##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2008
Commission File No. 000-53478
 
 CARDIOVASCULAR SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Minnesota
    
    No. 41-1698056(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 651 Campus Drive
St. Paul, Minnesota 55112-3495
(Address of Principal Executive Offices)
 Registrants telephone number (651) 259-1600
 
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting Company þ
 o þ




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##### 



Cardiovascular Systems, Inc.
Consolidated Financial Statements
Table of Contents
 PAGEPART I.FINANCIAL INFORMATIONITEM 1. Consolidated Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of December 31, 2008 and
June 30, 2008
    
    
    3Consolidated Statements of Operations for the three and
six months ended December 31, 2008 and 2007
    
    
    4Consolidated Statements of Changes in Shareholders
(Deficiency) Equity and Comprehensive (Loss) Income for
the six months ended December 31, 2008 and year ended June
30, 2008
    
    
    5Consolidated Statements of Cash Flows for the six months
ended December 31, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34ITEM 4T. Controls and Procedures
    
    
    36PART II. OTHER INFORMATION
    
    
    37ITEM 1. Legal Proceedings
    
    
    37ITEM 1A. Risk Factors
    
    
    37ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37ITEM 3. Defaults Upon Senior Securities
    
    
    37ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    37ITEM 5. Other Information
    
    
    37ITEM 6. Exhibits
    
    
    37Signatures
    
    
    38Exhibit Index
    
    
    39EX-10.1Exhibit 10.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Cardiovascular Systems, Inc.
 
 Consolidated Balance Sheets
 (Dollars in Thousands, except per share and share amounts)
 (Unaudited)
 December 31,
    
    
    June 30,2008
    
    
    2008ASSETSCurrent assetsCash and cash equivalents
    
    $
    6,370
    
    
    $
    7,595Accounts receivable, net
    
    
    7,351
    
    
    
    4,897Inventories
    
    
    3,072
    
    
    
    3,776Prepaid expenses and other current assets
    
    
    1,757
    
    
    
    1,936Total current assets
    
    
    18,550
    
    
    
    18,204Auction rate securities put option
    
    
    2,700
    
    
    
    Investments, trading
    
    
    19,500
    
    
    
    Investments, available-for-sale
    
    
    
    
    
    
    21,733Property and equipment, net
    
    
    1,291
    
    
    
    1,041Patents, net
    
    
    1,163
    
    
    
    980Total assets
    
    $
    43,204
    
    
    $
    41,958LIABILITIES AND SHAREHOLDERS (DEFICIENCY) EQUITYCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    27,821
    
    
    $
    11,888Accounts payable
    
    
    4,188
    
    
    
    5,851Accrued expenses
    
    
    5,242
    
    
    
    3,467Deferred revenue
    
    
    
    
    
    
    116Total current liabilities
    
    
    37,251
    
    
    
    21,322Long-term liabilitiesLong-term debt, net of current maturities
    
    
    2,100
    
    
    
    Redeemable convertible preferred stock warrants
    
    
    4,226
    
    
    
    3,986Deferred rent
    
    
    100
    
    
    
    100Total long-term liabilities
    
    
    6,426
    
    
    
    4,086Total liabilities
    
    
    43,677
    
    
    
    25,408Commitments and contingenciesSeries A redeemable convertible preferred stock, no par
value; authorized 5,400,000 shares, issued and
outstanding 4,737,561 at December 31, 2008 and June 30,
2008; aggregate liquidation value $32,334 and $31,230 at
December 31, 2008 and June 30, 2008, respectively
    
    
    52,776
    
    
    
    51,213Series A-1 redeemable convertible preferred stock, no
par value; authorized 2,188,425 shares at December 31,
2008 and June 30, 2008; issued and outstanding 2,188,425
at December 31, 2008 and June 30, 2008; aggregate
liquidation value $20,623 and $19,862 at December 31,
2008 and June 30, 2008, respectively
    
    
    24,379
    
    
    
    23,657Series B redeemable convertible preferred stock, no par
value; authorized 2,162,162 shares, issued and
outstanding 2,162,150 at December 31, 2008 and June 30,
2008; aggregate liquidation value $21,689 and $20,871 at
December 31, 2008 and June 30, 2008, respectively
    
    
    24,084
    
    
    
    23,372Shareholders (deficiency) equityCommon stock, no par value; authorized 70,000,000 common
shares and 5,000,000 undesignated shares at December 31,
2008 and June 30, 2008; issued and outstanding 7,815,413
and 7,575,206 at December 31, 2008 and June 30, 2008,
respectively
    
    
    39,869
    
    
    
    35,933Common stock warrants
    
    
    2,152
    
    
    
    680Accumulated deficit
    
    
    (143,733
    )
    
    
    (118,305
    )Total shareholders (deficiency) equity
    
    
    (101,712
    )
    
    
    (81,692
    )Total liabilities and shareholders (deficiency) equity
    
    $
    43,204
    
    
    $
    41,958
  3




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##### Table of Contents



Cardiovascular Systems, Inc.
 
 Consolidated Statements of Operations
 (Dollars in thousands, except per share and share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    14,004
    
    
    $
    4,631
    
    
    $
    25,650
    
    
    $
    4,631Cost of goods sold
    
    
    4,153
    
    
    
    2,193
    
    
    
    8,034
    
    
    
    2,732Gross profit
    
    
    9,851
    
    
    
    2,438
    
    
    
    17,616
    
    
    
    1,899ExpensesSelling, general and administrative
    
    
    14,949
    
    
    
    9,629
    
    
    
    31,373
    
    
    
    13,181Research and development
    
    
    3,469
    
    
    
    2,996
    
    
    
    8,424
    
    
    
    6,324Total expenses
    
    
    18,418
    
    
    
    12,625
    
    
    
    39,797
    
    
    
    19,505Loss from operations
    
    
    (8,567
    )
    
    
    (10,187
    )
    
    
    (22,181
    )
    
    
    (17,606
    )Other (expense) incomeInterest expense
    
    
    (799
    )
    
    
    
    
    
    
    (1,026
    )
    
    
    (216
    )Interest income
    
    
    2,867
    
    
    
    419
    
    
    
    3,009
    
    
    
    613Impairment on investments
    
    
    (2,233
    )
    
    
    
    
    
    
    (2,233
    )
    
    
    Total other (expense) income
    
    
    (165
    )
    
    
    419
    
    
    
    (250
    )
    
    
    397Net loss
    
    
    (8,732
    )
    
    
    (9,768
    )
    
    
    (22,431
    )
    
    
    (17,209
    )Accretion of redeemable
convertible preferred stock
    
    
    (2,997
    )
    
    
    (353
    )
    
    
    (2,997
    )
    
    
    (5,206
    )Net loss available to common
shareholders
    
    $
    (11,729
    )
    
    $
    (10,121
    )
    
    $
    (25,428
    )
    
    $
    (22,415
    )Loss per common share:Basic and diluted
    
    $
    (1.51
    )
    
    $
    (1.56
    )
    
    $
    (3.29
    )
    
    $
    (3.50
    )Weighted average common shares
used in computation:Basic and diluted
    
    
    7,756,147
    
    
    
    6,508,541
    
    
    
    7,724,197
    
    
    
    6,400,027
  4




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##### Table of Contents



Cardiovascular Systems, Inc.
 
 Consolidated Statements of Changes in Shareholders (Deficiency) Equity and
 Comprehensive (Loss) Income
 (Dollars in thousands, except per share and share amounts)
 (Unaudited)
 AccumulatedOtherCommon Stock
    
    
    
    
    
    
    Accumulated
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Warrants
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Total
    
    
    (Loss) IncomeBalances at June 30, 2007
    
    
    6,267,454
    
    
    
    26,054
    
    
    
    1,366
    
    
    
    (59,716
    )
    
    
    (7
    )
    
    
    (32,303
    )
    
    $
    (15,603
    )Issuance of restricted stock
awards
    
    
    840,138
    
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152Forfeiture of restricted
stock awards
    
    
    (27,834
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and
warrants at $1.00  $8.00 per
share
    
    
    495,448
    
    
    
    2,382
    
    
    
    (570
    )
    
    
    
    
    
    
    
    
    
    
    1,812Expiration of warrants
    
    
    
    
    
    
    116
    
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    Accretion of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,422
    )
    
    
    
    
    
    
    (19,422
    )Stock-based compensation
    
    
    
    
    
    
    6,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,229Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7
    
    
    $
    7Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,167
    )
    
    
    
    
    
    
    (39,167
    )
    
    
    (39,167
    )Balances at June 30, 2008
    
    
    7,575,206
    
    
    $
    35,933
    
    
    $
    680
    
    
    $
    (118,305
    )
    
    $
    
    
    
    $
    (81,692
    )
    
    $
    (39,161
    )Issuance of restricted stock
awards
    
    
    219,682
    
    
    
    2,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,724Forfeiture of restricted
stock awards
    
    
    (76,650
    )
    
    
    (260
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (260
    )Exercise of stock options and
warrants at $5.00-$5.71 per
share
    
    
    97,175
    
    
    
    640
    
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    374Issuance of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    1,814
    
    
    
    
    
    
    
    
    
    
    
    1,814Expiration of Warrants
    
    
    
    
    
    
    76
    
    
    
    (76
    )Accretion of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,997
    )
    
    
    
    
    
    
    (2,997
    )Stock-based compensation
    
    
    
    
    
    
    756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,431
    )
    
    
    
    
    
    
    (22,431
    )
    
    
    (22,431
    )Balances at December 31, 2008
    
    
    7,815,413
    
    
    $
    39,869
    
    
    $
    2,152
    
    
    $
    (143,733
    )
    
    $
    
    
    
    $
    (101,712
    )
    
    $
    (22,431
    )
  5




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##### Table of Contents



Consolidated Statements Cash Flows
(Dollars in thousands, except per share and share amounts)
(Unaudited)
 Six Months EndedDecember 31,2008
    
    
    2007Cash flows from operating activitiesNet loss
    
    $
    (22,431
    )
    
    $
    (17,209
    )Adjustments to reconcile net loss to net cash used in operationsDepreciation and amortization of property and equipment
    
    
    178
    
    
    
    104Provision for doubtful accounts
    
    
    85
    
    
    
    58Amortization of patents
    
    
    18
    
    
    
    28Change in carrying value of the convertible preferred stock
warrants
    
    
    165
    
    
    
    216Amortization of debt discount
    
    
    551
    
    
    
    Stock-based compensation
    
    
    3,220
    
    
    
    4,946Amortization of discount on investments
    
    
    
    
    
    
    (45
    )Impairment on investments
    
    
    2,233
    
    
    
    Gain on auction rate securities put option
    
    
    (2,700
    )
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    (2,539
    )
    
    
    (2,052
    )Inventories
    
    
    704
    
    
    
    (1,978
    )Prepaid expenses and other current assets
    
    
    149
    
    
    
    (1,066
    )Accounts payable
    
    
    (1,680
    )
    
    
    236Accrued expenses and deferred rent
    
    
    1,822
    
    
    
    310Deferred revenue
    
    
    (116
    )
    
    
    1,132Net cash used in operations
    
    
    (20,341
    )
    
    
    (15,320
    )Cash flows from investing activitiesExpenditures for property and equipment
    
    
    (428
    )
    
    
    (438
    )Purchases of investments
    
    
    
    
    
    
    (27,319
    )Sales of investments
    
    
    
    
    
    
    10,774Costs incurred in connection with patents
    
    
    (201
    )
    
    
    (138
    )Net cash used in investing activities
    
    
    (629
    )
    
    
    (17,121
    )Cash flows from financing activitiesProceeds from sale of redeemable convertible preferred stock
    
    
    
    
    
    
    30,296Payment of offering costs
    
    
    
    
    
    
    (34
    )Issuance of common stock warrants
    
    
    1,814
    
    
    
    Issuance of convertible preferred stock warrants
    
    
    75
    
    
    
    Exercise of stock options and warrants
    
    
    374
    
    
    
    1,359Proceeds from long-term debt
    
    
    17,893
    
    
    
    Payments on long-term debt
    
    
    (411
    )
    
    
    Net cash provided by financing activities
    
    
    19,745
    
    
    
    31,621Net decrease in cash and cash equivalents
    
    
    (1,225
    )
    
    
    (820
    )Cash and cash equivalentsBeginning of period
    
    
    7,595
    
    
    
    7,908End of period
    
    $
    6,370
    
    
    $
    7,088
  6




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 1. Business Overview
 Company Description
  Accounting
and Reporting by Development Stage Enterprises
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Interim Financial Statements
  7




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 Concentration of Credit Risk
  Fair Value of Financial Instruments
 Fair Value Measurements Effective Date
of FASB Statement No. 157,
  Level 1 Inputs
 Level 2 Inputs
 Level 3 Inputs
  Level 3Auction RateAvailable-for-
    
    
    Trading
    
    
    Securities PutSale Securities
    
    
    Securities
    
    
    OptionBalance at June 30, 2008
    
    $
    21,733
    
    
    $
    
    
    
    $
    Transfer to trading securities
    
    
    (21,733
    )
    
    
    21,733
    
    
    
    Unrealized loss on investments not previously recognized in earnings
    
    
    
    
    
    
    (343
    )
    
    
    Gain on auction rate securities put option
    
    
    
    
    
    
    
    
    
    
    2,700Impairment on investments
    
    
    
    
    
    
    (1,890
    )
    
    
    Balance at December 31, 2008
    
    $
    
    
    
    $
    19,500
    
    
    $
    2,700
  Use of Estimates
  Revenue Recognition
 Revenue Recognition Revenue
Arrangements with Multiple Deliverables
 8




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
     Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157,
 Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB
No. 51
 9




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
  3. Going Concern
    10




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 4. Selected Consolidated Financial Statement Information
 Inventories
   December 31,
    
    
    June 30,2008
    
    
    2008InventoriesRaw materials
    
    $
    1,551
    
    
    $
    2,338Work in process
    
    
    174
    
    
    
    117Finished goods
    
    
    1,347
    
    
    
    1,321$
    3,072
    
    
    $
    3,776
 Investments
        11




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
        12




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
  5. Debt
 Loan and Security Agreement with Silicon Valley Bank
  
    
    The $3,000 term loan has a fixed interest rate of 10.5% and a final payment amount equal
to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity, with
repayment terms that include interest only payments during the first six months followed by
30 equal principal and interest payments. This term loan also includes an acceleration
provision that requires the Company to pay the entire outstanding balance, plus a penalty
ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence and
continuance of an event of default. As part of the term loan agreement, the Company granted
Silicon Valley Bank a warrant to purchase 13,000 shares of Series B redeemable convertible
preferred stock at an exercise price of $9.25 per share. This warrant was assigned a value
of $75 for accounting purposes, is immediately exercisable, and expires ten years after
issuance. The balance outstanding on the term loan at December 31, 2008 was $3,000.
    
    The accounts receivable line of credit has a two year maturity and a floating interest
rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on
borrowings is due monthly and the principal balance is due at maturity. Borrowings on the
line of credit are based on 80% of eligible domestic receivables, which is defined as
receivables aged less than 90 days from the invoice date along with specific exclusions for
contra-accounts, concentrations, and government receivables. The Companys accounts
receivable receipts are deposited into a lockbox account in the name of Silicon Valley Bank.
The accounts receivable line of credit is subject to non-use fees, annual fees, cancellation
fees, and maintaining a minimum liquidity ratio. There was no balance outstanding on the
line of credit at December 31, 2008.
    
    One of the guaranteed term loans is for $3,000 and the other guaranteed term loan is for
$2,500, each with a one year maturity. Each of the guaranteed term loans has a floating
interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of 7.0%
(effective rate of 7.0% at December 31, 2008). Interest on borrowings is due monthly and the
principal balance is due at maturity. One of the Companys directors and shareholders and
two entities who hold the Companys preferred shares and are also affiliated with two of the
Companys directors agreed to act as guarantors of these term loans. In consideration for
guarantees, the Company issued the guarantors warrants to purchase an aggregate of
458,333 shares of the Companys common stock at an exercise price of $6.00 per share. The
balance outstanding on the guaranteed term loans at December 31, 2008 was $5,500 (excluding
debt discount of $1,338).
   Loan Payable
  13




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
    Six months ending June 30, 2009
    
    $
    22,1142010
    
    
    6,3072011
    
    
    1,2002012
    
    
    300Total
    
    $
    29,921Less: Current Maturities
    
    
    (27,821
    )Long-term debt
    
    $
    2,100
 6. Common Stock Warrants
  Warrants
    
    
    Price RangeOutstanding
    
    
    per ShareWarrants outstanding at June 30, 2008
    
    
    244,274
    
    
    $
    1.00 - $8.00Warrants issued
    
    
    458,333
    
    
    $
    6.00Warrants exercised
    
    
    (25,175
    )
    
    $
    5.00Warrants expired
    
    
    (13,300
    )
    
    $
    5.00-8.00Warrants outstanding at December 31, 2008
    
    
    664,132
    
    
    $
    1.00 - $8.00
  Six Months EndedDecember 31,2008Weighted average fair value of warrants granted
    
    $
    6.17Risk-free interest rates
    
    
    3.01
    %Expected life
    
    5 yearsExpected volatility
    
    
    46.7
    %Expected dividends
    
    None
 14




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 7. Stock Options and Restricted Stock Awards
   Number ofGrant Type
    
    SharesService based stock options (2007 Plan)
    
    
    1,383,364Performance based stock options (2007 Plan)
    
    
    775,000Service based stock options (2003 Plan)
    
    
    663,583Total
    
    
    2,821,947
    (1)Restricted stock awards (2007 Plan)
    
    
    1,059,820
 
 (1)
    
    Excludes 70,000 shares of service based stock options granted outside
of the plans.    WeightedShares Available
    
    Number of
    
    Averagefor Grant(a)
    
    Options(b)
    
    Exercise PriceOptions outstanding at June 30, 2008
    
    
    841,636
    
    
    
    5,878,141
    
    
    
    6.59Shares reserved
    
    
    379,397
    
    
    
    Options exercised
    
    
    
    
    
    
    (72,000
    )
    
    
    5.05Options forfeited or expired
    
    
    
    
    
    
    (70,667
    )
    
    
    6.00Options outstanding at December 31, 2008
    
    
    1,221,033
    
    
    
    5,735,474
    
    
    
    6.61
 15




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 
 (a)
    
    Excludes the effect of options granted, exercised, forfeited or
expired related to activity from options granted outside the stock
option plans described above; excludes the effect of restricted stock
awards granted or forfeited under the 2007 Plan.(b)
    
    Includes the effect of options granted, exercised, forfeited or
expired from the 1991 Plan, 2003 Plan, 2007 Plan, and options granted
outside the stock option plans described above.  2008Weighted average fair value of options granted
    

    $3.74Risk-free interest rates
    

    2.45% - 4.63%Expected life
    
    3.5 - 6 yearsExpected volatility
    

    43.1% - 46.4%Expected dividends
    
    None
    WeightedNumber of
    
    
    Average FairShares
    
    
    ValueRestricted stock awards outstanding at June 30, 2008
    
    
    812,304
    
    
    
    9.50Restricted stock awards granted
    
    
    219,682
    
    
    
    10.32Restricted stock awards forfeited
    
    
    (76,650
    )
    
    
    10.36Restricted stock awards outstanding at December 31, 2008
    
    
    955,336
    
    
    $
    9.67
 16




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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 8. Redeemable Convertible Preferred Stock and Convertible Preferred Stock Warrants
      Dividends
  Conversion
   17




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##### Table of Contents



CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 Redemption
  Liquidation
  Voting Rights
  Registration Rights
  9. Commitment and Contingencies
 Shturman Legal Proceedings
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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
  ev3 Legal Proceedings
   
    
    Individual defendants violated provisions in their employment agreements with their
former employer FoxHollow, barring them from misusing FoxHollow confidential information.
    
    Individual defendants violated a provision in their FoxHollow employment agreements
barring them, for a period of one year following their departure from FoxHollow, from
soliciting or encouraging employees of FoxHollow to join the Company.
    
    Individual defendants breached a duty of loyalty owed to FoxHollow.
    
    The Company and individual defendants misappropriated trade secrets of one or more of the
Plaintiffs.
    
    All defendants engaged in unfair competition.
    
    The Company tortiously interfered with the contracts between FoxHollow and individual
defendants by allegedly procuring breaches of the non-solicitation/encouragement provision
in those agreements, and an individual defendant tortiously interfered with the contracts
between certain individual defendants and FoxHollow by allegedly procuring breaches of the
confidential information provision in those agreements.
    
    All defendants conspired to gain an unfair competitive and economic advantage for the
Company to the detriment of the Plaintiffs.
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CARDIOVASCULAR SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (For the three and six months ended December 31, 2008 and 2007)
(dollars in thousands, except per share and share amounts)
(unaudited)
 10. Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007NumeratorNet loss available in basic calculation
    
    $
    8,732
    
    
    $
    9,768
    
    
    $
    22,431
    
    
    $
    17,209Plus: Accretion of redeemable
convertible preferred stock(a)
    
    
    2,997
    
    
    
    353
    
    
    
    2,997
    
    
    
    5,206Loss available to common shareholders
    
    $
    11,729
    
    
    $
    10,121
    
    
    $
    25,428
    
    
    $
    22,415DenominatorWeighted average common shares  basic
    
    
    7,756,147
    
    
    
    6,508,541
    
    
    
    7,724,197
    
    
    
    6,400,027Effect of dilutive stock options and
warrants(b)(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares
outstanding  diluted
    
    
    7,756,147
    
    
    
    6,508,541
    
    
    
    7,724,197
    
    
    
    6,400,027Loss per common share  basic and
diluted
    
    $
    (1.51
    )
    
    $
    (1.56
    )
    
    $
    (3.29
    )
    
    $
    (3.50
    )
 
 (a)
    
    The calculation for accretion of redeemable convertible preferred
stock marks the redeemable convertible preferred stock to fair value,
which equals or exceeds the amount of any undeclared dividends on the
redeemable convertible preferred stock.(b)
    
    At December 31, 2008 and 2007, 1,339,571 and 1,032,113 warrants,
respectively, were outstanding. The effect of the shares that would be
issued upon exercise of these warrants has been excluded from the
calculation of diluted loss per share because those shares are
anti-dilutive.(c)
    
    At December 31, 2008 and 2007, 5,735,474 and 5,986,595 stock options,
respectively, were outstanding. The effect of the shares that would be
issued upon exercise of these options has been excluded from the
calculation of diluted loss per share because those shares are
anti-dilutive. 11. Initial Public Offering Costs
  12. Reverse Merger Agreement
   20




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
   
    
 21




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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
  22




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Revenue Recognition. Revenue Recognition Revenue Arrangements with Multiple
Deliverables
  Investments.
    23




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24




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Excess and Obsolete Inventory.
 Stock-Based Compensation. Share-Based Payment Accounting for Stock Issued to Employees
  
    
    our common stocks volatility;
    
    the length of our options lives, which is based on future exercises and cancellations;
    
    the number of shares of common stock pursuant to which options which will ultimately be forfeited;
    
    the risk-free rate of return; and
    
    future dividends.
 Share-Based Payment
  25




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Valuation as of December 31, 2008
  Valuation as of September 30, 2008
  Valuation as of June 30, 2008
    Fair Market Value per ShareAssigned by Management andDate of Restricted Stock Award Grant
    
    Number of Shares
    
    Board of DirectorsDecember 15, 2008
    
    
    38,689
    
    
    $
    10.77October 21, 2008
    
    
    19,170
    
    
    $
    10.36July 22, 2008
    
    
    161,823
    
    
    $
    10.22April 22, 2008
    
    
    253,600
    
    
    $
    10.27April 14, 2008
    
    
    75,000
    
    
    $
    10.27February 14, 2008
    
    
    307,200
    
    
    $
    9.36December 12, 2007
    
    
    204,338
    
    
    $
    8.44
 Preferred Stock. Presentation in Financial
Statements of Redeemable Preferred Stocks
 26




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##### Table of Contents



Classification and Measurement of Redeemable Securities
  Series A
    
    Series A-1
    
    Series BDate
    
    Convertible Preferred Stock
    
    Convertible Preferred Stock
    
    Convertible Preferred StockDecember 31, 2008
    
    
    11.14
    
    
    
    11.14
    
    
    
    11.14September 30, 2008
    
    
    10.81
    
    
    
    10.81
    
    
    
    10.81June 30, 2008
    
    
    10.81
    
    
    
    10.81
    
    
    
    10.81
 Preferred Stock Warrants. Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
 RESULTS OF OPERATIONS
  Three Months Ended December 31,
    
    
    Six Months Ended December 31,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeRevenues
    
    $
    14,004
    
    
    $
    4,631
    
    
    
    202.4
    %
    
    $
    25,650
    
    
    $
    4,631
    
    
    
    453.9
    %Cost of goods sold
    
    
    4,153
    
    
    
    2,193
    
    
    
    89.4
    
    
    
    8,034
    
    
    
    2,732
    
    
    
    194.1Gross profit
    
    
    9,851
    
    
    
    2,438
    
    
    
    304.1
    
    
    
    17,616
    
    
    
    1,899
    
    
    
    827.6Expenses:Selling, general and administrative
    
    
    14,949
    
    
    
    9,629
    
    
    
    55.2
    
    
    
    31,373
    
    
    
    13,181
    
    
    
    138.0Research and development
    
    
    3,469
    
    
    
    2,996
    
    
    
    15.8
    
    
    
    8,424
    
    
    
    6,324
    
    
    
    33.2Total expenses
    
    
    18,418
    
    
    
    12,625
    
    
    
    45.9
    
    
    
    39,797
    
    
    
    19,505
    
    
    
    104.0Loss from operations
    
    
    (8,567
    )
    
    
    (10,187
    )
    
    
    15.6
    
    
    
    (22,181
    )
    
    
    (17,606
    )
    
    
    26.0Other (expense) income:Interest expense
    
    
    (799
    )
    
    
    
    
    
    
    100.0
    
    
    
    (1,026
    )
    
    
    (216
    )
    
    
    375.0Interest income
    
    
    2,867
    
    
    
    419
    
    
    
    584.2
    
    
    
    3,009
    
    
    
    613
    
    
    
    390.9Impairment on investments
    
    
    (2,233
    )
    
    
    
    
    
    
    100.0
    
    
    
    (2,233
    )
    
    
    
    
    
    
    100.0Total other (expense) income
    
    
    (165
    )
    
    
    419
    
    
    
    139.4
    
    
    
    (250
    )
    
    
    397
    
    
    
    163.0Net loss
    
    
    (8,732
    )
    
    
    (9,768
    )
    
    
    10.6
    
    
    
    (22,431
    )
    
    
    (17,209
    )
    
    
    30.3Accretion of redeemable convertible preferred stock
    
    
    (2,997
    )
    
    
    (353
    )
    
    
    749.0
    
    
    
    (2,997
    )
    
    
    (5,206
    )
    
    
    42.4Net loss available to common shareholders
    
    $
    (11,729
    )
    
    $
    (10,121
    )
    
    
    15.9
    %
    
    $
    (25,428
    )
    
    $
    (22,415
    )
    
    
    13.4
    %
 Comparison of Three Months Ended December 31, 2008 with Three Months Ended December 31, 2007
 27




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Revenues.
 Revenue Arrangements with Multiple Deliverables
 Cost of Goods Sold.
 Selling, General and Administrative Expenses.
 Research and Development Expenses.
 Interest Income.
 Interest Expense.
 Impairment on Investments.
 28




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Accretion of Redeemable Convertible Preferred Stock.
 Comparison of the Six Months Ended December 31, 2008 with Six Months Ended December 31,
2007
 Revenues.
 Revenue Arrangements with Multiple Deliverables
 Cost of Goods Sold.
 Selling, General and Administrative Expenses.
 Research and Development Expenses.
 Interest Income.
 Interest Expense.
 Impairment on Investments.
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##### Table of Contents



Accretion of Redeemable Convertible Preferred Stock.
 LIQUIDITY AND CAPITAL RESOURCES
     
    
    The $3.0 million term loan has a fixed interest rate of 10.5% and a final payment amount
equal to 3.0% of the loan amount due at maturity. This term loan has a 36 month maturity,
with repayment terms that include interest only payments during the first six months
followed by 30 equal principal and interest payments. This term loan also includes an
acceleration provision that requires us to pay the entire outstanding balance, plus a
penalty ranging from 1.0% to 6.0% of the principal amount, upon prepayment or the occurrence
and continuance of an event of default. As part of the term loan agreement, we granted
Silicon Valley Bank a warrant to purchase 13,000 shares of Series B redeemable convertible
preferred stock at an exercise price of $9.25 per share. This warrant was assigned a value
of $75,000 for accounting purposes, is immediately exercisable, and expires ten years after
issuance. The balance outstanding on the term loan at December 31, 2008 was $3.0 million.
 30




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
    
    The accounts receivable line of credit has a two year maturity and a floating interest
rate equal to the prime rate, plus 2.0%, with an interest rate floor of 7.0%. Interest on
borrowings is due monthly and the principal balance is due at maturity. Borrowings on the
line of credit are based on 80% of eligible domestic receivables, which is defined as
receivables aged less than 90 days from the invoice date along with specific exclusions for
contra-accounts, concentrations, and government receivables. Accounts receivable receipts
are deposited into a lockbox account in the name of Silicon Valley Bank. The accounts
receivable line of credit is subject to non-use fees, annual fees, cancellation fees, and
maintaining a minimum liquidity ratio. There was no balance outstanding on the line of
credit at December 31, 2008.
    
    One of the guaranteed term loans is for $3.0 million and the other guaranteed term loan
is for $2.5 million, each with a one year maturity. Each of the guaranteed term loans has a
floating interest rate equal to the prime rate, plus 2.25%, with an interest rate floor of
7.0% (effective rate of 7.0% at December 31, 2008). Interest on borrowings is due monthly
and the principal balance is due at maturity. One of our directors and shareholders and two
entities who hold preferred shares and are also affiliated with two of our directors agreed to
act as guarantors of these term loans. In consideration for guarantees, we issued the
guarantors warrants to purchase an aggregate of 458,333 shares of our common stock at an
exercise price of $6.00 per share. The balance outstanding on the guaranteed term loans at
December 31, 2008 was $5.5 million (excluding debt discount of $1.3 million).
     Cash and Cash Equivalents.
 Investments.
   31




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Operating Activities.
 Investing Activities.
 Financing Activities.
 
    
    issuance of common stock warrants of $1.8 million during the six months ended December 31, 2008;
    
    proceeds from long-term debt of $17.9 million during the six months ended December 31, 2008;
    
    exercise of stock options and warrants of $374,000 and $1.4 million during the six months ended
December 31, 2008 and 2007, respectively; and
    
    net proceeds from the issuance of convertible preferred stock of $30.3 million in the six
months ended December 31, 2007
  
    
    Payment of long-term debt of $411,000 during the six months ended December 31, 2008
  32




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INFLATION
  OFF-BALANCE SHEET ARRANGEMENTS
  RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value Measurements Effective Date of FASB Statement No. 157,
 Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB
No. 51
 PRIVATE SECURITIES LITIGATION REFORM ACT
  33




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www.sec.gov
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     34




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35




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ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  36




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PART II.  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS
  37




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SIGNATURES
  Dated: February 13, 2009
    
    CARDIOVASCULAR SYSTEMS, INC.By
    
    /s/ David L. MartinDavid L. MartinPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ Laurence L. BetterleyLaurence L. BetterleyChief Financial Officer(Principal Financial and Accounting Officer)
 38




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Exhibit No.
    
    Description**10.1
    
    Acceptance of offer from UBS relating to auction rate
securities, dated November 7, 2008.**10.2
    
    Amendment No. 5 to Stockholders Agreement, dated February 13, 2009.**31.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002**32.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**32.2
    
    Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    Filed herewith 39