Cardiovascular Systems, Inc., formerly known as Replidyne Inc., is headquartered in Saint Paul, Minnesota. It is a medical device company focusing on developing and commercializing interventional treatment systems for vascular disease. Its initial product, the Diamondback 360? Orbital Atherectomy System, is a minimally invasive catheter system for the treatment of peripheral arterial disease; and a range of plaque types, including calcified vessel lesions. The Diamondback 360? removes soft and calcified plaque in plaque-lined vessels through the orbital rotation of a diamond grit coated offset crown. The company refined its `orbital` technology to address the growing market need of providing a safer more effective atherectomy device. Cardiovascular Systems, Inc. has a market cap of $71.38 million; its shares were traded at around $4.89 with and P/S ratio of 1.26.
Highlight of Business Operations:Cost of Goods Sold. Cost of goods sold decreased by $393,000, or 10.1%, from $3.9 million for the three months ended September 30, 2008 to $3.5 million for the three months ended September 30, 2009. This decrease in cost of goods sold resulted in an increase to gross margin of 10%, from 67% for the three months ended September 30, 2008 to 77% for the three months ended September 30, 2009. Cost of goods sold represents the cost of materials, labor and overhead for single-use catheters, guidewires, control units, and other ancillary products. The increase in gross margin from the three months ended September 30, 2008 to September 30, 2009 is primarily due to higher production volumes, manufacturing efficiencies, product cost reductions, and shipment of fewer control units. Cost of goods sold for the three months ended September 30, 2009 and 2008 includes $129,000 and $176,000, respectively, for stock-based compensation. We expect that gross margin will stay fairly consistent in the future as sales volumes increase, although quarterly fluctuations could occur based on timing of new product introductions, sales mix, or other unanticipated circumstances.
Research and Development Expenses. Research and development expenses decreased by $2.2 million, or 43.9%, from $5.0 million for the three months ended September 30, 2008 to $2.8 million for the three months ended September 30, 2009. Research and development expenses relate to specific projects to improve our product or expand into new markets, such as the development of a new control unit, shaft designs, crown designs, and PAD and coronary clinical trials. The reduction in expense related to costs of a coronary clinical trial occurring during the three months ended September 30, 2008, along with fewer PAD development projects in 2009. Research and development for the three months ended September 30, 2009 and 2008 includes $281,000 and $112,000, respectively, for stock-based compensation. As we continue to expand our product portfolio within the market for the treatment of peripheral arteries and leverage our core technology into the coronary market, we expect to incur research and development expenses for the remainder of the fiscal year at a rate similar to that incurred for the three months ended September 30, 2009, although fluctuations could occur based on the number of projects and studies and the timing of expenditures.
In February 2008, we were notified that recent conditions in the global credit markets have caused insufficient demand for auction rate securities, resulting in failed auctions for $23.0 million of our auction rate securities. These securities are currently not liquid, as we have an inability to sell the securities due to continued failed auctions. At September 30, 2009, we maintained a margin loan with UBS Bank USA with maximum available borrowings, including interest, equal to the par value of auction rate securities held. At September 30, 2009, maximum available borrowings were $22.9 million. This maximum borrowing amount is not set forth in the written agreement for the loan and may be adjusted from time to time by UBS Bank in its sole discretion. The margin loan bears interest at variable rates that equal the lesser of (i) 30 day LIBOR plus 1.25% or (ii) the applicable reset rate, maximum auction rate or similar rate as specified in the prospectus or other documentation governing the pledged taxable student loan auction rate securities; however, interest expense charged on the loan will not exceed interest income earned on the auction rate securities. The loan is due on demand and UBS Bank will require us to repay it in full from the proceeds received from a public equity offering where net proceeds exceed $50.0 million. In addition, if at any time any of our auction rate securities may be sold, exchanged, redeemed, transferred or otherwise conveyed for no less than their par value, then we must immediately effect such a transfer and the proceeds must be used to pay down outstanding borrowings under this loan. The margin requirements are determined by UBS Bank but are not included in the written loan agreement and are therefore subject to change. As of September 30, 2009, the margin requirements include maximum borrowings, including interest, of $22.9 million. If these margin requirements are not maintained, UBS Bank may require us to make a loan payment in an amount necessary to comply with the applicable margin requirements or demand repayment of the entire outstanding balance. We have maintained the margin requirements under the loans from both UBS entities. The outstanding balance on this loan at September 30, 2009 was $22.8 million.
One of our directors and stockholders and two entities who held preferred shares and were also affiliated with two of our directors agreed to act as guarantors of the original term loans. In consideration for the guarantees, we issued the guarantors warrants to purchase an aggregate of 296,539 shares of our common stock at an exercise price of $9.28 per share. As a result of the refinancing, the guarantees on the original term loans have been released. The guaranteed term loans and common stock warrants were allocated using the relative fair value method. Under this method, we estimated the fair value of the term loans without the guarantees and calculated the fair value of the common stock warrants using the Black-Scholes method. The relative fair value of the loans and warrants were applied to the loan proceeds of $5.5 million resulting in an assigned value of $3.7 million for the loans and $1.8 million for the warrants. The assigned value of the warrants of $1.8 million is treated as a debt discount. The balance of the debt discount at September 30, 2009 is $0.6 million and is being amortized over the remaining term of the $5.5 million term loan.
Operating Activities. Net cash used in operating activities was $2.0 million and $12.0 million for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, we had a net loss of $6.2 million and $13.7 million, respectively. Changes in working capital accounts also contributed to the net cash used in the three months ended September 30, 2009 and 2008. Significant changes in working capital during these periods included:
Investing Activities. Net cash used in investing activities was $80,000 and $382,000 for the three months ended September 30, 2009 and 2008, respectively. Cash used in investing activities primarily related to the purchase of property and equipment. Purchases of property and equipment used cash of $41,000 and $201,000 for the three months ended September 30, 2009 and 2008, respectively.
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