 2026406 
Thereafter
Total lease payments2,067 
Less imputed interest(131)
Total operating lease liabilities$1,936 

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As of March 31, 2022, the weighted average remaining lease term for operating leases was 4.0 years and the weighted average discount rate used to determine operating lease liabilities was 2.51%.

10. Commitment and Contingencies

In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters including, but not limited to, employment claims, commercial disputes and product liability claims. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of March 31, 2022 that are probable or estimable, for which the outcome could have a material adverse impact on its consolidated balance sheets or statements of operations.

11. Earnings Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted earnings per common share computations (in thousands except share and per share amounts):
 Three Months EndedNine Months Ended
March 31,March 31,
 2022202120222021
Numerator
Net loss$(9,658)$(6,004)$(27,243)$(8,136)
Income allocated to participating securities— — — — 
Net loss available to common stockholders$(9,658)$(6,004)$(27,243)$(8,136)
Denominator
Weighted average common shares outstanding – basic39,287,632 38,911,454 39,190,865 38,800,622 
Effect of dilutive stock options(1)
— — — — 
Effect of dilutive restricted stock units(2)
— — — — 
Effect of performance-based restricted stock awards(3)
— — — — 
Weighted average common shares outstanding – diluted
39,287,632 38,911,454 39,190,865 38,800,622 
Earnings per common share – basic and diluted$(0.25)$(0.15)$(0.70)$(0.21)

(1)At March 31, 2022 and 2021, 76,019 and 42,528 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 for all periods presented because those shares are anti-dilutive.
(2)At March 31, 2022 and 2021, 310,415 and 282,763 additional shares of common stock, respectively, were issuable upon the settlement of outstanding restricted stock units. The effect of the shares that would be issued upon settlement of these restricted stock units has been excluded from the calculation of diluted loss per share for all periods presented because those shares are anti-dilutive.
(3)At March 31, 2022 and 2021, 789,394 and 760,584 performance-based restricted stock awards, respectively, were outstanding. The effect of the potential vesting of these awards has been excluded from the calculation of diluted loss per share for all periods presented because those shares are anti-dilutive.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 1 of Part I of this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended June 30, 2021 and subsequent Quarterly Reports on Form 10-Q, including in Item 1A of Part II of this Quarterly Report on Form 10-Q, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

We are a medical technology company leading the way in the effort to successfully treat patients suffering from peripheral and coronary artery diseases, including those with arterial calcium, the most difficult form of arterial disease to treat. We are committed to clinical rigor, constant innovation and a defining drive to set the industry standard to deliver safe and effective medical devices that improve the lives of patients facing this difficult disease state. We have developed patented orbital atherectomy systems (“OAS”) for both peripheral and coronary clinical applications. The primary base of our business is catheter-based platforms capable of treating a broad range of vessel sizes and plaque types, including calcified plaque, which address many of the limitations associated with other treatment alternatives.

Peripheral

Our peripheral artery disease (“PAD”) products are catheter-based platforms capable of treating a broad range of plaque types in leg arteries both above and below the knee, including calcified plaque, and address many of the limitations associated with other existing surgical, catheter and pharmacological treatment alternatives. The micro-invasive devices use small access sheaths that can provide procedural benefits, allow physicians to treat PAD patients in even the small and tortuous vessels located below the knee, and facilitate access through alternative sites in the ankle, foot and wrist, as well as in the groin.

The United States Food and Drug Administration (“FDA”) has granted us 510(k) clearances for our Peripheral OAS as a therapy in patients with PAD, as discussed in Item 1 of Part I of our Annual Report on Form 10-K for the year ended June 30, 2021. We refer to these products in this Quarterly Report on Form 10-Q as the “Peripheral OAS.” In addition to our Peripheral OAS, we also offer support products within the peripheral space. Peripheral sales in the United States during the nine months ended March 31, 2022 represented 66% of revenue.

Coronary

Our coronary artery disease (“CAD”) product, the Diamondback 360 Coronary OAS (“Coronary OAS”), is a catheter-based platform designed to facilitate stent delivery in patients with CAD who are acceptable candidates for percutaneous transluminal coronary angioplasty or stenting due to de novo, severely calcified coronary artery lesions. The Coronary OAS design is similar to technology used in our Peripheral OAS, customized specifically for the coronary application. In addition to the Coronary OAS, we also offer support products within the coronary space as we expand treatment to a broader patient population with complex coronary artery disease.

We have received premarket approval (“PMA”) from the FDA to market the Coronary OAS as a treatment for severely calcified coronary arteries. Coronary sales in the United States during the nine months ended March 31, 2022 represented approximately 27% of revenue.

International

We serve a growing patient population globally through an expanding distribution and sales network. Sales of our approved products in Japan are made through our exclusive Japan distributor, Medikit Co., Ltd. ("Medikit"). Sales of our products in the rest of the world, which primarily includes certain countries in Southeast Asia, Europe, Canada and the Middle East, are made through a network of distributors and sales agents. International sales during the nine months ended March 31, 2022 represented approximately 7% of revenue.

Impact of COVID-19

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The COVID-19 pandemic in the United States and internationally has caused us to experience ongoing disruptions in the procedures using our products. Procedures have been postponed, and may continue to be postponed, as a result of reduced availability of physicians or lab space to treat patients, the lack of personal protective equipment and active virus test kits, different treatment prioritizations, increased cost pressures and burdens on the overall healthcare infrastructure that result in reallocation of resources, customer staffing shortages, and governmental guidelines and restrictions. In addition, patients have elected to defer or avoid treatment for procedures that use our products due to anxiety about the potential spread of COVID-19 in facilities. Finally, our personnel and the personnel of our distribution partners experienced restrictions on their ability to access many customers, hospitals, labs and other medical facilities for sales activities, training and case support as they may have been deemed to be “non-essential” personnel by those facilities, and there has been a reduction in procedure activity in these accounts.

In addition to the impact on procedure volumes, we experienced other disruptions as a result of the COVID-19 pandemic. For example, enrollment in our ECLIPSE clinical trial was paused for several months. Other disruptions included restrictions on the ability of our personnel and personnel of our distribution partners to travel; delays in approvals by regulatory bodies; delays in product development efforts, which has also disrupted or delayed our ability to launch affected products; reallocation of company resources from our strategic priorities; supply chain disruptions that limited, delayed or prevented us from acquiring the components used to develop and manufacture our products or ship those products once manufactured; disruptions in our relationships with our distributors due to the impact of the COVID-19 pandemic on their operations; temporary closures of our facilities; loss of employee productivity; additional government requirements to “shelter at home” or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our products; and we have experienced an increase in employee turnover, which we believe has been consistent with broader market conditions. To address the continuing uncertainties associated with the pandemic and utilize our resources more effectively, we have reduced our field clinical support and realigned a small number of our sales representatives in territories or regions where procedural volumes no longer warrant incremental case support.

Throughout the pandemic, we have operated our manufacturing facilities and continued to ship product. Most of our office-based employees have telecommuted, and our field employees have continued to support cases in clinical settings where they are able to have access. We took and continue to take several actions intended to protect the health and well-being of our workforce and our customers. We will continue to monitor developments at the local, state and national levels in order to ensure that we and our employees have current information for purposes of making decisions in the dynamic and unpredictable environment and that we comply with applicable requirements.

We are monitoring the spread of variants, and continue to track hospitalizations resulting from these variants. In particular, disruptions in procedures beginning in early December with the Omicron variant outbreak, which continued to adversely affect our business in the third quarter. Many factors may increase or decrease procedure volumes, which would have an impact on our revenue and financial results, including vaccination levels and mandates, the spread of new, more viral or deadly variants of the SARS-CoV-2 virus, easing of social restrictions and government restrictions on elective and semi-elective cases, level of patient anxiety, medical facility and workforce capacity, and sales representative access to facilities to support cases.


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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations is 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, deferred revenue and stock-based compensation, 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.

Our critical accounting policies are identified in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 under the heading “Critical Accounting Policies and Significant Judgments and Estimates.”

RESULTS OF OPERATIONS

The following table sets forth our results of operations expressed as dollar amounts (in thousands) and the changes between the specified periods expressed as percent increases or decreases:
 Three Months Ended March 31,Nine Months Ended March 31,
20222021Percent
Change
20222021Percent
Change
Net revenues$56,221 $63,273 (11.1)%$173,726 $187,986 (7.6)%
Cost of goods sold14,790 14,013 5.5 47,171 40,497 16.5 
Gross profit41,431 49,260 (15.9)126,555 147,489 (14.2)
Expenses:
Selling, general and administrative41,680 41,442 0.6 123,933 121,785 1.8 
Research and development9,052 13,163 (31.2)27,947 31,816 (12.2)
Amortization of intangible assets346 304 13.8 996 912 9.2 
Total expenses51,078 54,909 (7.0)152,876 154,513 (1.1)
Loss from operations(9,647)(5,649)70.8 (26,321)(7,024)(274.7)
Other (income) expense, net(52)292 (117.8)660 923 (28.5)
Loss before income taxes(9,595)(5,941)61.5 (26,981)(7,947)(239.5)
Provision for income taxes63 63 — 262 189 38.6 
Net loss$(9,658)$(6,004)60.9 $(27,243)$(8,136)(234.8)


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Comparison of Three Months Ended March 31, 2022 with Three Months Ended March 31, 2021

Net revenues. Net revenues decreased by $7.1 million, or 11.1%, from $63.3 million for the three months ended March 31, 2021 to $56.2 million for the three months ended March 31, 2022. U.S. peripheral revenues decreased $4.9 million, or 11.7%, while U.S. coronary revenues decreased $2.8 million, or 16.0%. Both therapies were adversely affected by the impact of the Omicron variant of the SARS-CoV-2 virus, which began to surge in the U.S. in early December 2021. Contributing factors to the decreased case volumes from the Omicron variant were disruptions of referral patterns, deferrals of elective procedures, and staffing shortages. We have also been adversely affected by an increasingly competitive environment and reimbursement pressures in the office-based lab setting. Increased revenue from increased customer adoption of interventional support products partially offset the revenue declines from decreased case volumes in the peripheral and coronary franchise. International revenue was $4.4 million for the three months ended March 31, 2022, compared with international revenue of $3.7 million for the three months ended March 31, 2021. Although international sales were also impacted by the ongoing COVID-19 pandemic, increases in international sales were driven by a stronger recovery in Japan, increased adoption in Europe, and the commencement of sales into other territories. In the fourth quarter of fiscal 2022, we expect our revenue will continue to be impacted by the COVID-19 pandemic's effect on case volumes but to a lesser degree than previous quarters in fiscal 2022. Longer-term we expect revenue growth to improve when the pandemic subsides, driven by increasing the number of physicians using the devices; increasing the usage per physician; introducing new and improved products; generating additional clinical data; and continuing expansion into new geographies, partially offset by potential decreases in average selling prices. However, ongoing factors such as staffing shortages may continue to have an adverse impact.

Cost of Goods Sold. Cost of goods sold was $14.8 million for the three months ended March 31, 2022, an increase of 5.5% from $14.0 million for the three months ended March 31, 2021. These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. Gross margin decreased to 73.7% for the three months ended March 31, 2022 from 77.9% for the three months ended March 31, 2021. The increase in cost of goods sold and decrease in gross margin was primarily due to lower unit volumes as well as increased sales of lower margin products. We expect that gross margin in the fourth quarter of fiscal 2022 will be approximately the same as the three months ended March 31, 2022. We anticipate that there will be a continued shift of sales mix into interventional support products and international markets in addition to declining average selling prices which will also impact gross margins. Quarterly margin fluctuations could also occur based on production volumes, timing of new product introductions, sales mix, pricing changes, or other unanticipated circumstances.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $41.7 million for the three months ended March 31, 2022, an increase of 0.6% from $41.4 million for the three months ended March 31, 2021. Selling, general and administrative expense increases were led by costs associated with new product introductions and travel-related expenditures due to resumption of live meetings and tradeshows. These increases were partially offset by reduced commission expenses due to lower sales in the current year period and a decrease in incentive compensation expense due to lower performance. Selling, general and administrative expenses for the three months ended March 31, 2022 and 2021 include $3.4 million and $3.1 million, respectively, for stock-based compensation. We expect our selling, general and administrative expenses for the fourth quarter of fiscal 2022 to be greater than amounts incurred for the three months ended March 31, 2022.

Research and Development Expenses. Research and development expenses decreased by 31.2%, from $13.2 million for the three months ended March 31, 2021 to $9.1 million for the three months ended March 31, 2022. Research and development expenses relate to specific projects to develop new products or expand into new markets, such as the development of new versions of the Peripheral and Coronary OAS, shaft designs and crown designs, and expanded product offerings, including our percutaneous ventricular assist device, and to clinical trials. The decrease was primarily due to in process research and development ("IPR&D") charges incurred with our asset acquisition of a line of peripheral microcatheters in the three months ended March 31, 2021. We expect an increase in research and development expense in the fourth quarter of fiscal 2022 from what we incurred during the three months ended March 31, 2022. Quarterly fluctuations could occur based on the number of projects and studies, the progress of such projects and studies, the rate of study enrollment, acquisitions of IPR&D and possible charges in connection with those acquisitions, and the timing of expenditures.


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Comparison of Nine Months Ended March 31, 2022 with Nine Months Ended March 31, 2021

Net revenues. Net revenues decreased by $14.3 million, or 7.6%, from $188.0 million for the nine months ended March 31, 2021 to $173.7 million for the nine months ended March 31, 2022. U.S. peripheral revenues decreased $14.1 million, or 10.9% and U.S. coronary revenues decreased $3.9 million, or 7.5%. Both therapies were adversely affected by the impact of the Delta and Omicron variants of the SARS-CoV-2 virus, especially within the hospital setting. Contributing factors to the decreased case volumes from the Delta and Omicron variants were disruptions of referral patterns, deferrals of elective procedures, staffing shortages and heightened summer seasonality in the quarter ended September 30, 2021. We have also been adversely affected by an increasingly competitive environment and reimbursement pressures in the office-based lab setting. Increased revenue from new product launches and increased customer adoption of interventional support products partially offset the revenue declines from decreased case volumes in the peripheral and coronary franchise. International revenue was $11.4 million for the nine months ended March 31, 2022, compared with international revenue of $7.7 million for the nine months ended March 31, 2021. Although international sales were also impacted by the ongoing COVID-19 pandemic, increases in international sales were driven by Coronary OAS sales in Europe, a stronger recovery in Japan, and the commencement of sales into other territories.

Cost of Goods Sold. Cost of goods sold was $47.2 million for the nine months ended March 31, 2022, an increase of 16.5% from $40.5 million for the nine months ended March 31, 2021. These amounts represent the cost of materials, labor and overhead for single-use catheters, guide wires, pumps, and other ancillary products. Gross margin decreased to 72.8% for the nine months ended March 31, 2022 from 78.5% for the nine months ended March 31, 2021. The increase in cost of goods sold and decrease in gross margin were primarily due to the $2.8 million reserve related to the voluntary recall of the WIRION device, lower unit volumes, as well as increased sales of lower margin products.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $123.9 million for the nine months ended March 31, 2022, an increase of 1.8% from $121.8 million for the nine months ended March 31, 2021. Selling, general and administrative expense increases were led by costs associated with new product introductions and the resumption of travel-related expenditures due to increased live meetings and tradeshows, in addition to annual salary increases for our employees. These increases were partially offset by reduced commission expenses due to lower sales in the current year period and a decrease in incentive compensation expense due to lower performance. Selling, general and administrative expenses for the nine months ended March 31, 2022 and 2021 include $11.5 million and $10.5 million, respectively, for stock-based compensation.

Research and Development Expenses. Research and development expenses decreased by 12.2%, from $31.8 million for the nine months ended March 31, 2021 to $27.9 million for the nine months ended March 31, 2022. Research and development expenses relate to specific projects to develop new products or expand into new markets, such as the development of new versions of the Peripheral and Coronary OAS, shaft designs and crown designs, and expanded product offerings, including our percutaneous ventricular assist device, and to clinical trials. The decrease was primarily due to IPR&D charges incurred with our asset acquisition of a line of peripheral microcatheters in the nine months ended March 31, 2021.

LIQUIDITY AND CAPITAL RESOURCES

We had cash, cash equivalents and highly liquid marketable securities of $172.1 million and $207.0 million at March 31, 2022 and June 30, 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $413.9 million. We have historically funded our operating losses primarily from the issuance of common and preferred stock, convertible promissory notes, and debt.

A summary of our cash flow activities (in thousands) is as follows:
Nine Months Ended
March 31,
20222021
Net cash used in operating activities$(14,443)$(2,420)
Net cash provided by (used in) investing activities14,484 (104,878)
Net cash used in financing activities(4,158)(2,832)
Net change in cash and cash equivalents$(4,117)$(110,130)


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Changes in Liquidity

Operating Activities

Net cash used in operating activities was $14.4 million for the nine months ended March 31, 2022, primarily due to the net loss of $27.2 million, and $5.6 million relating to changes in working capital as a result of the payout of annual bonuses and commissions, partially offset by non-cash expenditures for the nine months ended March 31, 2022.

Net cash used in operating activities was $2.4 million for the nine months ended March 31, 2021, primarily due to the net loss of $8.1 million, and $14.4 million relating to changes in working capital as a result of the recovery from the initial wave of the COVID-19 pandemic in our business, partially offset by non-cash expenditures for the nine months ended March 31, 2022.

Investing Activities

Net cash provided by investing activities was $14.5 million for the nine months ended March 31, 2022, as maturities and sales of marketable securities exceeded marketable security purchases. These amounts were partially offset by a product acquisition of peripheral microcatheters, additional payments relating to strategic investments and capital expenditures as we continue to grow our business.

Net cash used in investing activities was $104.9 million for the nine months ended March 31, 2021, primarily due to investing cash from our June 2020 equity offering into marketable securities. We also deployed cash into strategic investments, product acquisitions and capital expenditures as we continue to grow our business. These uses of cash were partially offset by maturities and sales of marketable securities.

Financing Activities

Net cash used in financing activities was $4.2 million and $2.8 million for the nine months ended March 31, 2022 and 2021, respectively, primarily due to payment of payroll taxes on the employee vesting of stock awards, partially offset by proceeds from employee stock purchases.

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 business operations, 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, market and regulatory developments, ongoing facility requirements, potential strategic transactions (including the potential acquisition of, or investments in, businesses, technologies and products), international expansion, the existence, defense and resolution of legal proceedings, and the severity and duration of the COVID-19 pandemic. As discussed in the "Overview" above, the total impact of disruptions from COVID-19 has had a material impact on our financial condition and results of operations, but once the pandemic subsides, we expect our U.S. business to improve. We will continue to closely monitor our liquidity and capital resources through the disruption caused by COVID-19 and will continue to evaluate our financial position to assess additional spending reductions and our liquidity needs. As of March 31, 2022, we believe our current cash, cash equivalents and marketable securities will be sufficient to fund working capital requirements, including open purchase commitments, capital expenditures and operations for the foreseeable future, including at least the next twelve months, as well as to fund payments under our lease agreements, payments under development agreements and future payments relating to our asset acquisition of the WIRION embolic protection system. If needed, we have the ability to borrow under our senior, secured revolving credit facility. We intend to retain any future earnings to support operations and to finance the growth and development of our business. We do not anticipate paying any dividends in the foreseeable future.


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Facility Sale and Lease

On December 29, 2016, we entered into a Purchase and Sale Agreement, as subsequently amended (collectively, the “Sale Agreement”), with Krishna Holdings, LLC (“Krishna”), providing for the sale to Krishna of our headquarters facility in St. Paul, Minnesota (the “Facility”) for a cash purchase price of $21.5 million. On March 30, 2017, the sale of the Facility under the Sale Agreement closed. We received proceeds of approximately $20.9 million ($21.5 million less $556,000 of transaction expenses). In connection with the closing of the facility sale, we entered into a Lease Agreement (the “Lease Agreement”) with Krishna Holdings, LLC, Apex Holdings, LLC, Kashi Associates, LLC, Keva Holdings, LLC, S&V Ventures, LLC, Polo Group LLC, SPAV Holdings LLC, Star Associates LLC, and The Global Villa, LLC. The Lease Agreement has an initial term of fifteen years, with four consecutive renewal options of five years each, with a base annual rent in the first year of $1.6 million and annual escalations of 3%. See Note 6 to our Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion.

Revolving Credit Facility

In March 2017, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). In March 2020, we entered into the First Amendment to the Loan Agreement (the "Amendment"). The Amendment extended the maturity date of the Loan Agreement by two years, to March 31, 2022, and increased the maximum amount available under the senior, secured revolving credit facility (the "Revolver") to $50.0 million (the “Maximum Dollar Amount”). In March 2022, the Company entered into the Second Amendment to the Loan Agreement (the "Second Amendment"). The Second Amendment extended the maturity date of the Loan Agreement by one year, to March 31, 2023.

Advances under the Revolver may be made from time to time up to the Maximum Dollar Amount, subject to certain borrowing limitations. The Revolver bears interest at a floating per annum rate equal to the Wall Street Journal prime rate, less 0.75%. Interest on borrowings is due monthly and the principal balance is due at maturity. Upon the Revolver’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolver will be due and payable. We will incur a fee equal to 1.5% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the Second Amendment (the "Amended Loan Agreement"), or the Revolver for any reason prior to the date that is fifteen days prior to the maturity date, unless refinanced with SVB.

Our obligations under the Amended Loan Agreement are secured by certain of our assets, including, among other things, accounts receivable, deposit accounts, inventory, equipment, general intangibles and records pertaining to the foregoing. The collateral does not include our intellectual property, but we agreed not to encumber our intellectual property without the consent of SVB. The Amended Loan Agreement contains customary covenants limiting our ability to, among other things, incur debt or liens, make certain investments and loans, enter into transactions with affiliates, undergo certain fundamental changes, dispose of assets, or change the nature of our business. In addition, the Amended Loan Agreement contains financial covenants requiring us to maintain, at all times when any amounts are outstanding under the Revolver, either (i) minimum unrestricted cash at SVB and unused availability on the Revolver of at least $10.0 million or (ii) minimum trailing three-month Adjusted EBITDA (as defined in the Amended Loan Agreement) of $1.0 million. If we do not comply with the various covenants under the Amended Loan Agreement or an event of default under the Amended Loan Agreement occurs, such as a material adverse change, the interest rate on outstanding amounts will increase by 5% and SVB may, subject to various customary cure rights and the other terms and conditions of the Amended Loan Agreement, decline to provide additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Revolver, and foreclose on all collateral.

We are required to pay a fee equal to 0.15% per annum on the unused portion of the Revolver, payable quarterly in arrears. We are not obligated to draw any funds under the Revolver and have not done so under the Revolver since entering into the Loan Agreement. No amounts were outstanding as of March 31, 2022 and we currently do not have plans to borrow under the Amended Loan Agreement.

NON-GAAP FINANCIAL INFORMATION

To supplement our condensed consolidated financial statements prepared in accordance with GAAP, our management uses a non-GAAP financial measure referred to as “Adjusted EBITDA.” Reconciliations of this non-GAAP measure to the most comparable U.S. GAAP measure for the respective periods can be found in the following table. In addition, an explanation of the manner in which our management uses this measure to conduct and evaluate our business, the economic substance behind our management's decision to use this measure, the substantive reasons why our management believes that this measure provides useful information to investors, the material limitations associated with the use of this measure and the manner in which our management compensates for those limitations is included following the reconciliation table.

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 Three Months EndedNine Months Ended
March 31,March 31,
 2022202120222021
Net loss$(9,658)$(6,004)$(27,243)$(8,136)
Less: Other (income) expense, net(52)292 660 923 
Less: Provision for income taxes63 63 262 189 
Loss from operations(9,647)(5,649)(26,321)(7,024)
Add: Stock-based compensation3,892 3,704 13,804 12,488 
Add: Depreciation and amortization1,286 1,056 3,831 3,143 
Adjusted EBITDA$(4,469)$(889)$(8,686)$8,607 

Adjusted EBITDA decreased for the three and nine months ended March 31, 2022 as compared to the three and nine months ended March 31, 2021 primarily due to a greater loss from operations in the current year.

Use and Economic Substance of Non-GAAP Financial Measures Used and Usefulness of Such Non-GAAP Financial Measures to Investors

We use Adjusted EBITDA as a supplemental measure of performance and believe this measure facilitates operating performance comparisons from period to period and company to company by factoring out potential differences caused by depreciation and amortization expense, and stock-based compensation. Our management uses Adjusted EBITDA to analyze the underlying trends in our business, assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources and evaluate our performance period over period and in relation to our competitors’ operating results. Additionally, our management is partially evaluated on the basis of Adjusted EBITDA when determining achievement of their incentive compensation performance targets. Management does not use this Adjusted EBITDA measure as a liquidity measure or in the calculation of our financial covenants under the revolving credit facility with Silicon Valley Bank.

We believe that presenting Adjusted EBITDA provides investors greater transparency to the information used by our management for its financial and operational decision-making and allows investors to see our results “through the eyes” of management. We also believe that providing this information better enables our investors to understand our operating performance and evaluate the methodology used by our management to evaluate and measure such performance.

The following is an explanation of each of the items that management excluded from Adjusted EBITDA and the reasons for excluding each of these individual items:

Stock-based compensation. We exclude stock-based compensation expense from our non-GAAP financial measures primarily because such expense, while constituting an ongoing and recurring expense, is not an expense that requires cash settlement.

Depreciation and amortization expense. We exclude depreciation and amortization expense from our non-GAAP financial measures primarily because such expenses, while constituting ongoing and recurring expenses, are not expenses that require cash settlement and are not used by our management to assess the core profitability of our business operations.

Our management also believes that excluding these above items from our non-GAAP results is useful to investors to understand our operational performance, liquidity and ability to make additional investments in our company.

Beginning with the quarter ended March 31, 2022, following correspondence from the staff of the U.S. Securities and Exchange Commission, we no longer exclude IPR&D charges incurred in connection with asset acquisitions from Adjusted EBITDA or any other reported non-GAAP financial measures. For purposes of comparability, we have revised the reconciliation table above for three and nine months ended March 31, 2021 to reflect this approach.




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Material Limitations Associated with the Use of Non-GAAP Financial Measures and Manner in which We Compensate for these Limitations

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Some of the limitations associated with our use of these non-GAAP financial measures are:

Items such as stock-based compensation do not directly affect our cash flow position; however, such items reflect economic costs to us and are not reflected in our Adjusted EBITDA, and therefore these non-GAAP measures do not reflect the full economic effect of these items.

Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and therefore other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Our management exercises judgment in determining which types of charges or other items should be excluded from the non-GAAP financial measures we use. We compensate for these limitations by relying primarily upon our GAAP results and using non-GAAP financial measures only supplementally.

We provide detailed reconciliations of each non-GAAP measure to its most directly comparable GAAP measure. We encourage investors to review these reconciliations. We qualify our use of non-GAAP financial measures with cautionary statements as set forth above.

INFLATION

We do not believe that inflation had a material impact on our business and operating results during the periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the year ended June 30, 2021.

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 Quarterly Report on Form 10-Q and in other materials filed or to be filed by us with the SEC (as well as information included in oral statements or other written statements made or to be made by us). Forward-looking statements include all statements based on future expectations. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, (i) our expectations regarding the impact of the COVID-19 pandemic on our operations; (ii) our expectation of continued sales of our products internationally, including the specific products to be sold, the territories in which such products will be sold, the timing of such sales, and whether such sales will be through distributors or directly by us; (iii) seasonality in our business; (iv) our expectation that our revenue will continue to be impacted by the COVID-19 pandemic during our fourth quarter but to a lesser extent than prior quarters in fiscal 2022, and that our revenue growth will improve; (v) our expectation that we will incur selling, general and administrative expenses in the fourth quarter of fiscal 2022 that are higher than the amounts incurred in the three months ended March 31, 2022; (vi) our expectation that gross margin in the fourth quarter of fiscal 2022 will be similar to the gross margin in the three months ended March 31, 2022; (vii) our expectation that we will incur research and development expenses in the fourth quarter of fiscal 2022 that are higher than the amounts incurred in the three months ended March 31, 2022; (viii) our belief that our current cash and cash equivalents will be sufficient to fund working capital requirements, capital expenditures and operations for the foreseeable future, as well as to fund certain other anticipated expenses; (ix) our intention to retain any future earnings to support operations and to finance the growth and development of our business; (x) our dividend expectations; (xi) our plan not to borrow under our loan and security agreement; and (xii) the anticipated impact of adoption of recent accounting pronouncements on our financial statements.

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.
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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 the ongoing COVID-19 pandemic and the impact and scope thereof on us, our distribution partners, the supply chain and physicians and facilities, including government actions related to the COVID-19 outbreak, material delays and cancellations of procedures, delayed spending by healthcare providers, and distributor and supply chain disruptions; regulatory developments, clearances and approvals; approval of our products for distribution outside of the United States; approval of products for reimbursement and the level of reimbursement in the U.S., Japan and other foreign countries; dependence on market growth; agreements with third parties to sell their products; the ability of us and our distribution partners to successfully launch our products outside of the United States; our ability to maintain third-party supplier relationships and renew existing purchase agreements; our ability to maintain our relationships with distribution partners; the experience of physicians regarding the effectiveness and reliability of the products we sell; the reluctance of physicians, hospitals and other organizations to accept new products; the potential for unanticipated delays in enrolling medical centers and patients for clinical trials; actual clinical trial and study results; the impact of competitive products and pricing; our ability to comply with the financial covenants in our loan and security agreement and to make payments under and comply with the lease agreement for our corporate headquarters; unanticipated developments affecting our estimates regarding expenses, future revenues and capital requirements; the difficulty of successfully managing operating costs; our ability to manage our sales force strategy; actual research and development efforts and needs, including the timing of product development programs; successful development of new products; including agreements with development partners, advisors and other third parties; the ability of us and these third parties to meet development, contractual and other milestones; contractual rights and obligations; our ability to obtain and maintain intellectual property protection for product candidates; fluctuations in results and expenses based on new product introductions, sales mix, unanticipated warranty claims, and the timing of project expenditures; our ability to manage costs; our actual financial resources and our ability to obtain additional financing; investigations or litigation threatened or initiated against us; court rulings and future actions by the FDA and other regulatory bodies; international trade developments; the effects of hurricanes, flooding, and other natural disasters on our business; the impact of federal corporate tax reform on our business, operations and financial statements; shutdowns of the U.S. federal government; the potential impact of any future strategic transactions; and general economic conditions.

These and additional risks and uncertainties are described more fully in our Annual Report on Form 10-K for the year ended June 30, 2021 and subsequent Quarterly Reports on Form 10-Q, including in Item 1A of Part II of this Quarterly Report on Form 10-Q. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis and retrieval system (EDGAR) at www.sec.gov.

You should read these risk factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this Quarterly Report on Form 10-Q 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 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than the negative impact the COVID-19 pandemic has had and will continue to have on our business and results of operations as discussed elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the year ended June 30, 2021.

ITEM 4.    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 our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2022. Based on that review and evaluation, which included inquiries made to certain other of our employees, the Certifying Officers have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as designed and implemented, are effective.


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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. — OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

None.

ITEM 1A.    RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the important information in the section entitled “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q and materially adversely affect our business, financial condition and/or future operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also might materially adversely affect our business, financial condition and/or operating results.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Company Repurchases of Equity Securities

The following table presents information with respect to purchases made by us of our common stock during the third quarter of fiscal 2022:
Total Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased under the Plan or Programs
January 1 to January 31, 2022— $— N/AN/A
February 1 to February 28, 2022(1)
5,386 19.80 N/AN/A
March 1 to March 31, 2022— — N/AN/A
5,386 $19.80 
(1) Comprised of shares withheld pursuant to the terms of restricted stock awards under our stock-based compensation plans to offset tax withholding obligations that occur upon vesting and release of shares. The value of the shares withheld is the closing price of our common stock on the date the relevant transaction occurs.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

None.

ITEM 5.    OTHER INFORMATION

None.



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ITEM 6.    EXHIBITS
Exhibit No.Description
10.1†*
10.2†*
10.3*
31.1*
31.2*
32.1**
32.2**
101*
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Financial Statements.
104*Cover page interactive data file (formatted in Inline XBRL and contained in Exhibit 101).
_______________________

*    Filed herewith.
**    Furnished herewith.
†    Compensatory plan or agreement.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Dated: May 5, 2022
CARDIOVASCULAR SYSTEMS, INC.
By/s/ Scott R. Ward
Scott R. Ward
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By/s/ Jeffrey S. Points
Jeffrey S. Points
Chief Financial Officer
(Principal Financial and Accounting Officer)

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