10-Q 1 cybx-20140124x10q.htm 10-Q 1ab06da36a2d45a

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended January 24, 2014 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 Number:  0-19806

 

Description: CYBERONICS, INC. LOGO

CYBERONICS, INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

76-0236465

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

   

100 Cyberonics Boulevard

   

Houston, Texas

77058

(Address of principal executive offices)

(Zip Code)

 

(281) 228-7200

(Registrant's telephone number, including area code)

 

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   No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

¨

 

Non-accelerated filer

¨

 

Smaller reporting company

¨

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes  ¨

No  

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

 

 

 

 

 

Class

Outstanding at February 17, 2014

Common Stock $0.01 par value

26,834,053

 

 

1


 

 

 

 

Index 

 

CYBERONICS, INC.

 

INDEX

 

 

 

 

   

   

PAGE NO.

   

PART I.  FINANCIAL INFORMATION

   

Item 1

Condensed Consolidated Financial Statements

 

 

Condensed Consolidated Statements of Income for the thirteen weeks and thirty-nine weeks ended January 24, 2014 and January 25, 2013

3

 

Condensed Consolidated Statements of Comprehensive Income for the thirteen weeks and thirty-nine weeks ended January 24, 2014 and January 25, 2013

4

   

Condensed Consolidated Balance Sheets as of January 24, 2014 and April 26, 2013

5

   

Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended January 24, 2014 and January 25, 2013

6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4

Controls and Procedures

24

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

24

Item 1A

Risk Factors

24

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 6

Exhibits

25

 

In this Quarterly Report on Form 10-Q, “Cyberonics,” “the Company,” “we,” “us” and “our” refer to Cyberonics, Inc. and its consolidated subsidiaries (Cyberonics Europe BVBA, Cyberonics France Sarl, Cyberonics Holdings LLC, CYBX Netherlands C.V., Cyberonics Spain, S.L., Cyberonics Latam, S.R.L.).

______________

 

 

2


 

 

Index 

 

PART I.  FINANCIAL INFORMATION

 

C

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CYBERONICS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Net sales

 

$

68,191,414 

 

$

62,700,033 

 

$

207,164,890 

 

$

185,976,849 

Cost of sales

 

 

6,460,148 

 

 

5,367,218 

 

 

19,930,287 

 

 

15,548,199 

Gross profit

 

 

61,731,266 

 

 

57,332,815 

 

 

187,234,603 

 

 

170,428,650 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

29,427,340 

 

 

26,646,935 

 

 

88,367,536 

 

 

82,539,731 

Research and development

 

 

11,201,876 

 

 

10,244,322 

 

 

34,830,490 

 

 

30,006,041 

Litigation settlement

 

 

 -

 

 

 -

 

 

7,442,847 

 

 

 -

Total operating expenses

 

 

40,629,216 

 

 

36,891,257 

 

 

130,640,873 

 

 

112,545,772 

Income from operations

 

 

21,102,050 

 

 

20,441,558 

 

 

56,593,730 

 

 

57,882,878 

Interest income (expense), net

 

 

39,096 

 

 

8,858 

 

 

128,019 

 

 

(60,409)

Impairment of investment

 

 

 -

 

 

 -

 

 

 -

 

 

(4,058,768)

Gain on warrants' liability

 

 

 -

 

 

(2,112)

 

 

 -

 

 

1,325,574 

Other expense, net

 

 

(34,932)

 

 

(116,375)

 

 

(206,405)

 

 

(174,270)

Income before income taxes

 

 

21,106,214 

 

 

20,331,929 

 

 

56,515,344 

 

 

54,915,005 

Income tax expense

 

 

7,206,351 

 

 

7,148,435 

 

 

20,053,093 

 

 

20,089,574 

Net income

 

$

13,899,863 

 

$

13,183,494 

 

$

36,462,251 

 

$

34,825,431 

Basic income per share

 

$

0.52 

 

$

0.48 

 

$

1.34 

 

$

1.26 

Diluted income per share

 

$

0.51 

 

$

0.47 

 

$

1.32 

 

$

1.24 

Shares used in computing basic

 

 

 

 

 

 

 

 

 

 

 

 

income per share

 

 

26,964,861 

 

 

27,736,639 

 

 

27,250,740 

 

 

27,626,387 

Shares used in computing diluted

 

 

 

 

 

 

 

 

 

 

 

 

income per share

 

 

27,279,153 

 

 

28,124,433 

 

 

27,569,276 

 

 

28,045,437 

 

See accompanying notes to the condensed consolidated financial statements.

3


 

Index 

 

 

 

CYBERONICS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Net income

 

$

13,899,863 

 

$

13,183,494 

 

$

36,462,251 

 

$

34,825,431 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(196,331)

 

 

347,796 

 

 

241,050 

 

 

59,608 

Total other comprehensive income (loss)

 

 

(196,331)

 

 

347,796 

 

 

241,050 

 

 

59,608 

Total comprehensive income

 

$

13,703,532 

 

$

13,531,290 

 

$

36,703,301 

 

$

34,885,039 

 

See accompanying notes to the condensed consolidated financial statements.

4


 

Index 

 

CYBERONICS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

   

$

91,600,036 

   

$

120,708,572 

Short-term Investments

 

 

25,003,806 

 

 

15,000,000 

Accounts receivable, net

   

 

42,114,762 

   

 

39,450,113 

Inventories

   

 

18,083,321 

   

 

17,718,454 

Deferred tax assets

 

 

14,382,521 

 

 

10,297,991 

Other current assets

 

 

6,532,167 

 

 

4,183,213 

Total Current Assets

   

 

197,716,613 

   

 

207,358,343 

Property, plant and equipment, net

   

 

38,376,351 

   

 

28,555,742 

Intangible assets, net

 

 

11,949,952 

 

 

9,219,999 

Long-term investments

 

 

15,944,427 

 

 

10,588,202 

Deferred tax assets

 

 

4,555,927 

 

 

7,825,286 

Other assets

   

 

638,723 

   

 

495,738 

Total Assets

 

$

269,181,993 

 

$

264,043,310 

LIABILITIES AND STOCKHOLDERS' EQUITY

   

   

 

   

   

 

Current Liabilities:

   

   

 

   

   

 

Accounts payable

   

$

5,126,384 

   

$

8,025,512 

Accrued liabilities

   

   

18,862,732 

   

   

20,999,966 

Total Current Liabilities

   

   

23,989,116 

   

   

29,025,478 

Long-term liabilities

 

   

4,945,954 

 

   

5,449,604 

Total Liabilities

   

   

28,935,070 

   

   

34,475,082 

Commitments and Contingencies

   

   

 

   

   

 

Stockholders’ Equity:

   

   

 

   

   

 

Preferred Stock, $.01 par value per share; 2,500,000 shares authorized; no shares issued and outstanding

   

   

 -

   

   

 -

Common Stock, $.01 par value per share; 50,000,000 shares authorized; 31,756,151 shares issued and 26,878,753 shares outstanding at January 24, 2014 and 31,288,540 shares issued and 27,472,854 shares outstanding at April 26, 2013

   

   

317,562 

   

   

312,885 

Additional paid-in capital

   

   

413,435,737 

   

   

380,158,961 

Treasury stock, 4,877,398 and 3,815,686 common shares at January 24, 2014 and April 26, 2013, respectively, at cost

 

   

(175,466,665)

 

   

(116,160,606)

Accumulated other comprehensive income

   

   

409,027 

   

   

167,977 

Retained earnings (deficit)

   

   

1,551,262 

   

   

(34,910,989)

Total Stockholders’ Equity

   

   

240,246,923 

   

   

229,568,228 

Total Liabilities and Stockholders’ Equity

   

$

269,181,993 

   

$

264,043,310 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

5


 

 

 

Index 

CYBERONICS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net income

 

$

36,462,251 

 

$

34,825,431 

Non-cash items included in net income:

   

   

 

 

   

 

Depreciation

   

   

3,180,707 

 

   

2,807,785 

Amortization of intangible assets

   

   

969,047 

 

   

633,229 

Stock-based compensation

   

   

8,392,443 

 

   

9,109,422 

Deferred income taxes

 

 

(1,053,779)

 

 

16,388,319 

Deferred license revenue amortization

   

   

(1,467,869)

 

   

(1,120,476)

Impairment of investment

 

 

 -

 

 

4,058,768 

Gain on warrants' liability

 

 

 -

 

 

(1,325,574)

Unrealized loss in foreign currency transactions and other

   

   

27,994 

 

   

154,629 

Changes in operating assets and liabilities:

   

   

 

 

   

 

Accounts receivable, net

   

   

(2,255,045)

 

   

(6,225,989)

Inventories

   

   

(197,717)

 

   

(3,044,106)

Other current and non-current assets

   

   

(2,368,733)

 

   

722,709 

Other current and non-current liabilities

   

   

(3,941,016)

 

   

(1,278,862)

Net cash provided by operating activities

   

   

37,748,283 

 

   

55,705,285 

Cash Flow From Investing Activities:

 

 

 

 

 

 

Purchase of short-term investments

 

 

(39,984,639)

 

 

(15,000,000)

Maturities of short-term investments

 

 

29,990,389 

 

 

 -

Purchases of property, plant and equipment

 

 

(12,960,959)

 

 

(6,515,509)

Intangible asset purchases

 

 

(3,789,000)

 

 

(2,500,000)

Long-term investments

 

 

(5,356,225)

 

 

(2,588,200)

Net cash used in investing activities

   

   

(32,100,434)

 

   

(26,603,709)

Cash Flows From Financing Activities:

 

 

 

 

 

 

Purchase of treasury stock

 

 

(59,306,059)

 

 

(20,105,481)

Proceeds from exercise of options for common stock

 

 

8,283,999 

 

 

8,969,626 

Cash settlement of stock-based compensation stock units

 

 

(936,115)

 

 

 -

Realized excess tax benefits - stock-based compensation

 

 

17,157,916 

 

 

2,040,699 

Net cash used in financing activities

   

   

(34,800,259)

 

   

(9,095,156)

Effect of exchange rate changes on cash and cash equivalents

   

   

43,874 

 

   

(129,525)

Net increase (decrease) in cash and cash equivalents

   

   

(29,108,536)

 

   

19,876,895 

Cash and cash equivalents at beginning of period

   

   

120,708,572 

 

   

96,654,275 

Cash and cash equivalents at end of period

   

$  

91,600,036 

 

$  

116,531,170 

 

 

 

 

 

 

 

Supplementary Disclosures of Cash Flow Information:

 

 

 

 

 

 

Cash paid for interest

   

$

3,309 

 

$

83,225 

Cash paid for income taxes

   

$

3,943,931 

 

$

2,060,495 

Supplementary Disclosures of Non-Cash Investing Activities:

 

 

 

 

 

 

Purchases of plant and equipment - decrease (increase) in accounts payable and accrued liabilities

 

$

980,100 

 

$

(269,624)

Reclassification from common stock warrants to warrants' liability

 

$

 -

 

$

(3,649,637)

Reclassification from common stock warrants to additional paid-in-capital

 

$

 -

 

$

(21,550,363)

 

 

See accompanying notes to the condensed consolidated financial statements.

6


 

Index

 

CYBERONICS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

For the Period Ended January 24, 2014

 

Note 1Basis of Presentation and Use of Accounting Estimates

 

The accompanying unaudited condensed consolidated financial statements of Cyberonics, Inc. and its consolidated subsidiaries (collectively “Cyberonics”) at January 24, 2014 have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements of Cyberonics at April 26, 2013 have been prepared from audited financial statements. In the opinion of management, all the adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the thirty-nine weeks ended January 24, 2014 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending April 25, 2014. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 26, 2013 (“2013 Form 10-K”).

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience or various assumptions that we believe to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may differ materially from these estimates.

 

The fiscal years 2014 and 2013 will end or ended on April 25, 2014 and April 26, 2013, respectively.

 

 

Note 2.  Accounts Receivable and Allowance for Bad Debt

 

Accounts receivable, net consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Accounts receivable

   

$

42,966,791 

   

$

39,998,483 

Allowance for bad debt

   

 

(852,029)

   

 

(548,370)

 

   

$

42,114,762 

 

$

39,450,113 

 

 

 

Note 3.  Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Raw materials

   

$

7,629,702 

   

$

7,267,437 

Work-in-process

 

 

4,246,468 

 

 

4,813,227 

Finished goods

   

 

6,207,151 

   

 

5,637,790 

 

   

$

18,083,321 

 

$

17,718,454 

 

 

 

 

 

 

 

 

 

7


 

Index 

Note 4.  Property, Plant and Equipment

 

Property, plant and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Land

   

$

1,643,813 

   

$

1,128,813 

Building and building improvements

 

 

18,522,084 

 

 

16,646,446 

Equipment, furniture and fixtures

 

 

35,070,463 

 

 

33,104,334 

Leasehold improvements

 

 

1,424,641 

 

 

1,316,088 

Capital investment in process

 

 

13,558,422 

 

 

6,627,930 

Total

 

 

70,219,423 

 

 

58,823,611 

Accumulated depreciation

 

 

(31,843,072)

 

 

(30,267,869)

 

   

$

38,376,351 

 

$

28,555,742 

 

 

 

 

Note 5.  Intangible Assets

 

Schedules of finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Developed Technology Rights (1)

 

$

13,914,000 

 

$

10,370,000 

Other Intangible Assets (2)

 

 

1,148,000 

 

 

993,000 

 

 

 

15,062,000 

 

 

11,363,000 

Accumulated amortization

 

 

(3,112,048)

 

 

(2,143,001)

Net

 

$

11,949,952 

 

$

9,219,999 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Developed Technology Rights include purchased patents, licensed patent rights and know-how. These assets relate primarily to seizure detection and response, wireless communication technology, rechargeable battery technology,  conditionally safe magnetic resonance (“MR”) technology for implantable leads and the physiologic treatment of obstructive sleep apnea. 

(2)

Other Intangible Assets primarily consists of purchased clinical neurological and sleep apnea databases.

 

During the thirty-nine weeks ended January 24, 2014, our purchased intangible assets consisted primarily of Developed Technology Right, of $3.6 million, which consisted of patents and patent rights related to the treatment of obstructive sleep apnea, the integration of conditionally safe MR technology with our leads, and cardiac-based and cranial nerve-based seizure detection and response. These assets have an average amortization period of 12 years.

 

The weighted average amortization period in years for our intangible assets at January 24, 2014:

 

 

 

 

 

 

 

Developed Technology Rights

   

12 

Other Intangible Assets

 

 

Aggregate intangible asset amortization was $969,047 and $633,229 for the thirty-nine weeks ended January 24, 2014 and January 25, 2013, respectively, which was reported in research and development expense in the consolidated statements of net income. When a  product is commercialized, the amortization of the related intangible assets will be charged to cost of goods sold.

 

The estimated future amortization expense based on our finite-lived intangible assets at January 24, 2014:

 

 

 

 

 

 

 

 

 

For the remaining periods in fiscal year 2014

 

$

366,004 

Fiscal year 2015

 

 

1,464,014 

Fiscal year 2016 (53 week year)

 

 

1,444,318 

Fiscal year 2017

 

 

1,386,726 

Fiscal year 2018

 

 

1,386,726 

 

 

8


 

Index 

Note 6. Investments

 

Short-Term Investments detail.  Our short-term investments consist of securities with maturities ranging from 6 to 12 months and carried at amortized cost.  Refer to Note 14. Fair Value Measurements.” 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Certificates of deposits

   

$

20,009,045 

   

$

15,000,000 

Commercial paper

 

 

4,994,761 

 

 

 -

 

 

$

25,003,806 

 

$

15,000,000 

 

 

Long-Term Investments detail: Our long-term investments consisted of equity positions in two privately-held companies carried at original cost under the cost-method,  refer to Note 14. Fair Value Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

ImThera Medical, Inc. - convertible preferred shares and warrants (1)

   

$

12,000,002 

   

$

8,000,002 

Cerbomed GmbH - convertible preferred shares (2)

 

 

3,944,425 

 

 

2,588,200 

Carrying amount – long-term investments

 

$

15,944,427 

 

$

10,588,202 

 

 

(1)

ImThera Medical, Inc. is developing a neurostimulation device system for the treatment of obstructive sleep apnea.  During the quarter ended January 24, 2014, we purchased an additional tranche of convertible preferred non-voting stock with warrants for $4.0 million. 

 

(2)

Cerbomed GmbH is a German company developing a transcutaneous vagus nerve stimulation device for the treatment of epilepsy. During the quarter ended January 24, 2014, we purchased an addition tranche of convertible preferred stock for €1.0 million, or approximately $1.4 million. 

 

Note 7.  Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Payroll and other compensation

   

$

11,601,255 

   

$

16,869,112 

Tax accruals

 

 

1,953,927 

 

 

550,697 

Clinical study costs

 

 

1,283,857 

 

 

1,040,772 

Other accrued liabilities

 

 

4,023,693 

 

 

2,539,385 

 

   

$

18,862,732 

 

$

20,999,966 

 

 

Note 8.  Long-Term Liabilities

 

Other long-term liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 24, 2014

 

April 26, 2013

Liability for uncertain tax benefits

 

$

4,050,289 

 

$

3,599,787 

Deferred license revenue

 

 

 -

 

 

1,467,869 

Other

   

 

895,665 

   

 

381,948 

 

   

$

4,945,954 

 

$

5,449,604 

 

9


 

 

Index 

Note 9.  Commitments and Contingencies

 

Litigation.

 

In April 2012, we filed a complaint in the United States District Court for the Southern District of Texas (12-cv-1118) against Dr. Jacob Zabara in response to a letter from Dr. Zabara alleging that he was entitled to royalties on products that incorporate his patents licensed to us under a 1988 license agreement, even if the patents had expired. The complaint sought a declaratory judgment that Dr. Zabara was not entitled to royalties for expired patents and not entitled to royalties at all unless our device includes an invention claimed in an unexpired, licensed patent. Dr. Zabara answered the complaint and filed counterclaims seeking a declaratory judgment that he was entitled to an ongoing royalty, that we breached the license agreement by failing to pay at least a minimum royalty and by failing to pay a royalty on tunneling tools, and that we failed to use our “best efforts to develop and market a Product or Products” as required by the license agreement.

 

On May 3, 2013, the district court ruled (i) that we breached the license agreement by failing to pay the $9,000-per-quarter minimum royalty since July 2011, (ii) that the license agreement required us to use our “best efforts to develop and market a Product or Products” regarding each of the licensed patents, and (iii) that a trial would be required to determine whether we used our “best efforts” as required by the license agreement.

 

Dr. Zabara claimed to be entitled to damages of approximately $0.6 million for unpaid royalties on the tunneling tool and damages of at least $200 million for royalties he claims would have been earned had we used our “best efforts to develop and market a Product or Products” for the licensed patents not embodied in our epilepsy products.

 

On July 30, 2013, we executed a letter agreement with Dr. Zabara by which we agreed to settle all claims in the pending lawsuit.  On July 31, 2013, the district court dismissed the case without prejudice, subject to reinstatement if the settlement was not completely documented. On September 12, 2013, the parties executed final settlement papers pursuant to the terms of the letter agreement.  The principal terms of settlement included (i) a payment by us of $6.25 million to Dr. Zabara; (ii) the provision of up to 200 VNS Therapy® Systems to Dr. Zabara for research purposes; (iii) termination of the 1988 license agreement and all prior consulting agreements, subject to continuation of an existing sublicense and a non-exclusive, royalty-bearing license to us for future-developed products, if any, covered by Dr. Zabara’s patents; and (iv) mutual releases.  We incurred and recorded a charge of approximately $7.4 million to account for this settlement, including approximately $0.7 million in associated legal fees, during our quarter ended July 26, 2013.

 

On December 5, 2013, after the United States declined to intervene, the United States District Court for the District of Massachusetts unsealed a qui tam action (13-cv-10214) filed against Cyberonics, Inc. under the Federal False Claims Act (“FCA”) and the false claims statutes of 28 different states and the District of Columbia.  The FCA prohibits the submission of a false claim or the making of a false record or statement to secure reimbursement from, or limit reimbursement to, a government-sponsored program.  A “qui tam” action is a lawsuit brought by a private individual purporting to act on behalf of the government.  The government, after reviewing and investigating the allegations, may elect to participate, or intervene, in the lawsuit. 

 

This qui tam action was filed under seal in February 2013 by former employee Andrew Hagerty. Previously, in August 2012, Mr. Hagerty filed a related lawsuit in the same court and then voluntarily dismissed that lawsuit immediately prior to filing this qui tam action. In addition to his claims for wrongful and retaliatory discharge stated in the first lawsuit, the qui tam lawsuit alleges that we violated the FCA and various state false claims statutes while marketing our VNS Therapy System and seeks an unspecified amount consisting of treble damages, civil penalties, and attorneys’ fees and expenses.

 

In October 2013, the United States declined to intervene in the qui tam action, and in December 2013, the district court unsealed the action. The district court’s order unsealing the qui tam action requires that the complaint be served no later than 120 days from October 29, 2013. As of February 20, 2014, we have not received notice that we have been served with the complaint.

 

We believe that our marketing practices were and are in compliance with applicable legal standards, and we intend to defend this case vigorously. We can make no assurance as to the resources that will be needed to respond to these matters or the final outcome of such action, and we cannot estimate a range of potential loss or damages.

 

Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business.  Such matters are subject to many uncertainties and outcomes that are not predictable with assurance and that may not be known for extended periods of time.  Since the outcome of such lawsuits or other proceedings cannot be predicted with certainty, the costs associated with such proceedings could have a material adverse effect on our consolidated net income, financial position or cash flows.

10


 

Index 

Clinical Study Agreements.

 

We have agreements associated with clinical studies and registries in connection with which we expect to spend approximately $0.5 million over the next two years.

 

Licensing and Investment Agreements. 

 

In October 2009, we entered into a contractual arrangement with Flint Hills related primarily to cardiac-based seizure detection patents and patent applications. We agreed to future minimum or milestone-based fees for intellectual property licensing,  consulting and royalty fees. We expect future expenditures of approximately $3.2 million through fiscal year 2019 under our agreement with Flint Hills.

 

In June 2012, we entered into a patent license agreement and a technology transfer agreement with Imricor for the integration of its conditionally safe MR technology with our leads. We agreed to future milestone-based payments and minimum royalties and expect future expenditures of $1.3 million through fiscal year 2019.

 

Lease Agreements.

 

We lease facilities and equipment with non-cancellable leases, accounted for as operating leases, including: (i) a storage and distribution facility in Austin, Texas; (ii) administrative and sales offices in Brussels, Belgium and elsewhere in Europe,  the United States , Beijing, China and Hong Kong, and; (iii) vehicles and office equipment.

 

Note 10.  Stock-Based Incentive Plans

 

Stock-Based Compensation

 

Amounts of stock-based compensation recognized in the consolidated statement of income by expense category are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Cost of goods sold

   

$

109,604 

   

$

95,940 

 

$

346,024 

 

 

402,450 

Selling, general and administrative

 

 

1,881,986 

 

 

1,635,373 

 

 

5,955,691 

 

 

6,096,914 

Research and development

 

 

651,485 

 

 

531,921 

 

 

2,090,728 

 

 

2,610,058 

Total stock-based compensation expense

   

 

2,643,075 

 

 

2,263,234 

 

$

8,392,443 

 

$

9,109,422 

Income tax benefit, related to awards, recognized in the consolidated statements of income

 

 

1,001,806 

 

 

1,029,158 

 

 

2,747,144 

 

 

2,779,678 

Total expense, net of income tax benefit

 

$

1,641,269 

 

$

1,234,076 

 

$

5,645,299 

 

$

6,329,744 

 

Amounts of stock-based compensation expense recognized in the consolidated statement of income by type of arrangement are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Service-based stock option awards

   

$

921,513 

   

$

681,537 

 

$

2,795,031 

 

 

2,245,622 

Service-based restricted and restricted stock unit awards

 

 

1,316,905 

 

 

970,667 

 

 

4,086,696 

 

 

3,973,976 

Performance-based restricted stock and restricted stock unit awards

 

 

404,657 

 

 

611,030 

 

 

1,510,716 

 

 

2,889,824 

Total stock-based compensation expense

   

$

2,643,075 

 

$

2,263,234 

 

$

8,392,443 

 

$

9,109,422 

 

 

11


 

Index 

Stock Option Activity

 

The following tables detail the activity for service-based stock option awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended January 24, 2014

Options

 

Number of Optioned Shares

 

Wtd. Avg. Exercise Price

 

Wtd. Avg. Remaining Contractual Term (years)

 

Aggregate Intrinsic Value (1)

Outstanding — at April 26, 2013

 

1,161,427 

 

$

27.67 

 

 

 

 

 

Granted

 

251,777 

 

 

51.89 

 

 

 

 

 

Exercised

 

(338,983)

 

 

24.13 

 

 

 

 

 

Forfeited

 

(5,739)

 

 

41.76 

 

 

 

 

 

Expired

 

 -

 

 

 -

 

 

 

 

 

Outstanding — at January 24, 2014

 

1,068,482 

 

 

34.43 

 

7.05 

 

$

35,188,602 

Fully vested and exercisable — end of quarter

 

463,032 

 

 

24.59 

 

5.17 

 

 

19,925,618 

Fully vested and expected to vest — end of quarter (2)

 

1,034,376 

 

 

34.09 

 

7.00 

 

 

34,417,121 

 

(1)

The aggregate intrinsic value of options at quarter end is based on the difference between the fair market value of the underlying stock at January 24, 2014, using the market closing stock price, and the option exercise price for in-the-money options.

 

(2)

Factors in expected forfeitures.

 

Restricted Stock and Restricted Stock Units Awards

 

The following tables detail the activity for service-based restricted stock and restricted stock unit awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended January 24, 2014

 

 

Number of Shares

 

Wtd. Avg. Grant Date Fair Value

Non-vested shares at April 26, 2013

   

367,734 

   

$

31.61 

Granted

 

129,153 

 

 

51.78 

Vested

 

(119,911)

 

 

27.34 

Forfeited

 

(2,515)

 

 

42.32 

Non-vested shares at January 24, 2014

   

374,461 

 

 

39.86 

 

The following tables detail the activity for performance-based and market-based restricted stock and restricted stock unit awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended January 24, 2014

 

 

Number of Shares

 

Wtd. Avg. Grant Date Fair Value

Non-vested shares at April 26, 2013

   

396,161 

   

$

25.54 

Granted

 

 -

 

 

 -

Vested

 

(62,520)

 

 

27.13 

Forfeited

 

 -

 

 

 -

Non-vested shares at January 24, 2014

   

333,641 

 

 

25.24 

 

12


 

Index 

Note 11.  Income Taxes

 

Our effective tax rate for the thirty-nine weeks ended January 24, 2014 was 35.5%, driven primarily by our federal income tax rate of 35.0%, plus state and foreign income taxes, permanent differences and discrete items. Our effective tax rate for the thirty-nine weeks ended January 25, 2013 was 36.6%, driven primarily by our federal income tax rate of 35%, plus state and foreign income taxes and permanent differences. The 1.1% reduction in the tax rate between the two periods was primarily due to federal and Texas R&D tax credits. In January 2014, we filed our federal tax return for the fiscal year ended April 26, 2013 and generated an R&D tax credit greater than our original estimate and, we recorded a discrete reduction to the effective tax rate.  In addition, the Texas R&D tax credit was enacted during the thirteen weeks ended July 26, 2013 and applies to our tax year ended April 26, 2013 and provided a reduction to the effective tax rate. Finally, our  increased R&D activity for the fiscal year ending April 25, 2014 is contributing to an increased federal and Texas R&D tax credit.

 

Note 12.  Income Per Share

 

The following table sets forth the computation of basic and diluted net income per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,899,863 

 

$

13,183,494 

 

$

36,462,251 

 

$

34,825,431 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

26,964,861 

 

 

27,736,639 

 

 

27,250,740 

 

 

27,626,387 

Add effects of stock options

 

 

314,292 

 

 

387,794 

 

 

318,536 

 

 

419,050 

Diluted weighted average shares outstanding

 

 

27,279,153 

 

 

28,124,433 

 

 

27,569,276 

 

 

28,045,437 

Basic income per share

 

$

0.52 

 

$

0.48 

 

 

1.34 

 

 

1.26 

Diluted income per share

 

$

0.51 

 

$

0.47 

 

 

1.32 

 

 

1.24 

 

Anti-dilutive securities excluded from the computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Stock options (1)

   

17,924 

   

23,920 

 

45,634 

 

29,951 

Restricted stock units (2)

 

 -

 

 -

 

 -

 

 -

Warrants (3)

 

 -

 

 -

 

 -

 

3,012,050 

 

(1)

Outstanding options to purchase common shares that are excluded from the computation of earnings per share because generally the option exercise price exceeds the average market price of our common stock during the reporting period.

(2)

Restricted stock units that were non-participatory and were contingently issuable based on performance for all or part of the period were excluded from the basic earnings per share and included in dilutive earnings per share.

(3)

In September 2005, we sold common stock warrants at an exercise price of $50.00 per share. The warrants were anti-dilutive for the thirty-nine weeks ended January 25, 2013 because the exercise price of the warrants exceeded the average market price during this period. Refer to “Note 13. Derivatives” for further information.

 

Note 13. Derivatives

 

Foreign Currency Exposure

 

We operate in a number of international markets and are exposed to the impact of foreign currency exchange rate movements on earnings, particularly with respect to the U.S. dollar versus the euro. Our aggregate foreign currency exchange losses for the thirty-nine weeks ended January 24, 2014 and January 25, 2013 were approximately $206,000 and $174,000, respectively. At times, we enter into foreign currency derivatives to partially offset our foreign currency exchange gains and losses; however, we did not enter into any foreign currency derivatives during the periods reported.

13


 

Index 

Warrants’ Liability

 

In September 2005, we sold warrants for $25.2 million to Merrill Lynch International. The warrants were recorded in common stock warrants on our consolidated balance sheets. The warrants entitled the holder to receive the net value for the purchase of 3,012,050 shares of our common stock for the amount in excess of $50.00 per share. The warrant agreement was amended during the quarter ended October 26, 2012 to change the settlement measurement period and, as a result, common stock warrants representing the right to receive net value for the purchase of 2,008,000 shares of our common stock at $50.00 per share were re-classed to warrants’ liability at a fair value of $3.6 million. At October 26, 2012, we revalued the warrants’ liability at $2.3 million and recorded a gain of $1.3 million, which was included in non-operating income in the consolidated statement of income for the thirty-nine weeks ended January 25, 2013. All warrants were settled by the quarter ended January 25, 2013.

 

Note 14. Fair Value Measurements

 

Fair value is defined as the exit price or the amount that we would receive upon selling our assets in an orderly transaction to a market participant as of the period ending on the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value. The hierarchy is broken down into three levels defined as follows:

 

 

 

 

·

 

Level 1

– Inputs are quoted prices in active markets for identical assets.

·

 

Level 2

– Inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs that are observable for the asset, either directly or indirectly.

·

 

Level 3

– Inputs are unobservable inputs for the asset.

 

Observable inputs are inputs market participants would use in valuing the asset based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing our asset and are developed based on the best information available in the circumstances. The categorization of assets within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. Level 3 financial assets include investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation.

 

Cash equivalents

 

Our cash equivalents consisted of a  U.S. government money market mutual fund, which amounted to $1.4 million at January 24, 2014 and zero at April 25, 2013. We carry this investment at fair value using Level 1 inputs per the fair value hierarchy and have recorded no gains or losses.

 

Short-Term Investments

 

Our short-term investments consisted of certificates of deposit and commercial paper with maturities of six to 12 months that are considered held-to-maturity debt securities and carried at amortized cost, which approximated fair value. We use Level 2 inputs to determine fair value. As of January 24, 2014, the next contractual maturity date for our commercial paper will be in July 2014 and in December 2014 for our certificate of deposit. 

 

Investment in Cost-Method Equity Securities

 

Our investment in cost-method equity securities consisted of convertible preferred stock of two privately-held companies for which there are no quoted market prices. Refer to “Note 6. Investments” for further information. We have not estimated the fair value of these investments because their fair value is not readily determinable without incurring excessive cost. However, each reporting period we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of these investments. The information we review falls into Level 3 of the fair value hierarchy and includes: the issuers’financial statements and achievement of milestone goals, changes in the issuers’market space, and participation by third-party equity investors in the market space. If impairment is indicated, we would determine the fair value of the investment and, if below cost, we would determine if the loss is temporary or other-than-temporary. Temporary loss would not be recognized and other-than-temporary loss would be recognized in ‘Other Expense, Net’ in the consolidated statement of income.

14


 

Index 

Investment in Convertible Debt Security

 

We invested in a convertible debt security issued by NeuroVista Corporation (“NeuroVista”) on August 20, 2010. NeuroVista was a privately-held company focused on the development of an implantable device intended to inform patients when seizures are likely to occur, as well as to alert caregivers when seizures do occur. We considered this security an ‘available-for-sale’ debt security measured at fair value on a recurring basis using Level 3 inputs, as the investee is a privately-held entity without quoted market prices. During the quarter ended July 27, 2012, we determined that we were unlikely to receive the return of our principal and accrued interest and performed a fair value analysis of the assets we expected to receive in foreclosure. We estimated the fair value of the debt instrument at $1,450,000, with the resulting impairment loss of $4,058,768 reported as other-than-temporary and separately stated in the consolidated statement of income. During the quarter ended October 26, 2012, NeuroVista advised us that an event of default had occurred under the terms of the convertible debt security, and in February 2013, we conducted a foreclosure sale of the assets subject to our security interest and took possession of the company’s tangible and intangible assets, which resulted in no further gain or loss on the settlement of the debt security. The following table provides a reconciliation of the beginning and ending balance of the NeuroVista debt instrument measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

Beginning Balance

 

$

 -

 

$

5,508,768 

Net purchases / (settlements)

 

 

 -

 

 

 -

Transfers in/(out) of Level 3

 

 

 -

 

 

 -

Other-than-temporary impairment included in net income

 

 

 -

 

 

(4,058,768)

Ending Balance

 

$

 -

 

$

1,450,000 

 

Note 15. New Accounting Pronouncement

 

In July 2013, the Financial Accounting Standards Board issued amended guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry-forward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction of a deferred tax asset when a net operating loss carry-forward, similar tax loss, or tax credit carry-forward exists, with certain exceptions.  This accounting guidance is effective prospectively starting with our first quarter of fiscal year 2015 and is related to presentation only. Its adoption will have no material impact on our consolidated results of operations or financial position.

15


 

 

Index 

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

 

Cautionary Statement Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. The words “believe,” “potential,” forecast,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “may,” “estimate,” “project” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based on various factors, including but not limited to the risks and uncertainties summarized below:

 

 

 

·

 

changes in our common stock price;

·

 

changes in our profitability;

·

 

regulatory activities and announcements;

·

 

effectiveness of our internal controls over financial reporting;

·

 

fluctuations in future quarterly operating results;

·

 

failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, United States (“U.S.”) Food and Drug Administration (“FDA”) laws and regulations;

·

 

failure to establish, expand or maintain market acceptance or reimbursement for the use of VNS Therapy® or any component which comprises the VNS Therapy System for the treatment of epilepsy;

·

 

any legislative or administrative reform to the healthcare system, including the U.S. Medicare or Medicaid systems or international reimbursement systems, that significantly reduces reimbursement for procedures using the VNS Therapy System, or any component thereof, or denies coverage for such procedures, as well as adverse decisions by administrators of such systems on coverage or reimbursement issues relating to our products;

·

 

failure to maintain the current regulatory approvals for our epilepsy and depression indications;

·

 

failure to obtain insurance coverage and reimbursement for our depression indication;

·

 

failure to develop VNS Therapy for the treatment of indications other than epilepsy and depression;

·

 

unfavorable results from clinical studies;

·

 

variations in sales and operating expenses relative to estimates;

·

 

our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;

·

 

product liability-related losses and costs;

·

 

protection, expiration and validity of our intellectual property;

·

 

changes in technology, including the development of superior or alternative technology or devices by competitors;

·

 

failure to comply with applicable domestic laws and regulations, including federal and state privacy and security laws and regulations;

·

 

failure to comply with foreign law and regulations;

·

 

international operational and economic risks and concerns;

·

 

failure to attract or retain key personnel;

·

 

losses or costs from pending or future lawsuits and governmental investigations;

·

 

changes in accounting rules that adversely affect the characterization of our consolidated results of  income, financial position or cash flows;

·

 

changes in customer spending patterns;

·

 

continued volatility in the global market and worldwide economic conditions;

·

 

changes in tax laws or exposure to additional income tax liabilities; and

·

 

harsh weather or natural disasters that interrupt our business operations or the business operations of our hospital-customers. 

16


 

Index 

Other factors that could cause our actual results to differ from our projected results are described in (1) Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our Annual Report on Form 10-K for the period ended April 26, 2013 (“2013 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the U.S. Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.

 

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report. Operating results for the thirteen and thirty-nine weeks ended January 24, 2014 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our Annual Consolidated Financial Statements, Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” contained in our 2013 Form 10-K.

 

Business Overview

 

We are a medical device company, incorporated in 1987, engaged in the design, development, sales and marketing of an implantable medical device, the VNS Therapy System, which provides neuromodulation therapy for the treatment of refractory epilepsy and treatment-resistant depression (“TRD”). We are also investigating neuromodulation therapy for other indications, including chronic heart failure, and developing non-implantable device solutions for the management of epilepsy.

 

Our VNS Therapy System includes the following:

 

 

 

·

 

an implantable pulse generator to provide appropriate stimulation to the vagus nerve;

·

 

a lead that connects the pulse generator to the vagus nerve;

·

 

a surgical instrument to assist with the implant procedure;

·

 

equipment to enable the treating physician to set the pulse generator stimulation parameters for the patient;

·

 

instruction manuals; and

·

 

magnets to suspend or induce stimulation manually.

 

The VNS Therapy pulse generator and lead are surgically implanted, generally during an outpatient procedure.  The battery contained in the generator has a finite life, which varies according to the model and the stimulation parameters used for each patient. At or near the end of the useful life of a battery, a patient may, with the advice of a physician, choose to implant a new generator, with or without replacing the original lead.

 

The FDA approved our VNS Therapy System in July 1997 for use as an adjunctive therapy in epilepsy patients over 12 years of age in reducing the frequency of partial onset seizures that are refractory or resistant to antiepileptic drugs. Regulatory bodies in Canada, the European Economic Area, certain countries in Eastern Europe, Russia, South America, Africa, Australia and certain countries in Asia, including Japan, China and Taiwan, have approved the VNS Therapy System for the treatment of epilepsy, many without age restrictions or seizure-type limitations. In July 2005, the FDA approved the VNS Therapy System for the adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate anti-depressant treatments. Regulatory bodies in the European Economic Area, Canada and Israel have approved the VNS Therapy System for the treatment of chronic or recurrent depression in patients who are in a treatment-resistant or treatment-intolerant depressive episode without age restrictions.

 

We sell the VNS Therapy System for refractory epilepsy to hospitals and ambulatory surgery centers. Our ability to successfully expand the commercialization of the VNS Therapy System depends on maintaining regulatory approval and favorable insurance coverage. This coverage allows our customers to invoice and be paid by third-party payers. Currently, there is broad coverage, coding and reimbursement for VNS Therapy for the treatment of refractory epilepsy.

 

In May 2007, the Centers for Medicare and Medicaid Services (“CMS”) issued a national determination of non-coverage with respect to reimbursement of VNS Therapy for patients with TRD, significantly limiting access to this therapeutic option for many patients.  Following this determination, we have not engaged in active commercial efforts with respect to TRD in any of our markets.  As a result of new clinical evidence, including the completion of a post-approval dosing study and publication in four peer-reviewed journals, we submitted a formal request to CMS for reconsideration of its determination and requested coverage for VNS Therapy for TRD for a sub-population of Medicare beneficiaries that is estimated to represent approximately 0.2% of CMS’s patient population.  CMS declined our request for reconsideration on May 28, 2013. 

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We believe reimbursement or payment rates from private insurers were largely unchanged over the past year. In November 2012, CMS announced calendar year 2013 final Ambulatory Payment Classification (APC) reimbursement rates, which were increased over the calendar year 2012 rates by 5.7% for full systems and 7.9% for generator-only replacements.  For calendar year 2014, CMS proposed a new hospital outpatient rule that created “comprehensive” APCs for our products.  These new comprehensive APCs are designed to package reimbursement for all items incurred within a period of up to 30 days into a single payment.  This means that costs associated with services having nothing to do with our device-related procedures may be reimbursed from our comprehensive APCs. However, CMS ultimately postponed the new comprehensive APCs until calendar year 2015. CMS announced calendar year 2014 final rates in November 2013.  The final APC rates for calendar year 2014 were increased as compared to the calendar year 2013 final APC rates by 7.7% for full systems and 5.1% for generator-only replacements. 

 

Any decrease in reimbursement rates or change in reimbursement methodology by CMS, including the proposed new comprehensive APCs, could have an adverse impact on our business and our future operating results.

 

We continue to invest in and support the development of future generations of our VNS Therapy System, including generators employing new stimulation paradigms, cardiac-based seizure detection, rechargeable battery technology, and wireless communication technology and the integration of conditionally safe magnetic resonance (“MR”) technology with our leads. We also continue to fund and develop other devices that support our focus on device solutions for epilepsy management, such as seizure monitoring, logging and notification technology using external heart monitoring and movement-related sensor advancements. In addition, we are investing in a pilot study related to the use of VNS Therapy for the treatment of chronic heart failure. We also sponsor post-marketing studies in refractory epilepsy and support a variety of studies for our product development efforts to build clinical evidence for VNS Therapy. A description and the status of these studies may be found at www.clinicaltrials.gov. On February 20, 2014, we announced CE Mark approval in Europe for our AspireSR™ generator. The AspireSR generator provides the benefits of VNS Therapy, with an additional feature;  Automatic Stimulation in response to detection of a seizure. Proprietary technology enables the AspireSR generator to analyze relative heart rate changes and better aligns stimulation with the clinical onset of a seizure.

 

Proprietary protection for our products is important to our business. We seek U.S. and foreign patents on selected inventions, acquire licenses under selected patents of third parties, and enter into confidentiality agreements with our employees, vendors and consultants with respect to technology that we consider important to our business. We also rely on trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position.

 

We periodically evaluate whether to out-license or to in-license intellectual property rights to optimize our portfolio. This includes identifying our intellectual property rights for indications we do not have plans to develop and determining whether these rights can be licensed or otherwise granted to third parties. It also involves assessing the intellectual property rights owned by third parties to determine whether we should attempt to license or otherwise acquire those rights. We have entered into several license and investment agreements that may involve substantial future payments. See “Note 9. Commitments and Contingencies – Investment Agreements” in our consolidated financial statements for additional information.

 

Significant Accounting Policies and Critical Accounting Estimates

 

We have adopted various accounting policies in preparing the consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements included in our 2013 Form 10-K.

 

Preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to adopt various accounting policies and to make estimates and assumptions that affect the reported amounts in such financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions, including those related to sales return reserves, amortization periods for and impairment of intangible assets, income taxes and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, and the results form the basis for making judgments about the reported value of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies from the information provided in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 Form 10-K.

 

Deferred Licensing Revenue

 

Effective in December 2007, we entered into an agreement granting an exclusive license to certain patents and patent applications pertaining to weight reduction, hypertension and diabetes in exchange for an up-front, non-refundable payment of $9.5 million, plus a royalty on future commercial sales of any product covered by the licensed patents. We retained the responsibility to prosecute the licensed patent applications and estimated that our obligation would be satisfied during the quarter ending April 25, 2014. However, during the quarter ended July 26, 2013, our obligations under the contract ended,  and we amortized the remaining balance of our deferred revenue resulting in recognition of licensing revenue in the consolidated statement of income of $1.5 million for the thirteen weeks ended July 26, 2013.

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Index 

Results of Operations

Net Sales

 

The table below illustrates comparative net product revenue and unit sales by geographic area and our licensing revenues. Product shipped to destinations outside the U.S. is classified as “International” sales (in thousands, except unit sales and percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

 

 

 

January 24, 2014

 

January 25, 2013

 

% Change

U.S.

 

$

53,020 

   

$

50,355 

 

5.3% 

International

 

 

15,171 

 

 

11,972 

 

26.7% 

Total net product sales (1)

 

$

68,191 

 

$

62,327 

 

9.4% 

 

 

 

 

 

 

 

 

 

Unit Sales

 

 

 

 

 

 

 

 

U.S.

 

 

2,259 

 

 

2,255 

 

0.2% 

International

 

 

1,150 

 

 

960 

 

19.8% 

Total unit sales (2)

 

 

3,409 

 

 

3,215 

 

6.0% 

 

 

 

 

 

 

 

 

 

Licensing Revenue

 

$

 -

 

$

373 

 

-100.0%

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended

 

 

 

 

January 24, 2014

 

January 25, 2013

 

 

U.S.

 

$

167,261 

   

$

152,741 

 

9.5% 

International

 

 

38,436 

 

 

32,115 

 

19.7% 

Total net product sales (1)

 

$

205,697 

 

$

184,856 

 

11.3% 

 

 

 

 

 

 

 

 

 

Unit Sales

 

 

 

 

 

 

 

 

U.S.

 

 

7,232 

 

 

6,905 

 

4.7% 

International

 

 

3,027 

 

 

2,596 

 

16.6% 

Total unit sales (2)

 

 

10,259 

 

 

9,501 

 

8.0% 

 

 

 

 

 

 

 

 

 

Licensing Revenue

 

$

1,468 

 

$

1,120 

 

31.1% 

 

(1)  Net product sales represents revenue from sales of generators, leads and other items related to our device.

(2)  Unit sales are based on the number of generators sold.

 

U.S. net product sales for the thirteen weeks ended January 24, 2014 increased by $2.7 million, or 5.3%, as compared to the thirteen weeks ended January 25, 2013, due to increased unit sales of 0.2% and an increased average selling price of 5.1%. The average selling price increased due to continued market penetration of our higher-priced AspireHC™ generator, price increases effective January 1, 2013 and January 1, 2014, and because we increased our lead sales relative to generators. Unit sales increased in the U.S. by 0.2%, which was less than the equivalent prior period growth rate. We believe that the lower growth rate of U.S. unit sales was primarily due to a combination of holidays that fell in the middle of the week, inclement weather that disrupted hospital and patient schedules, and the disruptive effects of health insurance coverage changes.

 

International net product sales for the thirteen weeks ended January 24, 2014 increased by $3.2 million, or 26.7%, as compared to the thirteen weeks ended January 25, 2013, due primarily to an increased unit sales of 19.8% and an increase in the average selling price of 6.9%. Unit sales increased in the majority of our international markets, with one particular order that accounted for 10.4% of our international volume growth. The average selling price increased due to favorable pricing on the one large international sale, partially offset by lower average pricing in our European market.

 

U.S. net product sales for the thirty-nine weeks ended January 24, 2014 increased by $14.5 million, or 9.5%, as compared to the thirty-nine weeks ended January 25, 2013, due to increased unit sales of 4.7% and an increased average selling price of 4.8%. The average selling price increased due to continued higher market penetration of our AspireHC generator and price increases effective January 1, 2013 and January 1, 2014. Unit sales increased in the U.S. by 4.7%, which was less than the equivalent prior period growth rate. We believe that the lower growth rate of U.S. unit sales was primarily due to a combination of effects that fell in the quarter ended January 24, 2014, as mentioned above, which included holidays that fell in the middle of the week, inclement weather that disrupted hospital and patient scheduling and the disruptive effects of health insurance coverage changes. Additionally, generator replacement unit growth rates declined but are still in line with our mid-single digit growth rate expectations over the last four quarters.

19


 

Index 

International net product sales for the thirty-nine weeks ended January 24, 2014 increased by $6.3 million, or 19.7%, as compared to the thirty-nine weeks ended January 25, 2013, due to increased unit sales of 16.6% and an increase in the average selling price of 3.1%. Unit sales increased in most international markets, while one order accounted for 3.9% of our international unit volume growth. The average selling price increased due to favorable pricing on the one large international sale, partially offset by lower average pricing in our European market.

 

Licensing revenues decreased to zero from $0.4 million for the thirteen weeks ended January 24, 2014 as compared to the thirteen weeks ended January 25, 2013, due to the fact that deferred revenue was fully amortized during the thirteen weeks ended July 26, 2013.   Licensing revenue increased by $0.3 million for the thirty-nine weeks ended January 24, 2014, as compared to the thirty-nine weeks ended January 25, 2013,  because we fully amortized the remaining balance of our deferred revenue during the thirteen weeks ended July 26, 2013. 

 

Cost of Sales and Expenses

 

The table below illustrates our cost of sales and major expenses as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

January 24, 2014

 

January 25, 2013

 

January 24, 2014

 

January 25, 2013

Cost of sales

 

9.5% 

 

8.6% 

 

9.6% 

 

8.4% 

Selling, general and administrative

 

43.2% 

 

42.5% 

 

42.7% 

 

44.4% 

Research and development

 

16.4% 

 

16.3% 

 

16.8% 

 

16.1% 

Litigation settlement

 

0.0% 

 

0.0% 

 

3.6% 

 

0.0% 

 

Cost of Sales

 

Cost of sales consists primarily of direct labor, allocated manufacturing overhead, the acquisition cost of raw materials and components and the medical device excise tax (“MDET”). Our cost of sales as a percent of net sales for the thirteen weeks ended January 24, 2014 increased by 0.9% to 9.5%, as compared to the thirteen weeks ended January 25, 2013. This increase was primarily due to the MDET on devices sold domestically, which added an incremental $0.5 million, or 0.7%, to cost of sales.

 

Our cost of sales as a percent of net sales for the thirty-nine weeks ended January 24, 2014 increased by 1.2% to 9.6%, as compared to the thirty-nine weeks ended January 25, 2013.  This increase was primarily due to the MDET on devices sold domestically, which added an incremental $2.3 million, or 1.1%, to cost of sales.

 

Selling, General and Administrative (“SG&A”) Expenses

 

SG&A expenses are comprised of sales, marketing, general and administrative activities. SG&A expenses as a percent of net sales for the thirteen weeks ended January 24, 2014 increased by 0.7% to 43.2%, as compared to the thirteen weeks ended January 25, 2013,  primarily due to increased costs, amounting to $1.2 million or a 1.8% increase, associated with the large international sale as noted in the revenue analysis above, offset by decreased incentive compensation costs. SG&A expenses as a percent of net sales for the thirty-nine weeks ended January 24, 2014 decreased by 1.7% to 42.7%, as compared to the thirty-nine weeks ended January 25, 2013, primarily due to decreases  in incentive compensation costs.

 

Research and Development (“R&D”) Expenses

 

R&D expenses consist of expenses related to our product and process development, product design efforts, clinical trial programs and regulatory activities. R&D expenses as a percentage of sales for the thirteen weeks ended January 24, 2014 increased 0.1% to 16.4%, as compared to the thirteen weeks ended January 25, 2013. R&D expenses as a percentage of net sales for the thirty-nine weeks ended January 24, 2014 increased by 0.7% to 16.8%, as compared to the thirty-nine weeks ended January 25, 2013. These increases  of R&D expenses were primarily due to an increase in our product development efforts with respect to the AspireSR™ generator, the ProGuardian™ seizure monitoring system, the Centro™ generator with wireless communication technology, and studies related to the treatment of chronic heart failure with Autonomic Regulation Therapy.

 

Litigation Settlement

 

We settled a lawsuit relating to our 1988 patent license agreement with Dr. Jacob Zabara, resulting in a $7.4 million charge, before a tax benefit of $2.7 million, recorded as a separate item in our operating expenses in the consolidated statement of income for the thirty-nine weeks ended January 24, 2014. For a description of this matter, see “Note 9. Commitments and Contingencies – Litigation” in the notes to our consolidated financial statements.

20


 

Index 

Impairment of Investment

 

During the thirteen weeks ended July 27, 2012, we determined that the fair value of our investment in a convertible debt instrument of NeuroVista Corporation, a privately-held, development-stage medical device company, was below the carrying value and recorded an other-than-temporary impairment loss of $4.1 million,  which was recorded as a non-operating expense. See “Note 14. Fair Value Measurements” in the notes to the consolidated financial statements for further details.

 

Gain on Warrants’ Liability

 

During the thirteen weeks ended January 25, 2013,  we realized a non-operating, non-cash gain of $1.3 million based on the change in fair value of our liability-based warrants. See “Note 13.  Derivatives – Warrants’ Liability” in the notes to the consolidated financial statements for further details.

 

Income Taxes

 

Our effective tax rate for the thirty-nine weeks ended January 24, 2014 was 35.5%, driven primarily by our U.S. federal income tax rate of 35.0% plus state and foreign income taxes, permanent differences and discrete items. Our effective tax rate for the thirty-nine weeks ended January 25, 2013 was 36.6%, driven primarily by our U.S. federal income tax rate of 35% plus state and foreign income taxes and permanent differences. The 1.1% reduction in the tax rate between the two periods was primarily due to U.S. federal and Texas R&D tax credits. In January 2014, we filed our U.S. federal tax return for the fiscal year ended April 26, 2013 and generated an R&D tax credit greater than our original estimate, and we recorded a discrete reduction to the effective tax rate.  In addition, the Texas R&D tax credit was enacted during the thirteen weeks ended July 26, 2013 and applies to our tax year ended April 26, 2013 and provided a reduction to the effective tax rate. Finally, we expect increased R&D activity, and an increased U.S. federal and Texas R&D tax credit, for the fiscal year ending April 25, 2014, as compared to fiscal year ended April 26, 2013.

 

As of January 24, 2014, we have not provided for U.S. income taxes for the undistributed earnings of our foreign subsidiaries. These earnings, while not material to our consolidated statements of income, are intended to be permanently reinvested outside the United States.

 

We are subject to income tax examinations for our U.S. federal income taxes, non-U.S. income taxes and state and local income taxes for the fiscal year 1992 and subsequent years, with certain exceptions. During the thirty-nine weeks ended January 24, 2014, the Belgium tax authority concluded an audit of our European subsidiary, Cyberonics Europe BVBA (“Cyberonics BVBA”) with respect to transfer pricing for fiscal years 2011 and 2010, and as a result we agreed to forfeit $18.2  million in Cyberonics BVBA net operating loss carryforwards (“NOLs”).  Based on this conclusion,  during the thirteen weeks ended January 24, 2014, we reduced our deferred tax assets by $6.2 million and released an equal amount of valuation allowance that resulted in no effect to the tax provision. We periodically review the activity of Cyberonics BVBA to determine if the remaining balance of the NOLs are more likely than not recoverable. As of January 24, 2014, we have not released the remaining balance of the valuation allowance, however,  if  our review at April 25, 2014 determines that the NOLs are more likely than not recoverable, we would release some or all of the remaining valuation allowance, resulting in a reduction of our effective tax rate for the fiscal year ending April 25, 2014.

 

Liquidity and Capital Resources

 

Cash and Cash Equivalents

 

Cash Flows

 

Net cash provided by (used in) operating, investing and financing activities for the thirty-nine weeks ended January 24, 2014 and January 25, 2013 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Thirty-Nine Weeks Ended

 

 

 

 

 

January 24, 2014

 

January 25, 2013

 

 

Change

Operating activities

   

$

37,748 

 

$

55,705 

 

$

(17,957)

Investing activities

 

 

(32,100)

   

 

(26,604)

 

 

(5,496)

Financing activities

 

 

(34,800)

 

 

(9,095)

 

 

(25,705)

Effect of exchange rate changes on cash and cash equivalents

 

 

43 

 

 

(129)

 

 

172 

Net increase (decrease)

 

$

(29,109)

 

$

19,877 

 

$

(48,986)

 

21


 

Index 

Operating Activities

 

Cash provided by operating activities decreased by $18.0 million during the thirty-nine weeks ended January 24, 2014, as compared to the thirty-nine weeks ended January 25, 2013, primarily due to a decrease in the non-cash deferred tax benefit of $17.4 million related primarily to utilization of net operating losses.

 

Investing Activities

 

Cash used in investing activities increased by $5.5 million during the thirty-nine weeks ended January 24, 2014, as compared to the thirty-nine weeks ended January 25, 2013, primarily due to a $6.4 million increase in purchases of property, plant and equipment  primarily for the Costa Rica manufacturing facility, an increase in cost-method equity investments of $2.8 million, and an increase in purchases of intangible assets of $1.3 million, offset by a net decrease in investments in short-term securities of $5.0 million. The intangible asset purchases  focused on patent and patent right purchases related to the treatment of obstructive sleep apnea,  the integration of conditionally safe MR technology with our leads and cardiac-based and cranial nerve-based seizure detection technology.  We expect to expend approximately $17  million for property, plant and equipment during fiscal year 2014, including the Costa Rica project. The construction of the Costa Rica manufacturing facility is expected to be largely completed in fiscal year 2014 and to become operational in fiscal year 2015. Finally, we invested $5.4 million in the preferred stock of two private medical device start-up companies. Refer to “Note 6 – Investments” in the consolidated financial statements for more information about these companies.

 

Financing Activities

 

Cash used in financing activities increased by $25.7 million during the thirty-nine weeks ended January 24, 2014, as compared to the thirty-nine weeks ended January 25, 2013, primarily due to a $39.2 million increase in purchases of treasury stock offset by an  increase in realized windfall tax deductions related to the vesting and exercise of share-based compensation arrangements. We purchase our common stock on the open market, and the volume and timing of such purchases depend on market conditions and other factors. On January 26, 2013, the Board of Directors authorized the repurchase of one million shares, and we completed this program in early December 2013. On December 3, 2013, our Board of Directors authorized an additional repurchase program of one million shares, which we expect to complete by the end of fiscal year 2015.

 

Liquidity

 

We believe our current liquidity and capital resources will be adequate to fund anticipated business activities for the next 12 months. Our liquidity could be adversely affected by factors affecting future operating results, including those referred to in “Item 1A. Risk Factors” previously.

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Index 

Contractual Obligations and Commitments

 

A summary of contractual obligations as of January 24, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations related to off-balance sheet arrangements:

 

Less Than One Year

 

One to Three Years

 

Three to Five Years

 

Over Five Years

 

Total Contractual Obligations

Operating leases (1)

 

$

1,614,235 

 

$

2,306,515 

 

$

766,967 

 

$

649,713 

 

$

5,337,430 

Inventory purchases (2)

 

 

3,387,898 

 

 

 -

 

 

 -

 

 

 -

 

 

3,387,898 

Clinical studies and patient registries

 

 

470,814 

 

 

37,860 

 

 

 -

 

 

 -

 

 

508,674 

Investments (3)

 

 

784,242 

 

 

2,250,966 

 

 

1,500,000 

 

 

750,000 

 

 

5,285,208 

Other (4)

 

 

441,268 

 

 

 -

 

 

 -

 

 

 -

 

 

441,268 

Total (5)

 

$

6,698,457 

 

$

4,595,341 

 

$

2,266,967 

 

$

1,399,713 

 

$

14,960,478 

 

 

 

(1)

Reflects operating lease obligations related to facilities, office equipment and automobiles. The lease obligations do not reflect rent collected from the tenants in our headquarters building. These rents currently amount to approximately $350,000 per year.

(2)

Reflects certain inventory purchase commitments that specify minimum purchase quantities. These purchase commitments do not exceed our projected manufacturing requirements and are in the normal course of business.

(3)

Reflects contractually optional but expected future purchases primarily for patent and patent rights with our collaborative partners and minimum royalty payments. The amount of $750,000 due “over five years” is comprised of one year of minimum royalty payments.

(4)

Reflects expected future payments in connection with: (i) an information technology service agreement, (ii) sales, marketing and training events and (iii) our Costa Rica manufacturing facility land purchase and construction contract.

(5)

The table above does not reflect the unrecognized tax benefits of $7.1 million due to our inability to make a reasonably reliable estimate of the timing of any payments.

 

 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to certain market risks as part of our ongoing business operations, including risks from foreign currency exchange rates and concentration of credit that could adversely affect our consolidated balance sheet, net income and cash flow. We manage these risks through regular operating and financing activities and, at certain times, derivative financial instruments. Quantitative and qualitative disclosures about these risks are included in our 2013 Form 10-K for the year ended April 26, 2013 in Part II, Item 7A. There have been no material changes from the information provided therein.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Evaluation and Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported on herein.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 24, 2014.

 

Changes in Internal Control over Financial Reporting

 

During the thirteen weeks ended January 24, 2014, there have been no changes that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

23


 

 

Index 

PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business.  Such matters are subject to many uncertainties and outcomes that are not predictable with assurance and that may not be known for extended periods of time.  Any material legal proceedings are discussed in “Note 9. Commitments and Contingencies - Litigation” in the Notes to Condensed Consolidated Financial Statements and are incorporated herein by reference.  Since the outcome of such lawsuits or other proceedings cannot be predicted with certainty, the costs associated with such proceedings could have a material adverse effect on our consolidated net income, financial position or cash flows.

 

ITEM 1A.  RISK FACTORS

 

Our business faces many risks. Any of the risks referenced below or elsewhere in this Form 10-Q or our other SEC filings could have a material impact on our business and consolidated financial position or results of operations.  Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.

 

For a detailed discussion of the risk factors that should be understood by any investor contemplating investment in our stock, please refer to “Item 1A. Risk Factors” in our 2013 Form 10-K. There has been no material change in the risk factors set forth in our 2013 Form 10-K. 

 

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

 

 

 

Purchase of equity securities by us and our affiliated purchasers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased (1)

 

Average Price Paid per Share (2)

 

Total number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)

 

Maximum Number of Shares that may yet be Purchased under the Plans or Programs (3)

October 26 – November 29, 2013

 

180,000 

 

$

59.8370 

 

180,000 

 

80,200 

November 30 – December 27, 2013

 

98,843 

 

 

67.9960 

 

97,500 

 

982,700 

December 28 - January 24, 2014

 

54,000 

 

 

66.2917 

 

54,000 

 

928,700 

Totals

 

332,843 

 

 

63.2882 

 

331,500 

 

 

 

 

 

 

(1)

Total number of shares purchased includes shares purchased as part of a publicly announced plan and shares purchased to cover employees’ minimum tax withholding obligations related to vested share-based compensation grants.

(2)

Shares are purchased at market price.

(3)

On January 26, 2013, the Board of Directors authorized a program to repurchase up to one million shares. This program was completed early in December 2013. On December 3, 2013 the Board authorized an additional repurchase program of one million shares. This program is expected to be completed by the end of fiscal year 2015.

 

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Index 

 

ITEM 6.   EXHIBITS

 

The exhibits marked with the asterisk symbol (*) are filed, or furnished in the case of Exhibit 32.1, with this Form 10-Q.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit Number

 

Document Description

 

Report or Registration Statement

 

SEC File or Registration Number

 

Exhibit Reference

3.1

 

Amended and Restated Certificate of Incorporation of Cyberonics, Inc.

 

Cyberonics, Inc. Registration Statement on Form S-3 filed on February 21, 2001

 

333-56022

 

3.1

3.2

 

Cyberonics, Inc. Amended and Restated Bylaws

 

Cyberonics, Inc. Current Report on Form 8-K filed on October 26, 2007

 

000-19806

 

3.2(i)

31.1*

 

Certification of the Chief Executive Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

31.2*

 

Certification of the Chief Financial Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

   

 

   

 

   

32.1*

 

Certification of the Chief Executive Officer and Chief Financial Officer of Cyberonics, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

   

 

   

 

   

 

25


 

Index 

 

SIGNATURE

 

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.

 

Date:  February 21, 2014

 

 

 

 

 

   

/s/ GREGORY H. BROWNE

   

Gregory H. Browne

   

Senior Vice President, Finance and Chief Financial Officer

   

(Duly Authorized Officer and Principal Financial Officer)

 

26


 

Index 

 

INDEX TO EXHIBITS

 

The exhibits marked with the asterisk symbol (*) are filed, or furnished in the case of Exhibit 32.1, with this Form 10-Q.

 

 

 

 

 

 

 

 

 

 

Exhibit Number

 

Document Description

 

Report or Registration Statement

 

SEC File or Registration Number

 

Exhibit Reference

3.1

 

Amended and Restated Certificate of Incorporation of Cyberonics, Inc.

 

Cyberonics, Inc. Registration Statement on Form S-3 filed on February 21, 2001

 

333-56022

 

3.1

3.2

 

Cyberonics, Inc. Amended and Restated Bylaws

 

Cyberonics, Inc. Current Report on Form 8-K filed on October 26, 2007

 

000-19806

 

3.2(i)

31.1*

 

Certification of the Chief Executive Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

31.2*

 

Certification of the Chief Financial Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

   

 

   

 

   

32.1*

 

Certification of the Chief Executive Officer and Chief Financial Officer of Cyberonics, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

   

 

   

 

   

 

27