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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 December 31, 2020
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 class Trading Symbol Name of each exchange on which registered
Common Stock, One-tenth of One Cent ($0.001) Par Value Per Share CSII The 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 filer x Accelerated filer
Non-accelerated filer Smaller 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 January 29, 2021 was: 40,191,937 shares.



Cardiovascular Systems, Inc.
Table of Contents
 
  PAGE
2
2
3
4
5
7
8



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)
 
December 31,
2020
June 30,
2020
ASSETS
Current assets
Cash and cash equivalents $ 73,783  $ 185,463 
Marketable securities 151,272  46,691 
Accounts receivable, net 32,526  25,212 
Inventories 32,506  27,706 
Prepaid expenses and other current assets 2,994  2,617 
Total current assets 293,081  287,689 
Property and equipment, net 28,123  27,810 
Intangible assets, net 15,998  16,606 
Other assets 11,734  7,414 
Total assets $ 348,936  $ 339,519 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 13,669  $ 11,539 
Accrued expenses 32,338  31,100 
Deferred revenue 2,078  1,867 
Total current liabilities 48,085  44,506 
Long-term liabilities
Financing obligation 20,716  20,818 
Deferred revenue 3,644  4,707 
Other liabilities 2,659  696 
Total liabilities 75,104  70,727 
Commitments and contingencies (see Note 10)
Common stock, $0.001 par value; authorized 100,000,000 common shares; issued and outstanding 40,191,609 at December 31, 2020 and 39,675,865 at June 30, 2020, respectively
39  39 
Additional paid in capital 642,702  631,559 
Accumulated other comprehensive income 115  269 
Accumulated deficit (369,024) (363,075)
Total stockholders’ equity 273,832  268,792 
Total liabilities and stockholders’ equity $ 348,936  $ 339,519 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

Cardiovascular Systems, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share and share amounts)
(Unaudited)
 
  Three Months Ended Six Months Ended
December 31, December 31,
  2020 2019 2020 2019
Net revenues $ 64,169  $ 68,334  $ 124,713  $ 132,824 
Cost of goods sold 13,920  13,718  26,484  26,390 
Gross profit 50,249  54,616  98,229  106,434 
Expenses:
Selling, general and administrative 40,061  46,867  80,343  93,619 
Research and development 9,601  10,786  18,653  21,551 
Amortization of intangible assets 304  337  608  571 
Total expenses 49,966  57,990  99,604  115,741 
Income (loss) from operations 283  (3,374) (1,375) (9,307)
Other (income) expense, net:
Interest expense 412  500  911  972 
Interest income and other, net (136) (517) (280) (1,180)
Total other (income) expense, net 276  (17) 631  (208)
Income (loss) before income taxes (3,357) (2,006) (9,099)
Provision for income taxes 63  44  126  82 
Net loss $ (56) $ (3,401) $ (2,132) $ (9,181)
Basic and diluted earnings per share $ —  $ (0.10) $ (0.06) $ (0.27)
Basic and diluted weighted average shares outstanding 38,808,980  34,069,412  38,746,410  33,969,818 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

Cardiovascular Systems, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)

Three Months Ended Six Months Ended
December 31, December 31,
2020 2019 2020 2019
Net loss $ (56) $ (3,401) $ (2,132) $ (9,181)
Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale debt securities (85) (9) (154) 15 
Comprehensive loss $ (141) $ (3,410) $ (2,286) $ (9,166)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4

Cardiovascular Systems, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except per share amounts)
(Unaudited)

  Common Stock Additional
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 

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

5

Cardiovascular Systems, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except per share amounts)
(Unaudited)

  Common Stock Additional
Paid  In
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
 
Balances at June 30, 2019 $ 34  $ 477,368  $ 78  $ (329,536) $ 147,944 
Stock-based compensation related to restricted stock awards, net —  3,804  —  —  3,804 
Shares withheld for payroll taxes —  —  —  (5,506) (5,506)
Employee stock purchase plan activity —  242  —  —  242 
Unrealized gain on available-for-sale debt securities —  —  24  —  24 
Stock issued for acquisitions —  1,346  —  —  1,346 
Net loss —  —  —  (5,780) (5,780)
Balances at September 30, 2019 34  482,760  102  (340,822) 142,074 
Stock-based compensation related to restricted stock awards, net —  3,091  —  —  3,091 
Shares withheld for payroll taxes —  —  —  (379) (379)
Employee stock purchase plan activity —  1,929  —  —  1,929 
Unrealized loss on available-for-sale debt securities —  —  (9) —  (9)
Net loss —  —  —  (3,401) (3,401)
Balances at December 31, 2019 $ 34  $ 487,780  $ 93  $ (344,602) $ 143,305 

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

6

Cardiovascular Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
  Six Months Ended
December 31,
  2020 2019
Cash flows from operating activities
Net loss $ (2,132) $ (9,181)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation of property and equipment 1,479  1,493 
Amortization of intangible assets 608  571 
Write-off of patent costs —  771 
Provision for doubtful accounts —  450 
Loss on disposal of equipment 138  — 
Stock-based compensation 8,784  7,196 
Amortization of premium (accretion of discount) on marketable securities 625  (142)
Changes in assets and liabilities
Accounts receivable (7,314) (268)
Inventories (4,800) (3,414)
Prepaid expenses and other assets (108) 886 
Accounts payable 2,192  5,409 
Accrued expenses and other liabilities 913  (4,642)
Deferred revenue (852) (909)
Net cash used in operating activities (467) (1,780)
Cash flows from investing activities
Purchases of property and equipment (1,992) (1,080)
Acquisitions —  (5,741)
Purchases of marketable securities (122,193) (4,844)
Sales of marketable securities 2,485  85 
Maturities of marketable securities 14,450  9,400 
Costs incurred in connection with patents —  (573)
Other investing activities (2,175) — 
Net cash used in investing activities (109,425) (2,753)
Cash flows from financing activities
Proceeds from employee stock purchase plan 2,098  1,687 
Payments of employee taxes related to vested restricted stock (3,817) (5,885)
Principal payments made on financing obligation (69) (39)
Net cash used in financing activities (1,788) (4,237)
Net change in cash and cash equivalents (111,680) (8,770)
Cash and cash equivalents
Beginning of period 185,463  74,237 
End of period $ 73,783  $ 65,467 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7

CARDIOVASCULAR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the Six Months Ended December 31, 2020 and 2019)
(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. 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, 2020. 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:
December 31, June 30,
2020 2020
Accounts receivable $ 34,184  $ 26,971 
Less: Allowance for doubtful accounts (1,658) (1,759)
   Accounts receivable, net $ 32,526  $ 25,212 


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Inventories

Inventories consist of the following:
December 31, June 30,
2020 2020
Raw materials $ 10,690  $ 8,508 
Work in process 2,705  2,637 
Finished goods 19,111  16,561 
   Inventories $ 32,506  $ 27,706 

Property and Equipment, Net

Property and equipment consists of the following:
December 31, June 30,
2020 2020
Land $ 572  $ 572 
Building 22,420  22,420 
Equipment 18,893  18,255 
Furniture 3,360  3,326 
Leasehold improvements 681  672 
Construction in progress 3,729  3,251 
49,655  48,496 
Less: Accumulated depreciation (21,532) (20,686)
Property and equipment, net $ 28,123  $ 27,810 

Accrued Expenses

Accrued expenses consist of the following:
December 31, June 30,
2020 2020
Acquisition consideration $ 10,000  $ 9,914 
Commissions 5,965  2,122 
Salaries and bonus 5,814  8,476 
Accrued vacation 5,381  5,536 
Accrued excise, sales and other taxes 1,860  2,145 
Clinical studies 1,254  1,420 
Other accrued expenses 2,064  1,487 
Accrued expenses $ 32,338  $ 31,100 


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3. Revenue

The following table disaggregates the Company’s net revenues by product category and geography for the following periods:
Three Months Ended Six Months Ended
December 31, December 31,
Product Category 2020 2019 2020 2019
Peripheral $ 43,956  $ 47,580  $ 86,888  $ 93,109 
Coronary 20,213  20,754  37,825  39,715 
Total net revenues $ 64,169  $ 68,334  $ 124,713  $ 132,824 
Geography
United States $ 61,907  $ 65,960  $ 120,738  $ 127,489 
International 2,262  2,374  3,975  5,335 
Total net revenues $ 64,169  $ 68,334  $ 124,713  $ 132,824 

Revenue of $851 was recognized in the six months ended December 31, 2020 that was deferred as of June 30, 2020. As of December 31, 2020 and June 30, 2020, the Company had a liability of $1,515 and $1,719, respectively, related to estimates of variable consideration which are recorded within accounts payable on the consolidated balance sheet.

4. Acquisition

On August 5, 2019, the Company acquired the WIRION Embolic Protection System and related assets from Gardia Medical Ltd. ("Gardia"), a wholly owned Israeli subsidiary of Allium Medical Solutions Ltd., for a total purchase price of $16,687. The device, which received CE Mark in June 2015 and FDA clearance in March 2018, is a distal embolic protection filter used to capture debris that can be associated with all types of peripheral vascular intervention procedures. The Company acquired the device to expand its portfolio of products for physicians that treat complex peripheral arterial disease.

Upon closing, the Company made an initial $5,600 cash payment, net of transaction expenses, and issued Gardia 31,493 shares of common stock of the Company valued at $1,346. Following the successful completion of the manufacturing transfer of the WIRION system to the Company, the Company has agreed to pay Gardia an additional $10,000, half of which may be paid by the Company through an additional issuance of shares of common stock. The Company has accounted for this transaction as an asset acquisition resulting in developed technology of $15,624 and a trade name of $760, both recognized as a component of intangible assets, net within the Company's consolidated balance sheet. The remainder of the purchase price was recognized in property and equipment.

The purchase also includes a performance milestone payment to Gardia equal to $3,000 for each $10,000 in net revenues recognized by the Company from sales of the WIRION system for applications above-the-knee in excess of $30,000 during the 36 month period beginning on the earlier of the first commercial sale of the system by the Company or six months following successful manufacturing transfer. If payment of the performance milestone becomes probable, these additional costs will be added to the carrying value of the acquired assets.

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 the asset acquisition discussed in Note 4, as well as costs incurred to obtain patents. Developed technology and trade name assets are amortized over 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:
December 31, 2020 June 30, 2020
Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value
Developed technology $ 15,624  $ (1,475) $ 14,149  $ 15,624  $ (955) $ 14,669 
Patents 1,882  (721) 1,161  1,882  (659) 1,223 
Trade name 760  (72) 688  760  (46) 714 
Total intangible assets, net $ 18,266  $ (2,268) $ 15,998  $ 18,266  $ (1,660) $ 16,606 

Amortization expense expected for the next five years and thereafter is as follows:

Remainder of fiscal 2021 $ 608 
Fiscal 2022 1,216 
Fiscal 2023 1,212 
Fiscal 2024 1,208 
Fiscal 2025 1,205 
Thereafter 10,549 
$ 15,998 

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”).

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 3% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the 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.

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 December 31, 2020.
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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 December 31, 2020 are as follows:
Remainder of fiscal 2021 $ 908 
Fiscal 2022 1,857 
Fiscal 2023 1,913 
Fiscal 2024 1,970 
Fiscal 2025 2,029 
Thereafter 15,376 
$ 24,053 

7. Marketable Securities & Fair Value Measurements

The Company’s marketable securities are classified on the consolidated balance sheet as follows:

December 31, June 30,
2020 2020
Short-term available-for-sale debt securities $ 140,825  $ 40,088 
Long-term available-for-sale debt securities 10,158  6,276 
Available-for-sale debt securities 150,983  46,364 
Mutual funds 289  327 
Total marketable securities $ 151,272  $ 46,691 

Available-for-sale debt securities are invested in the following financial instruments:

As of December 31, 2020
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Commercial paper $ 42,157  $ —  $ —  $ 42,157 
U.S. government securities 46,559  (2) 46,559 
Corporate debt 48,827  95  (10) 48,912 
Asset backed securities 13,326  29  —  13,355 
  Total available-for-sale debt securities $ 150,869  $ 126  $ (12) $ 150,983 


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As of June 30, 2020
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Commercial paper $ 9,778  $ —  $ —  $ 9,778 
U.S. government securities 6,120  —  6,121 
Corporate debt 21,267  232  (1) 21,498 
Asset backed securities 8,930  37  —  8,967 
Total available-for-sale debt securities $ 46,095  $ 270  $ (1) $ 46,364 

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 December 31, 2020
Using Inputs Considered as
Fair Value Level 1 Level 2 Level 3
Commercial paper $ 42,157  $ —  $ 42,157  $ — 
U.S. government securities 46,559  —  46,559  — 
Corporate debt 48,912  —  48,912  — 
Asset backed securities 13,355  —  13,355  — 
Mutual funds 289  115  174  — 
  Total marketable securities $ 151,272  $ 115  $ 151,157  $ — 

Fair Value Measurements as of June 30, 2020
Using Inputs Considered as
Fair Value Level 1 Level 2 Level 3
Commercial paper $ 9,778  $ —  $ 9,778  $ — 
U.S. government securities 6,121  —  6,121  — 
Corporate debt 21,498  —  21,498  — 
Asset backed securities 8,967  —  8,967  — 
Mutual funds 327  99  228  — 
  Total marketable securities $ 46,691  $ 99  $ 46,592  $ — 

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 six months ended December 31, 2020. 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 December 31, 2020 and June 30, 2020, the carrying value of these investments was $6,771 and $6,306, respectively. During the six months ended December 31, 2020, no impairment indicators were noted. The Company is committed to funding an additional $2,750 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. These investments are recorded within other assets on the consolidated balance sheet.

In January 2021, the Company provided an additional $5,399 of debt financing into an existing strategic investment opportunity for the Company. As of December 31, 2020, the carrying value and approximated fair value of this investment was $1,675 which is accounted for as an available-for-sale debt security and recorded within other assets on the consolidated
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balance sheet. The fair value of this investment is measured using Level 3 inputs and is not included in the tables above. Impairment is assessed similar to the Company's other strategic investments and no impairment indicators were noted during the six months ended December 31, 2020.

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. The 2017 Plan replaced the 2014 Equity Incentive Plan (the “2014 Plan”), and no further equity awards may be granted under the 2014 Plan (the 2017 Plan and the 2014 Plan are collectively referred to as the “Plans”). On March 12, 2020, the Company’s Board of Directors approved the Amended and Restated 2017 Equity Incentive Plan, which amends the 2017 Plan.

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 six months ended December 31, 2020 is as follows:
Number of
Shares
Weighted
Average  Fair
Value
Outstanding at June 30, 2020 434,067  $ 38.34 
Granted 295,165  $ 31.13 
Forfeited (13,914) $ 36.88 
Vested (182,018) $ 37.57 
Outstanding at December 31, 2020 533,300  $ 34.77 

Performance-Based Restricted Stock

The Company also grants performance-based restricted stock awards to certain executives and other management. In August 2020, the Company granted an aggregate maximum of 339,395 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, 2020 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. 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, 2023 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 $4,330, 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 2019 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, 2018 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, 2021 and July 1, 2022, respectively.

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Performance-based restricted stock award activity for the six months ended December 31, 2020 is as follows:
Number of
Shares
Weighted
Average  Fair
Value
Outstanding at June 30, 2020 660,622  $ 21.69 
Granted 339,395  $ 12.75 
Forfeited (72,549) $ 13.64 
Vested (166,086) $ 13.96 
Outstanding at December 31, 2020 761,382  $ 20.26 

9. Leases

Effective July 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842 - Leases using the modified retrospective transition approach and electing the package of practical expedients. This resulted in the recognition of right-of-use assets of $441 and total operating lease liabilities of $463. There was no cumulative-effect adjustment recorded to retained earnings upon adoption.

The Company leases its Texas manufacturing facility under an operating lease agreement. During the six months ended December 31, 2020, the Company exercised its option to extend the term of this lease agreement by five years, so that it now expires in April 2026, and entered into an amendment for this extended period. The Company also leases office equipment under lease agreements that expire at various dates through April 2024.

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 $252 and $241 for the six months ended December 31, 2020 and 2019, respectively. Cash paid for operating lease liabilities approximated operating lease cost for the six months ended December 31, 2020. There were $2,238 and $437 of operating lease right-of-use assets obtained in exchange for new lease liabilities during the six months ended December 31, 2020 and 2019, respectively.
December 31, June 30,
2020 2020
Right-of-use assets
Other assets $ 2,434  $ 427 
Operating lease liabilities
Accrued expenses 493  412 
Other liabilities 1,941  15 
Total operating lease liabilities $ 2,434  $ 427 



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Future minimum lease payments under the agreements as of December 31, 2020 are as follows:
Remainder of fiscal 2021 $ 251 
Fiscal 2022 494 
Fiscal 2023 486 
Fiscal 2024 485 
Fiscal 2025 483 
Thereafter 403 
Total lease payments 2,602 
Less imputed interest (168)
Total operating lease liabilities $ 2,434 

As of December 31, 2020, the weighted average remaining lease term for operating leases was 5.3 years and the weighted average discount rate used to determine operating lease liabilities was 2.54%.

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 and commercial disputes. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of December 31, 2020 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 Ended Six Months Ended
December 31, December 31,
  2020 2019 2020 2019
Numerator
Net (loss) income $ (56) $ (3,401) $ (2,132) $ (9,181)
Income allocated to participating securities —  —  —  — 
Net (loss) income available to common stockholders $ (56) $ (3,401) $ (2,132) $ (9,181)
Denominator
Weighted average common shares outstanding – basic(1)
38,808,980  34,069,412  38,746,410  33,969,818 
Effect of dilutive restricted stock units(2)
—  —  —  — 
Effect of performance-based restricted stock awards(3)
—  —  —  — 
Weighted average common shares outstanding – diluted
38,808,980  34,069,412  38,746,410  33,969,818 
Earnings per common share – basic and diluted $ —  $ (0.10) $ (0.06) $ (0.27)

(1)The increase in weighted average shares outstanding is primarily from the Company's offering of common stock completed in June 2020.
(2)At December 31, 2020 and 2019, 281,430 and 365,818 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 December 31, 2020 and 2019, 761,382 and 661,314 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.

Unvested time-based restricted stock awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to the Company are allocated between common stockholders and the participating awards, as if the awards were a second class of stock. During periods of net income, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss,
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undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. During the three and six months ended December 31, 2020 and 2019, there were no undistributed earnings allocated to participating securities due to the net losses.
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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, 2020 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 living with peripheral and coronary artery diseases, including those with arterial calcium, the most difficult 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 lives of patients facing these difficult disease states.

In the past, we have observed some degree of seasonality in our business, as there tends to be a lower number of procedures that use our products during the three months ending September 30. Interventional procedure volume usually grows throughout the course of the fiscal year, with the quarter ending June 30 representing the highest volume of cases and, therefore, the highest amount of revenue generated by us during the course of the fiscal year. With the COVID-19 pandemic in fiscal 2020 and 2021, we have not experienced this same pattern of seasonality due to the significant decrease in procedure volumes, and we cannot be certain if this pattern will resume in the future.

Peripheral

Our peripheral arterial 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, 2020. 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 six months ended December 31, 2020 represented 70% 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 six months ended December 31, 2020 represented approximately 27% of revenue.

International

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 and the Middle East, are currently made through OrbusNeich®. In the three months ended December 31, 2020, we amended our international
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distribution agreement with OrbusNeich. Pursuant to this amendment, OrbusNeich has retained exclusive or non-exclusive rights to distribute our products in the territories in which it is currently selling our products, as well as certain additional territories, with all other territorial distribution rights reverting to us. We intend to seek additional distributors or commence direct sales in certain territories in which OrbusNeich has non-exclusive distribution rights or no further distribution rights following such amendment. International sales during the six months ended December 31, 2020 represented approximately 3% of revenue.

Impact of COVID-19

Beginning in the three months ended March 31, 2020, we experienced a disruption in the procedures using our products as a result of the COVID-19 pandemic in the United States and internationally. Procedures were 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, and other governmental guidelines and restrictions. In addition, patients 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 have experienced, and we expect will continue to experience, 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. These disruptions continued in the six months ended December 31, 2020.

In addition to the impact on procedure volumes, we are experiencing and may experience other disruptions as a result of the COVID-19 pandemic. For example, enrollment in our ECLIPSE clinical trial was paused at the outset of the pandemic, but we began to enroll new patients on a limited basis beginning in October 2020. Other disruptions or potential disruptions include 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 will also disrupt or delay our ability to launch affected products; reallocation of company resources from our strategic priorities; supply chain disruptions that limit, delay or prevent us from acquiring the components used to develop and manufacture our products or ship those products once manufactured; disruptions and changes in our relationships with our distributors due to the impact of the COVID-19 pandemic on their operations and ability to sell our products; temporary closures of our facilities; loss of employee productivity; and 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.

We have been operating our manufacturing facilities and have continued to ship product; however, we will continue to monitor federal, state and local requirements that apply to these operations and we may experience disruptions in these operations or limitations in our ability to continue producing and shipping products. Most of our office-based employees are telecommuting, and our field employees will continue to support cases in clinical settings where they continue to have access. We have taken several actions intended to protect the health and well-being of our workforce and our customers, such as implementing restrictions on access to our facilities; deploying screening, safety and rapid testing protocols for employees who work on site; utilizing remote working systems and providing home office equipment for employees; providing employees with access to coronavirus test kits and antibody tests; training employees on personal protection, hygiene and safe practices in patient care; establishing protocols for our field sales personnel for their interactions with customer and facilities; supplying personal protective equipment to employees and customers; introducing new paid leave programs for employees who have been adversely impacted by the pandemic; adopting virtual physician and sales training on the use of our devices; and establishing new company-wide safety policies and a COVID-19 preparedness plan. We are monitoring 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 have continued to manage our expenses during the continuation of the pandemic, which includes freezing most new hiring, ceasing most travel and all in-person conference activity, and suspending work on certain product development and other internal projects. We are also engaged in ongoing business planning for the recovery period as we anticipate how our business will return to a more normalized level of activity once the pandemic and its effects subside.

In the near term, as the pandemic continues, we anticipate that we may experience a continued reduction in the number of procedures using our devices relative to prior year comparable periods, which could result in lower revenue and increased utilization of our existing capital resources. We expect that the pandemic will continue to have an acute, short-term impact on our business. Many factors may increase or decrease procedure volumes, including, as noted above, developments relating to social restrictions and government restrictions on elective and semi-elective cases, level of patient anxiety, availability of personal protective equipment, medical facility and workforce capacity, sales representative access to facilities to support cases, and availability of vaccines. We expect that medical facilities will continue to preserve cash and they will not immediately
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replenish their inventories. Travel restrictions and our inability to support new accounts will continue to negatively impact our international business. We also expect that the total impact of disruptions resulting from the pandemic could be material on our financial condition, capital resources and results of operations, but we cannot predict the specific extent, or duration, of the impact of the COVID-19 pandemic on our condition, resources and results.

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, 2020 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 December 31, Six Months Ended December 31,
2020 2019 Percent
Change
2020 2019 Percent
Change
Net revenues $ 64,169  $ 68,334  (6.1) % $ 124,713  $ 132,824  (6.1) %
Cost of goods sold 13,920  13,718  1.5  26,484  26,390  0.4 
Gross profit 50,249  54,616  (8.0) 98,229  106,434  (7.7)
Expenses:
Selling, general and administrative 40,061  46,867  (14.5) 80,343  93,619  (14.2)
Research and development 9,601  10,786  (11.0) 18,653  21,551  (13.4)
Amortization of intangible assets 304  337  (9.8) 608  571  6.5 
Total expenses 49,966  57,990  (13.8) 99,604  115,741  (13.9)
Income (loss) from operations 283  (3,374) (108.4) (1,375) (9,307) 85.2 
Other (income) expense, net 276  (17) (1,723.5) 631  (208) (403.4)
Income (loss) before income taxes (3,357) (100.2) (2,006) (9,099) 78.0 
Provision for income taxes 63  44  43.2  126  82  53.7 
Net loss $ (56) $ (3,401) (98.4) $ (2,132) $ (9,181) 76.8 


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Comparison of Three Months Ended December 31, 2020 with Three Months Ended December 31, 2019

Net revenues. Net revenues decreased by $4.1 million, or 6.1%, from $68.3 million for the three months ended December 31, 2019 to $64.2 million for the three months ended December 31, 2020. Peripheral revenues decreased $3.6 million, or 7.6%, and coronary revenues decreased $541,000, or 2.6%. Decreases in both peripheral and coronary revenues were driven by decreased unit volumes in the hospital site of service as a result of the continuing effects of the COVID-19 pandemic. These volume decreases in the hospital setting were partially offset by increased volumes in office-based labs. International revenue was $2.3 million for the three months ended December 31, 2020, compared with international revenue of $2.4 million for the three months ended December 31, 2019. The COVID-19 pandemic has impacted global case volumes and our ability to provide case support worldwide. In the third quarter of fiscal 2021 we continue to expect our revenue will be impacted by the COVID-19 pandemic's effect on case volumes. Longer-term we expect revenue growth to return to recently observed normal levels driven by increasing the number of physicians using the devices; increasing the usage per physician; introducing new and improved products such as the Sapphire balloons, Teleport Microcatheter, and ViperWire with Flex Tip; generating additional clinical data; and continuing expansion into new geographies, partially offset by potential decreases in average selling prices.

Cost of Goods Sold. Cost of goods sold was $13.9 million for the three months ended December 31, 2020, an increase of 1.5% from $13.7 million for the three months ended December 31, 2019. 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 78.3% for the three months ended December 31, 2020 from 79.9% for the three months ended December 31, 2019, primarily due to increased sales of lower margin products and lower volumes of devices sold. This decrease was partially offset by product cost reductions and manufacturing efficiencies. We expect that gross margin in the third quarter of fiscal 2021 will be slightly lower than gross margin in the three months ended December 31, 2020 due to sales mix and declining average selling prices, partially offset by increased sales volumes. 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 $40.1 million for the three months ended December 31, 2020, a decrease of $6.8 million, or 14.5%, from $46.9 million for the three months ended December 31, 2019. Expense decreases were driven by reduced costs associated with travel and meetings due to customer facility access restrictions, cessation of in-person sales and physician trainings, and internal and external conferences moving to a virtual format during the pandemic, in addition to lower sales commissions as a result of reduced sales due to COVID-19. Selling, general and administrative expenses for the three months ended December 31, 2020 and 2019 include $3.2 million and $2.7 million, respectively, for stock-based compensation. We expect our selling, general and administrative expenses for the third quarter of fiscal 2021 to be greater than amounts incurred for the three months ended December 31, 2020.

Research and Development Expenses. Research and development expenses decreased by 11.0%, from $10.8 million for the three months ended December 31, 2019 to $9.6 million for the three months ended December 31, 2020. 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, and to clinical trials. The decrease was primarily due to decreased activity on the ECLIPSE clinical trial as enrollments were paused at the onset of COVID-19 and only began to recommence on a limited basis in October 2020. We expect increased research and development expenses in the third quarter of fiscal 2021 as we continue resumption of enrollments in ECLIPSE and continue ongoing product development activities. Quarterly fluctuations could occur based on the number of projects and studies, the progress of such projects and studies, the rate of study enrollment, and the timing of expenditures.


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Comparison of Six Months Ended December 31, 2020 with Six Months Ended December 31, 2019

Net revenues. Net revenues decreased by $8.1 million, or 6.1%, from $132.8 million for the six months ended December 31, 2019 to $124.7 million for the six months ended December 31, 2020. Peripheral revenues decreased $6.2 million, or 6.7%, and coronary revenues decreased $1.9 million, or 4.8%. Decreases in peripheral and coronary revenue were driven by decreased unit volumes in the hospital site of service as a result of the continuing effects of the COVID-19 pandemic. Decreased revenues due to volume decreases in the hospital setting were partially offset by increased volumes in office-based labs. International revenue was $4.0 million for the six months ended December 31, 2020, compared with international revenue of $5.3 million for the six months ended December 31, 2019, a decrease of $1.3 million.

Cost of Goods Sold. Cost of goods sold was $26.5 million for the six months ended December 31, 2020, an increase of 0.4% from $26.4 million for the six months ended December 31, 2019. 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 78.8% for the six months ended December 31, 2020 from 80.1% for the six months ended December 31, 2019, primarily due to increased sales of lower margin products and lower volumes of devices sold. This decrease was partially offset by product cost reductions and manufacturing efficiencies.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $80.3 million for the six months ended December 31, 2020, a decrease of $13.3 million, or 14.2%, from $93.6 million for the six months ended December 31, 2019. Expense decreases were driven by reduced costs associated with travel and meetings due to customer facility access restrictions, cessation of in-person sales and physician trainings, and internal and external conferences moving to a virtual format during the pandemic, in addition to lower sales commissions as a result of reduced sales due to COVID-19. Selling, general and administrative expenses for the six months ended December 31, 2020 and 2019 include $7.1 million and $5.8 million, respectively, for stock-based compensation.

Research and Development Expenses. Research and development expenses decreased by 13.4%, from $21.6 million for the six months ended December 31, 2019 to $18.7 million for the six months ended December 31, 2020. 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, and to clinical trials. The decrease was primarily due to decreased activity on the ECLIPSE clinical trial as enrollments were paused at the onset of COVID-19 and only began to recommence on a limited basis in October 2020. Research and development expenses for the six months ended December 31, 2020 and 2019 include $1.3 million and $1.0 million respectively, for stock-based compensation.

LIQUIDITY AND CAPITAL RESOURCES

We had cash, cash equivalents and highly liquid marketable securities of $225.1 million and $232.2 million at December 31, 2020 and June 30, 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $369.0 million. We have historically funded our operating losses primarily from the issuance of common and preferred stock, convertible promissory notes, and debt. In June 2020, we completed a public offering of 4,227,941 shares of common stock which resulted in net proceeds to us, before expenses, of approximately $135.0 million.


A summary of our cash flow activities is as follows:
Six Months Ended
December 31,
2020 2019
Net cash used in operating activities $ (467) $ (1,780)
Net cash used in investing activities (109,425) (2,753)
Net cash used in financing activities (1,788) (4,237)
Net change in cash and cash equivalents $ (111,680) $ (8,770)


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Changes in Liquidity

Operating Activities

Net cash used in operating activities was $467,000 for the six months ended December 31, 2020, primarily due to the net loss of $2.1 million, and $10.0 million relating to changes in working capital as a result of the ongoing recovery from the COVID-19 pandemic in our business, partially offset by non-cash expenditures for the six months ended December 31, 2020.

Net cash used in operating activities was $1.8 million for the six months ended December 31, 2019, primarily due to the net loss of $9.2 million and increased use of cash as we build inventory and diversify our products, as well as for payouts of previously accrued bonuses and commissions. The amount of cash used was partially offset by collections on receivables, increased accounts payable due to timing of activity and payments, and non-cash expenditures for the six months ended December 31, 2019.

Investing Activities

Net cash used in investing activities was $109.4 million for the six months ended December 31, 2020, primarily due to investing cash from our recently completed equity offering into marketable securities. We also deployed cash into strategic investments and capital expenditures as we continue to grow our business. These uses of cash were partially offset by maturities and sales of marketable securities.

Net cash used in investing activities was $2.8 million for the six months ended December 31, 2019, primarily due to the cash payment made for the WIRION acquisition, additional purchases of marketable securities, purchases of property and equipment and costs associated with capitalized patent activities. These uses of cash were partially offset by maturities of marketable securities.

Financing Activities

Net cash used in financing activities was $1.8 million and $4.2 million for the six months ended December 31, 2020 and 2019, respectively, primarily due to the 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 current COVID-19 pandemic. As discussed in the “Overview” above, the disruptions from COVID-19 have had a material impact on our financial condition and results of operations, and we cannot predict the specific extent, or duration, of the continuing impact of the COVID-19 pandemic on our condition and results. We will continue to closely monitor our liquidity and capital resources through the disruptions caused by COVID-19 and will continue to evaluate our financial position to assess additional spending reductions and our liquidity needs. As of December 31, 2020, we believe our current cash, cash equivalents and highly liquid marketable securities will be sufficient to fund working capital requirements, capital expenditures and operations for the foreseeable future, including at least the next twelve months, as well as to fund expenses relating to compliance with our Corporate Integrity Agreement, payments under our lease agreements, payments under development agreements, future payments relating to our asset acquisition of the WIRION embolic protection system, and commitments to funding strategic investments. 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”).

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 3% of the Maximum Dollar Amount upon termination of the Loan Agreement, as amended by the 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 December 31, 2020 and we currently do not have plans to borrow under the Amended Loan Agreement.


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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.
  Three Months Ended Six Months Ended
December 31, December 31,
  2020 2019 2020 2019
Net loss $ (56) $ (3,401) $ (2,132) $ (9,181)
Less: Other (income) expense, net 276  (17) 631  (208)
Less: Provision for income taxes 63  44  126  82 
Income (loss) from operations 283  (3,374) (1,375) (9,307)
Add: Stock-based compensation 3,877  3,290  8,784  7,196 
Add: Depreciation and amortization 1,058  1,090  2,087  2,064 
Adjusted EBITDA $ 5,218  $ 1,006  $ 9,496  $ (47)

Adjusted EBITDA increased for the three and six months ended December 31, 2020 as compared to the three and six months ended December 31, 2019 primarily due to a smaller loss from operations and increased stock-based compensation 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. Our management believes that excluding this item from our non-GAAP results is useful to investors to understand the application of stock-based compensation guidance and its impact on our operational performance, liquidity and ability to make additional investments in our company, and it allows for greater transparency to certain line items in our financial statements.

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 items from our non-GAAP results is useful to
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investors to understand our operational performance, liquidity and ability to make additional investments in our company.

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.

OFF-BALANCE SHEET ARRANGEMENTS

Since inception, we have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

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, 2020.

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 third quarter, and that our revenue growth will return to recently observed normal levels longer-term; (v) our expectation that we will incur selling, general and administrative expenses in the third quarter of fiscal 2021 that are higher than the amounts incurred in the three months ended December 31, 2020; (vi) our expectation that gross margin in the third quarter of fiscal 2021 will be less than gross margin in the three months ended December 31, 2020; (vii) our expectation that we will incur research and development expenses in the third quarter of fiscal 2021 that are higher than the amounts incurred in the three months ended December 31, 2020; (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
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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.

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; regulatory developments, clearances and approvals; approval of our products for distribution in foreign countries; 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, OrbusNeich and other distributors to successfully launch our products outside of the United States and Japan; our ability to maintain third-party supplier relationships and renew existing purchase agreements; our ability to maintain our relationships with Medikit and OrbusNeich; 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; 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 impact of federal corporate tax reform on our business, operations and financial statements; shutdowns of the U.S. federal government; unanticipated developments during the manufacturing transfer process for the WIRION system; the efforts and success of the entities in which we have made and are committed to make strategic investments; 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, 2020 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, 2020.


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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 December 31, 2020. 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.

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 December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 2020 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 second quarter of fiscal 2021:
Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs
October 1 to October 31, 2020 —  —  N/A N/A
November 1 to November 30, 2020(1)
11,393  $ 35.76  N/A N/A
December 1 to December 31, 2020 —  —  N/A N/A
11,393  $ 35.76 
(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*
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 December 31, 2020, 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.
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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: February 4, 2021
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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