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Coronary product revenue encompasses sales of the Company’s C2 catheter and C2+ catheter. Peripheral product revenue encompasses sales of the Company’s M5 catheter, M5+ catheter, S4 catheter, and L6 catheter. Reducer revenue encompasses sales of the Company’s Reducer product. Other product revenue encompasses sales of the Company’s generators and related accessories.
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| Product revenue | $ | | | | $ | | |
ordinary shares, which represents % of the total equity of the JV, to Genesis in exchange for a cash contribution of $ million, and (ii) ordinary shares, which represents % of the total equity of the JV, to the Company as consideration for the Shockwave License Agreement (the “License Agreement”). Under the License Agreement, the Company has agreed to contribute to the JV an exclusive license under certain of the Company’s intellectual property rights to develop, manufacture, distribute and commercialize certain products in the PRC and is entitled to receive royalties on the sales of the licensed products in the PRC. Further, the Company entered into a Distribution Agreement, pursuant to which the Company has agreed to sell certain Company-manufactured products to the JV or a PRC subsidiary of the JV for commercialization and distribution in the PRC.As of March 31, 2024, the carrying value of the Company’s investment in the JV was $ million and the Company owned a % interest in the entity.
SHOCKWAVE MEDICAL, INC.
Notes to Condensed Consolidated Financial Statements
million for the outstanding performance obligation. The Company will satisfy the outstanding performance obligation upon the completion of training provided by the Company to the JV, and successful regulatory approval for the JV manufactured product from the China National Medical Products Administration.
million and tax expense of $ million for the three months ended March 31, 2024 and 2023, respectively, representing an effective tax rate of ()% and %, respectively. For the three months ended March 31, 2024, the effective tax rate differed from the U.S. federal statutory rate primarily due to stock-based compensation for tax purposes. For the three months ended March 31, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to the stock-based compensation for tax purposes and research credits.
The Company’s effective tax rate may be subject to fluctuation due to several factors, including the Company’s ability to accurately predict the pre-tax earnings in the various jurisdictions, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions and the effects of tax law changes.
SHOCKWAVE MEDICAL, INC.
Notes to Condensed Consolidated Financial Statements
per share (the “Merger Consideration”), without interest thereon and less any applicable withholdings. •Each Company stock option (“Company Option”) that is outstanding and unexercised as of immediately prior to the Effective Time, whether vested or unvested, and which has a per share exercise price that is less than the Merger Consideration, will be cancelled and converted into the right to receive an amount in cash (without interest), less any applicable withholdings, equal to the product of (i) the aggregate number of shares underlying such Company Option immediately prior to the Effective Time, and (ii) the excess of (A) the Merger Consideration over (B) the per share exercise price of such Company Option. Each Company Option with a per share exercise price that equals or exceeds the amount of the Merger Consideration will be cancelled for no consideration.
•Each restricted stock unit (“RSU Award”) that is outstanding as of immediately prior to the Effective Time, whether vested or unvested, will be canceled and converted into the right to receive an amount in cash (without interest), less any applicable withholdings, equal to the product of (i) the aggregate number of shares underlying such RSU Award immediately prior to the Effective Time and (ii) the Merger Consideration.
•Each performance stock unit for which the performance period has not been completed as of the date of the Merger Agreement (“PSU Award”) that is outstanding as of immediately prior to the Effective Time, whether vested or unvested, will be canceled and converted into the right to receive an amount in cash (without interest), less any applicable withholdings, equal to the product of (i) the aggregate number of shares underlying such PSU Award immediately prior to the Effective Time (assuming attainment of (A) the actual level of performance for performance metrics for which the relevant performance period has been completed as of the Effective Time and (B) the maximum level of performance as determined under the terms of the applicable award agreement as in effect on the date of the Merger Agreement for performance metrics for which the relevant performance period has not been completed as of the Effective Time) and (ii) the Merger Consideration.
The Merger Agreement contains customary representations and warranties by Johnson & Johnson, Merger Sub and the Company. The Merger Agreement also contains customary covenants and agreements, including with respect to the operations of the business of the Company between signing and closing.
The Merger is expected to close by mid-year 2024, subject to approval by the Company’s stockholders, as well as the receipt of applicable regulatory approvals and other customary closing conditions.
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 condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 26, 2024 (the “2023 Annual Report”). 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, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” in the “Risk Factors” section of this Quarterly Report on Form 10-Q and in the “Risk Factors” section of our 2023 Annual Report, our actual results could differ materially from the results described in, or implied, by those forward-looking statements.
Overview
We are a medical device company focused on developing and commercializing novel technologies that transform the care of patients with cardiovascular disease. We aim to establish a new standard of care for the treatment of calcified cardiovascular disease through our differentiated and proprietary local delivery of sonic pressure waves, which we refer to as intravascular lithotripsy (“IVL”). Our IVL system (our “IVL System”), which leverages our IVL technology (our “IVL Technology”), is a minimally invasive, easy-to-use, and safe way to improve outcomes for patients with calcified cardiovascular disease. Additionally, we aim to transform the standard of care for patients suffering from refractory angina with our coronary sinus reducer (the “Reducer”) technology, an innovative technology that creates a permanent, controlled narrowing of the coronary sinus.
Our differentiated range of IVL catheters enables delivery of IVL therapy to diseased vasculature throughout the body for calcium modification. Our currently approved IVL catheters that treat peripheral artery disease and coronary artery disease resemble a standard balloon angioplasty catheter, the device most commonly used by interventional cardiologists. This familiarity makes our IVL System easy for healthcare providers to learn, adopt and use on a day-to-day basis. The Reducer is also a catheter-based device and is implanted in the coronary sinus, which is a major coronary vein located on the left side of the heart. It was developed to deliver this coronary sinus reduction therapy in a safe, simple and effective manner via a minimally invasive catheter that is consistent with contemporary medical practice. The Reducer is implanted using conventional catheter-based interventional techniques and reduces the diameter of the coronary sinus, which redistributes blood into the ischemic myocardium to help reduce angina symptoms. The implant procedure requires minimal training for experienced interventionalists.
On April 4, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Johnson & Johnson, a New Jersey corporation, and Sweep Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Johnson & Johnson (“Merger Sub”), pursuant to which Johnson & Johnson has agreed to acquire us for $335.00 per share in cash (the “Merger”), corresponding to an enterprise value of approximately $13.1 billion including cash acquired. The transaction is expected to close by mid-year 2024, subject to customary closing conditions, including approval by our stockholders and regulatory approvals. See Note 16, “Subsequent Events” for more information.
Our markets
We market our products to hospitals whose interventional cardiologists, vascular surgeons and interventional radiologists treat patients with PAD, CAD and refractory angina. We have dedicated meaningful resources to establish direct sales capability in the United States, Germany, Austria, Switzerland, France, Ireland, Japan, the United Kingdom, Spain, Portugal, Canada and Italy, which we have complemented with distributors actively selling our products in over 55 countries in North and South America, Europe, the Middle East, Asia, Africa, and Australia/New Zealand. We are continuing to add new U.S. sales territories and are actively expanding our international field presence through new distributors, as well as additional sales and clinical personnel and expanded direct sales territories.
Financial overview
For the three months ended March 31, 2024 and 2023, we generated revenue of $218.8 million and $161.1 million, respectively, and had operating income of $42.4 million and $39.8 million, respectively. For the three months ended March 31, 2024 and 2023, 20% and 18%, respectively, of our product revenue was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in Euros. As a result, we
have foreign exchange exposure. We have not entered into any material foreign currency hedging contracts, although we may do so in the future.
Although we had net income for the year ended December 31, 2023 and the three months ended March 31, 2024, we may incur net losses in the future, which may vary significantly from period to period. We expect to continue to incur significant expenses as we (i) expand our marketing efforts to increase adoption of our products, (ii) expand existing relationships with our customers, (iii) obtain regulatory clearances or approvals for our planned or future products, (iv) conduct clinical trials on our existing and planned or future products, and (v) develop new products or add new features to our existing products. We will need to continue to generate significant revenue in order to sustain profitability as we continue to grow our business. Even if we achieve profitability for any period, we cannot be sure that we will remain profitable for any substantial period of time.
To date, our principal sources of liquidity have been the net proceeds we received through cash provided by our operating activities, sales of our equity securities, and proceeds from our debt financings. For the three months ended March 31, 2024, we generated positive cash flows from operations of $35.8 million. As of March 31, 2024, we had $1,029.2 million in cash, cash equivalents and short-term investments and retained earnings of $165.8 million.
Convertible Debt
In August 2023, we issued $750.0 million aggregate principal amount of 1.0% convertible senior notes due 2028, (the “Notes”). In connection with the issuance of the Notes, we paid $96.4 million, including expenses, to enter into privately negotiated capped call transactions with certain initial purchasers of the Notes or their respective affiliates and certain other financial institutions (the “Capped Call Transactions”). The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Notes in the event that the market price per share of our common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the conversion price of the Notes, and is subject to anti-dilution adjustments generally similar to those applicable to the conversion rate of the Notes. For additional information regarding the Notes and the Capped Call Transactions, see the section titled “Liquidity and Capital Resources.”
Impact of current global business, political and macroeconomic conditions
Uncertainty in the global business, political and macroeconomic environments presents significant risks to our business. We are subject to continuing risks and uncertainties, including inflation, rising interest rates, uncertainty with respect to the federal budget, instability in the global banking system, volatile market conditions, supply chain disruptions, cybersecurity events, and global events, including regional conflicts around the world. We are closely monitoring the impact of these factors on all aspects of our business, including the impacts on our customers, patients, employees, suppliers, vendors, business partners and distribution channels.
In particular, while we have not experienced material disruptions in our supply chain to date, we have been and continue to be impacted by disruptions in the operations of certain of our third-party suppliers, resulting in increased lead-times, higher component costs and lower allocations for our purchase of some components. In certain cases, we have incurred higher logistical expenses. We are continuing to work closely with our manufacturing partners and suppliers to source key components and maintain appropriate inventory levels to meet customer demand.
The ultimate extent of the impact of global economic conditions on our business remains highly uncertain and will depend on future developments and factors that continue to evolve. Most of these developments and factors are outside of our control and could exist for an extended period of time. As a result, we are subject to continuing risks and uncertainties and continue to closely monitor the impact of the current conditions on our business. For more information regarding these risks and uncertainties, see the section titled “Risk Factors” in our 2023 Annual Report, together with any updates in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q.
Components of Our Results of Operations
Product revenue
Product revenue is primarily from the sale of our IVL catheters.
We sell our products to hospitals, primarily through direct sales, as well as through distributors in selected international markets. For products sold through direct sales and distributors, control is transferred based on the contractual or standard shipping terms.
Cost of product revenue
Cost of product revenue consists primarily of the costs of the components for use in our products, the materials and labor that are used to produce our products, the manufacturing overhead that directly supports production and the expense relating to the equipment used in our IVL System to the extent that we loan generators to our hospital customers, without charge to facilitate the use of our IVL catheters in their procedures. We expect costs of product revenue to increase in absolute terms as our revenue grows.
Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of direct materials, product mix, geographic mix, discounting practices, manufacturing costs, product yields, headcount, amortization of acquired developed technology, and cost-reduction strategies. We expect our gross margin percentage to marginally increase over the long term to the extent we are successful in increasing our sales volume and are therefore able to leverage our fixed costs. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which, if successful, we believe will reduce costs and enable us to increase our gross margin percentage. While we expect gross margin percentage to increase over the long term, it will likely fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and development expenses
Research and development expenses consist of applicable personnel, consulting, materials, and clinical trial expenses. Research and development expenses include, but are not limited to:
•certain personnel-related expenses, including salaries, benefits, bonus, travel, and stock-based compensation;
•cost of clinical studies to support new products and product enhancements, including expenses for clinical research organizations, and site payments;
•materials and supplies used for internal research and development and clinical activities;
•allocated overhead including facilities and information technology expenses; and
•cost of outside consultants who assist with technology development, regulatory affairs, clinical affairs and quality assurance.
Research and development costs are expensed as incurred. In the future, we expect research and development expenses to increase in absolute dollars as we continue to develop new products, enhance existing products and technologies, and perform activities related to obtaining additional regulatory approvals.
Sales and marketing expenses
Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits, sales commissions, travel, and stock-based compensation. Other sales and marketing expenses consist of marketing and promotional activities, including trade shows and market research. We expect to continue to grow our sales force and increase marketing efforts as we continue commercializing products based on our IVL Technology. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long term.
General and administrative expenses
General and administrative expenses consist of personnel-related expenses, including salaries, benefits, bonus, travel, and stock-based compensation. Other general and administrative expenses consist of professional services fees, including legal, audit and tax fees, insurance costs, outside consultant fees and employee recruiting and training costs. Moreover, we
incur expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and Securities and Exchange Commission (“SEC”) compliance and investor relations.
Income (loss) from equity method investment
Income (loss) from equity method investment represents our proportionate share of the underlying income or loss incurred in connection with our joint venture, Genesis Shockwave Private Ltd. (the “JV”), with Genesis MedTech International Private Limited. Also included in income (loss) from equity method investment is the portion of intra-entity profit which is eliminated to the extent the goods have not yet either been consumed by the JV for use in clinical trials or sold through by the JV to an end customer at the end of the reporting period.
Interest income
Interest income consists of the interest earned on our cash equivalents and short-term investments.
Interest expense
Interest expense consists of the interest and amortization expense related to our Credit Agreement (as defined below) and the Notes, as well as the loss on debt extinguishment related to the repayment of the amount drawn under our Credit Agreement.
Other (expense) income, net
Other (expense) income, net consists of net impact of foreign exchange gains and losses.
Income tax (benefit) provision
Income tax (benefit) provision consists of income taxes from the U.S. and foreign jurisdictions.
Results of Operations
Comparison of the Three Months Ended March 31, 2024 and 2023
The following table shows our results of operations for the three months ended March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change
$ | | Change
% |
| 2024 | | 2023 |
| (in thousands, except percentages) |
| Revenue: | | | | | | | |
| Product revenue | $ | 218,805 | | | $ | 161,066 | | | $ | 57,739 | | | 36% |
| Cost of revenue: | | | | | | | |
| Cost of product revenue | 28,207 | | | 21,066 | | | 7,141 | | | 34% |
| Gross profit | 190,598 | | | 140,000 | | | 50,598 | | | 36% |
| Operating expenses: | | | | | | | |
| Research and development | 44,466 | | | 26,971 | | | 17,495 | | | 65% |
| Sales and marketing | 74,492 | | | 54,011 | | | 20,481 | | | 38% |
| General and administrative | 29,233 | | | 19,204 | | | 10,029 | | | 52% |
| Total operating expenses | 148,191 | | | 100,186 | | | 48,005 | | | 48% |
| Income from operations | 42,407 | | | 39,814 | | | 2,593 | | | 7% |
| Income (loss) from equity method investment | 713 | | | (823) | | | 1,536 | | | (187)% |
| Interest income | 12,318 | | | 1,740 | | | 10,578 | | | 608% |
| Interest expense | (2,943) | | | (636) | | | (2,307) | | | 363% |
| Other (expense) income, net | (2,496) | | | 642 | | | (3,138) | | | (489)% |
| Net income before taxes | 49,999 | | | 40,737 | | | 9,262 | | | 23% |
| Income tax (benefit) provision | (5,347) | | | 1,612 | | | (6,959) | | | (432)% |
| Net income | $ | 55,346 | | | $ | 39,125 | | | $ | 16,221 | | | 41% |
Product revenue
Product revenue increased by $57.7 million, or 36%, from $161.1 million during the three months ended March 31, 2023 to $218.8 million during the three months ended March 31, 2024. The change was driven primarily by coronary catheter revenues, and secondarily by peripheral catheter revenues, as further described below.
The following table represents our product revenue based on product line:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Change
$ | | Change
% |
| 2024 | | 2023 | |
| (in thousands, except percentages) |
| Coronary | $ | 164,526 | | | $ | 113,875 | | | $ | 50,651 | | | 44% |
| Peripheral | 51,843 | | | 46,130 | | | 5,713 | | | 12% |
| Reducer | 1,837 | | | — | | | 1,837 | | | 100% |
| Other | 599 | | | 1,061 | | | (462) | | | (44)% |
| Product revenue | $ | 218,805 | | | $ | 161,066 | | | $ | 57,739 | | | 36% |
Coronary product revenue increased by $50.7 million, or 44%, from $113.9 million for the three months ended March 31, 2023 to $164.5 million for the three months ended March 31, 2024. The increase in coronary product revenue was due to an increase in the purchase volume of our C2 catheters and C2+ catheters in the United States and increased adoption of our products internationally.
Peripheral product revenue increased by $5.7 million, or 12%, from $46.1 million for the three months ended March 31, 2023 to $51.8 million for the three months ended March 31, 2024. The change was due to an increase in the purchase volume of our M5+ catheter, S4 catheter, and L6 catheter within the United States and internationally driven by increased adoption of our products.
Revenue from our Reducer product, which was acquired through the acquisition of Neovasc Inc. (“Neovasc”) in April 2023, was $1.8 million for the three months ended March 31, 2024.
Other product revenue decreased by $0.5 million, or 44%, from $1.1 million for the three months ended March 31, 2023 to $0.6 million for the three months ended March 31, 2024. The change was due to a decrease in the purchase volume of our IVL generators and other accessories internationally.
Product revenue, classified by the major geographic areas into which our products are shipped, was $175.5 million, or 80%, within the United States and $43.3 million, or 20%, for all other countries in the three months ended March 31, 2024, compared to $131.6 million, or 82%, within the United States and $29.4 million, or 18%, for all other countries in the three months ended March 31, 2023.
Cost of product revenue, gross profit and gross margin percentage
Cost of product revenue increased by $7.1 million, or 34%, from $21.1 million during the three months ended March 31, 2023 to $28.2 million during the three months ended March 31, 2024. The increase was driven by higher product sales volume compared to the prior year.
Gross margin percentage was consistent at 87% for the three months ended March 31, 2024, compared to 87% for the three months ended March 31, 2023.
Research and development expenses
Research and development expenses increased by $17.5 million, or 65%, from $27.0 million during the three months ended March 31, 2023 to $44.5 million during the three months ended March 31, 2024. The increase was primarily due to a $9.3 million increase in compensation and personnel-related costs due to an increase in headcount, an increase in clinical-related costs of $4.9 million, a $1.6 million increase in information technology, rent and building expenditures, a $0.7 million increase in outside consultants, a $0.6 million increase in materials and supplies, and a $0.5 million increase in other research and development costs. Included in other research and development costs are $0.2 million in software license expenses related to research and development.
Sales and marketing expenses
Sales and marketing expenses increased by $20.5 million, or 38%, from $54.0 million during the three months ended March 31, 2023 to $74.5 million during the three months ended March 31, 2024. The change was primarily due to a $14.0 million increase in compensation and personnel-related costs, resulting from increased headcount and commissions driven by increased sales of our products. There was also a $4.0 million increase due to travel related costs, a $1.6 million increase in information technology, rent and building expenditures, a $0.7 million increase in marketing and promotional costs to support the continued commercialization of our products, a $0.2 million increase in general corporate costs, and a $0.1 million increase in recruiting and training fees, offset by a $0.1 million decrease in materials and supplies.
General and administrative expenses
General and administrative expenses increased by $10.0 million, or 52%, from $19.2 million during the three months ended March 31, 2023 to $29.2 million during the three months ended March 31, 2024. The change was primarily due to a $5.5 million increase in consulting and professional services, a $4.7 million increase in compensation and personnel-related costs due to an increase in headcount, $0.6 million in recruiting and training fees, and a $0.3 million increase in general corporate costs, partially offset by a $0.9 million decrease in information technology, rent and building expenditures, and a $0.2 million decrease in travel related costs.
Income (loss) from equity method investment
Income (loss) from equity method investment changed by $1.5 million, or 187%, from loss of $0.8 million during the three months ended March 31, 2023 to income of $0.7 million during the three months ended March 31, 2024. The change was primarily due to a decrease in the elimination of intra-entity profit for goods sold by us to the JV that have not yet been sold through by the JV to an end customer at the end of the reporting period.
Interest income
Interest income increased by $10.6 million, or 608%, from $1.7 million during the three months ended March 31, 2023 to $12.3 million during the three months ended March 31, 2024. The increase in interest income was related to an increase in interest income from our cash equivalents and short-term investments.
Interest expense
Interest expense increased by $2.3 million, or 363%, from $0.6 million during the three months ended March 31, 2023 to $2.9 million during the three months ended March 31, 2024. The increase in interest expense was related to the convertible debt from the private offering in August 2023.
Other (expense) income, net
Other (expense) income, net changed by $3.1 million, or 489%, from $0.6 million in other income during the three months ended March 31, 2023 to $2.5 million in other expense, net during the three months ended March 31, 2024. The change is mainly attributable to an increase in foreign exchange losses.
Income tax (benefit) provision
Income tax benefit of $5.3 million for the three months ended March 31, 2024 primarily consisted of U.S. (federal and state) and foreign income taxes. Income tax provision of $1.6 million for the three months ended March 31, 2023 primarily consisted of U.S. (federal and state) income taxes.
Liquidity and Capital Resources
To date, our principal sources of liquidity have been the cash provided by our operating activities, $750.0 million that we received through the issuance of our Notes, $280.0 million that we received through the sale of our common stock in our public offerings, $10.0 a million from a private placement of our equity securities, and access to funds under our Credit Agreement (as defined below).
On October 19, 2022, we entered into the Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Bank, National Association, as swingline lender and an issuing lender, Wells Fargo Securities, LLC and Silicon Valley Bank, as joint lead arrangers and joint bookrunners, Silicon Valley Bank, as syndication agent, and the several lenders party thereto (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility in an aggregate principal amount of $175.0 million with the right to request increases to the revolving commitments (subject to certain conditions) of up to the greater of (x) $100.0 million or (y) our consolidated EBITDA for the four fiscal quarter period most recently ended prior to the date of such increase.
On March 16, 2023, we drew $80.0 million under the Credit Agreement. We repaid the $80.0 million drawn under the Credit Agreement on April 26, 2023.
On August 15, 2023, we issued $750.0 million aggregate principal amount of Notes. The Notes mature on August 15, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The Notes were not convertible as of March 31, 2024. On August 10, 2023, in connection with the pricing of the Notes and the initial purchasers’ exercise of their option to purchase additional Notes, we entered into privately negotiated Capped Call Transactions for a cost of $96.4 million.
We have a number of ongoing clinical trials and expect to continue to make substantial investments in these trials as well as additional clinical trials designed to provide clinical evidence of the safety and efficacy of our existing products. We intend to continue to make significant investments in our sales and marketing organization by increasing the number of
U.S. sales representatives and expanding our international marketing programs to help facilitate further adoption among existing hospital accounts and physicians as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs, and clinical studies to develop future generations of products based on our products, support regulatory submissions, and demonstrate the clinical efficacy of our products. Moreover, we expect to continue to incur expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations and other expenses. Because of these and other factors, although we had net income and generated cash flows from operations for the three months ended March 31, 2024 and for the year ended December 31, 2023, we may incur net losses and have negative cash flows from operations in the future.
As of March 31, 2024, we have $1,029.2 million in cash, cash equivalents and short-term investments and retained earnings of $165.8 million.
In the short term, we believe that our cash, cash equivalents and short-term investments will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including supporting working capital, capital expenditure requirements, investments, acquisitions and repayments of indebtedness. In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including:
•the cost, timing and results of our clinical trials and regulatory reviews;
•the cost of our research and development activities for new and modified products;
•the cost and timing of establishing sales, marketing and distribution capabilities;
•the terms and timing of any other collaborative, licensing and other arrangements that we may establish including any contract manufacturing arrangements;
•the timing, receipt and amount of sales from our current and potential products;
•the degree of success we experience in commercializing our products;
•the emergence of competing or complementary technologies;
•the impact of global business, political and macroeconomic conditions, including inflation, rising interest rates, uncertainty with respect to the federal budget, instability in the global banking system, volatile market conditions, supply chain disruptions, cybersecurity events, and global events, including regional conflicts around the world;
•the cost of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights; and
•the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions.
To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and cash and other requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event that additional financing is required from outside sources, there is a possibility we may not be able to raise it on terms acceptable to us or at all. Further, the current macroeconomic environment may make it difficult for us to raise capital on terms favorable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.
Our material cash requirements include the following contractual and other obligations:
Debt, Principal, and Interest
As of March 31, 2024, our debt, principal and interest commitments consist of our debt obligations under the Credit Agreement and the Notes.
As discussed above in Note 9, on October 19, 2022, we entered into the Credit Agreement, which provides for a revolving credit facility in an aggregate principal amount of $175.0 million with the right to request increases to the revolving commitments (subject to certain conditions) of up to the greater of (x) $100.0 million or (y) our consolidated EBITDA for the four fiscal quarter period most recently ended prior to the date of such increase.
The Credit Agreement is secured by substantially all of our assets, including intellectual property. The Credit Agreement is subject to customary affirmative and restrictive covenants, including with respect to our ability to enter into fundamental transactions, incur additional indebtedness, grant liens, and pay any dividend or make any distributions to stockholders.
As of March 31, 2024, there were no outstanding borrowings under the Credit Agreement.
As discussed above, on August 15, 2023, we issued $750.0 million aggregate principal amount of the Notes and on August 10, 2023 we entered into the Capped Call Transactions for a cost of $96.4 million. The net proceeds from the issuance of the Notes and the Capped Call Transactions are discussed further in Note 10 “Convertible Debt”. The Notes mature on August 15, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The Notes were not convertible as of March 31, 2024.
Manufacturing Purchase Obligations
We have engaged certain contract manufacturers to produce and supply us with certain products. We have fixed commitments of approximately $6.6 million within the next four years.
Operating Leases
Our operating lease commitments mostly consist of our lease obligations for our Santa Clara headquarter office spaces, leased facilities for Neovasc, and leased facilities for laboratory and manufacturing space. Our total operating lease commitments as of March 31, 2024 are approximately $55.6 million, of which $6.8 million is expected to be paid within the next twelve months.
Contingent Consideration Liabilities Related to Business Combination
Acquisition related contingent consideration liabilities consist of estimated amounts in relation to a contingent value right entitling certain holders of Neovasc common stock and eligible equity awards to receive an additional cash payment of up to $12.00 per share or per share underlying an eligible equity award contingent on the attainment of a milestone. The milestone is defined as the grant by the FDA’s final approval of the Reducer premarket approval application regarding its treatment of angina. As of March 31, 2024, the total fair value of the contingent consideration liabilities was $7.7 million.
There were no other material changes during the three months ended March 31, 2024 to our contractual obligations as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report.
We did not have during the periods presented, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2024 | | 2023 |
| Net cash provided by (used in): | (in thousands) |
| Operating activities | $ | 35,840 | | | $ | 33,962 | |
| Investing activities | (84,453) | | | 6,182 | |
| Financing activities | 5,011 | | | 83,409 | |
| Effect of exchange rate changes on cash and cash equivalents | (3,175) | | | 792 | |
| Net increase in cash, cash equivalents and restricted cash | $ | (46,777) | | | $ | 124,345 | |
Operating activities
During the three months ended March 31, 2024, cash provided by operating activities was $35.8 million, attributable to a net income of $55.3 million and non-cash charges of $5.3 million, partially offset by a net change in our net operating assets and liabilities of $24.8 million. Non-cash charges of $5.3 million primarily consisted of $22.9 million in stock-based compensation, $3.1 million in depreciation and amortization, $0.9 million in non-cash lease expense, $2.3 million in foreign currency remeasurement, $0.9 million in amortization of debt issuance costs, partially offset by $9.9 million in accretion of discount on available-for-sale securities, $1.6 million in change in fair value of contingent consideration, $0.8 million in net income of equity method investment, $12.6 million in deferred income taxes.
The change in our net operating assets and liabilities of $24.8 million was primarily due to a $9.0 million increase in accounts receivable due to an increase in sales, and a $3.3 million increase in inventory driven by an increase in raw materials, work in progress, and finished goods inventory, and a $16.1 million decrease in accrued and other current liabilities, a $0.9 million decrease in lease liabilities, and partially offset by a $2.1 million decrease in prepaid expenses, a $1.4 million increase in long-term income tax liability, a $0.4 million decrease in other current assets, and a $0.4 million increase in accounts payable.
During the three months ended March 31, 2023, cash provided by operating activities was $34.0 million, attributable to a net income of $39.1 million and non-cash charges of $17.4 million, partially offset by a net change in our net operating assets and liabilities of $22.5 million. Non-cash charges of $17.4 million primarily consisted of $16.0 million in stock-based compensation, $1.7 million in depreciation and amortization, and $0.7 million in non-cash lease expense. The change in our net operating assets and liabilities of $22.5 million was primarily due to a $13.0 million increase in accounts receivable due to an increase in sales, a $7.8 million increase in inventory driven by an increase in raw materials and finished goods inventory, and a $6.7 million decrease in accrued and other current liabilities from payment of accrued bonuses and other compensation in the current quarter.
Investing activities
During the three months ended March 31, 2024, cash used in investing activities was $84.5 million, attributable to purchases of available-for-sale investments of $400.6 million, and purchases of property and equipment of $8.4 million, partially offset by proceeds from maturities of available-for-sale investments of $324.5 million.
During the three months ended March 31, 2023, cash provided by investing activities was $6.2 million, attributable to proceeds from maturities of available-for-sale investments of $34.5 million, partially offset by purchases of available-for-sale investments of $21.1 million and purchases of property and equipment of $7.2 million.
Financing activities
During the three months ended March 31, 2024, cash provided by financing activities was $5.0 million, attributable to proceeds of $4.3 million from the issuance of shares under our employee stock purchase plan and proceeds of $0.8 million from stock option exercises.
During the three months ended March 31, 2023, cash provided by financing activities was $83.4 million, attributable to proceeds of $80.0 million from debt financing, net of issuance costs, $3.1 million from the issuance of shares under our employee stock purchase plan, and proceeds of $0.3 million from stock option exercises.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
There have been no significant changes in our critical accounting policies and assumptions associated with the greatest potential impact on our consolidated financial statements as disclosed in our 2023 Annual Report in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Recent Accounting Pronouncements
See Note 2 “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Item 1 “Financial Statements and Supplementary Data” for additional information regarding recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on our Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our 2023 Annual Report.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting, previously reported in Item 9A of the 2023 Annual Report, which has not yet been remediated. The material weakness did not result in any material misstatements in our previously issued financial statements, in the financial statements included in the 2023 Annual Report, nor the financial statements in this Form 10-Q. Our management is committed to maintaining a strong internal control environment and, as previously described in Item 9A of the 2023 Annual Report, remediating this material weakness.
Notwithstanding the material weakness, management, including our Chief Executive Officer and Chief Financial Officer, believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
A petition for inter partes review (“IPR”) of U.S. Pat. No. 8,956,371 (the “’371 patent”), which is one of our issued U.S. patents that relates to our current IVL technology, was filed on December 7, 2018 at the U.S. Patent and Trademark Office’s (the “USPTO”) Patent Trial and Appeal Board (the “PTAB”) by Cardiovascular Systems, Inc. (“CSI”), which was acquired by Abbott Laboratories in April 2023. The PTAB instituted IPR proceedings for this patent and held oral hearings on April 15, 2020. On July 8, 2020, the PTAB ruled that one claim (“Claim 5”) in the ’371 patent is valid and ruled that all other claims in the ’371 patent are invalid. We have filed an appeal of the PTAB rulings to the United States Court of Appeals for the Federal Circuit, and CSI has filed a cross-appeal to challenge the decision that Claim 5 of the ‘371 patent is valid. Accordingly, Claim 5 and all other claims remain valid and enforceable until all appeals have been exhausted. Upon the conclusion of such appeals, if we are unsuccessful in whole or in part, the ’371 patent proceedings could result in the loss or narrowing in scope of the ’371 patent, which could further limit our ability to stop others from using or commercializing products and technology similar or identical to ours.
For more information regarding the risks presented by such proceedings, please see the section of our 2023 Annual Report, titled “Risk Factors—Risks Related to Our Intellectual Property.”
From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business. We have received, and may from time to time receive, letters from third parties alleging patent infringement, violation of employment practices or trademark infringement, and we may in the future participate in litigation to defend ourselves. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
Item 1A. Risk Factors.
The following risk factors supplement and, to the extent inconsistent, supersede, the risk factors disclosed in Part I, Item 1A. “Risk Factors” of our 2023 Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2024. The risk factors included herein as well as the risk factors described in our 2023 Annual Report, and other information set forth in this Quarterly Report on Form 10-Q, could materially adversely affect our business, financial condition, results of operations and prospects, and should be carefully considered. The risks and uncertainties that we face, however, are not limited to those described herein or in the 2023 Annual Report. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities.
RISKS RELATED TO BUSINESS
The announcement and pendency of our agreement to be acquired by Johnson & Johnson could have an adverse effect on our business.
On April 4, 2024, we entered into the Merger Agreement with Johnson & Johnson and Merger Sub, pursuant to which Johnson & Johnson has agreed to acquire us for $335.00 per share in cash. Uncertainty about the effect of the Merger on our customers, patients, employees, suppliers, vendors, business partners and distribution channels may have an adverse effect on our business and operations that may be material to our company. For example, our employees may experience uncertainty about their roles following the Merger. There can be no assurance we will be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management attention and resources towards the completion of the Merger, which could materially adversely affect our business and operations.
Moreover, our customers and patients may experience uncertainty associated with the Merger, including with respect to possible changes to our products, technology or policies. Similarly, our suppliers, vendors, business partners and distribution channels may experience uncertainty associated with the Merger, including with respect to current or future business relationships with us. Uncertainty may cause customers to refrain from purchasing our products and to instead purchase our competitors’ products, and suppliers, vendors and business partners may seek to change existing business
relationships, which could result in an adverse effect on our business, operations and financial condition in a way that may be material to our company.
Pursuant to the terms of the Merger Agreement, until the Merger becomes effective or the Merger Agreement is terminated, we are subject to certain contractual restrictions on the conduct of our business, including in certain cases restrictions on our ability to enter into certain material contracts, acquire or dispose of assets outside of the ordinary course of business, incur indebtedness or make unbudgeted capital expenditures. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous, and result in our inability to respond effectively to competitive pressures and industry developments and may otherwise harm our business and operations.
The failure to complete the Merger could adversely affect our business.
Completion of the Merger is subject to conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the approval of our stockholders and the expiration or termination of applicable waiting periods and the receipt of certain clearances under antitrust and competition laws. If the Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay Johnson & Johnson a termination fee of $448.0 million in event the Merger is not completed. Further, a failure to complete the Merger may result in negative publicity and a negative impression of us in the investment community. Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, patients, suppliers, vendors and business partners could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. .
, , the Company’s , entered into a letter of pre-arranged written stock sale plan dated , in accordance with (the “Phung 10b5-1 Modification”) under the Exchange Act, for the sale of shares of the Company’s common stock. The Phung 10b5-1 Modification was entered into during an open trading window in accordance with the Company’s policies regarding transactions in the Company’s securities and is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act. The Phung 10b5-1 Modification provides for the potential sale of up to shares of the Company’s common stock, including upon the exercise of vested stock options for shares of the Company’s common stock, less the number of shares sold to satisfy tax withholding obligations pursuant to the Company’s “sell to cover” requirement, so long as the market price of the Company’s common stock is higher than certain minimum threshold prices specified in the Phung 10b5-1 Modification, between June 7, 2024 and December 15, 2024. The number of shares to be sold to satisfy the Company’s tax withholding obligations under the “sell-to-cover” arrangement is dependent on future events which cannot be known at this time, including the future trading price of the Company’s common stock., , the Company’, terminated his pre-arranged written stock sale plan dated May 25, 2023, in accordance with under the Exchange Act, for the sale of shares of the Company’s common stock.
Item 6. Exhibits.
Furnish the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit
Number | | Description | | Form | | File No. | | Exhibit(s) | | Filing Date |
| 2.1 | | | | 8-K | | 001-38829 | | 2.1 | | April 5, 2024 |
| 10.1† | | | | 10-K | | 001-38829 | | 10.16 | `` | February 26, 2024 |
| 10.2† | | | | 10-K | | 001-38829 | | 10.17 | `` | February 26, 2024 |
| 10.3† | | | | 8-K | | 001-38829 | | 10.1 | | April 9, 2024 |
| 10.4† | | | | 10-K/A | | 001-38829 | | 10.21 | | April 26, 2024 |
| 31.1* | | | | | | | | | | |
| 31.2* | | | | | | | | | | |
| 32.1*# | | | | | | | | | | |
| 32.2*# | | | | | | | | | | |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| 101.PRE* | | Inline Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
| 104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 has been formatted in Inline XBRL and contained in Exhibit 101 | | | | | | | | |
_______________________________
†Indicates a management contract or compensatory plan or arrangement.
*Filed herewith.
# This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| Shockwave Medical, Inc. |
| | |
Date: May 6, 2024 | By: | /s/ Douglas Godshall |
| | Douglas Godshall |
| | President, Chief Executive Officer & Director |
| | (Principal Executive Officer) |
| | |
Date: May 6, 2024 | By: | /s/ Trinh Phung |
| | Trinh Phung |
| | Senior Vice President of Finance |
| | (Principal Accounting Officer) |
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