Basis of Preparation and Summary of Significant Accounting Policies

12 Months Ended

Mar. 31, 2022

Accounting Policies [Abstract]

Basis of Preparation and Summary of Significant Accounting Policies

Note 2. Basis of Preparation and Summary of Significant Accounting Policies

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”) and Regulation S-X. The information presented reflects the application of significant accounting policies described below.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

COVID-19 Pandemic

The Company is subject to additional risks and uncertainties as a result of the ongoing novel coronavirus (“COVID-19”) pandemic. Since March 2020, the ongoing COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s workforce and the operations of its customers, suppliers, and business partners. While the COVID-19 (including new variants of COVID-19) pandemic remains fluid and continues to evolve differently across various geographies, the Company believes it is likely to continue to experience variable impacts on its business.

To ensure the health and safety of its global employees, the Company continues to offer onsite COVID-19 testing and vaccinations in order to maintain a safe working environment. The Company’s proactive testing and vaccination programs have reduced exposure with early detection and enabled its manufacturing facilities to operate at full capacity.

The depth and extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, results of operations, financial condition and individual markets is dependent upon various factors, including the spread of additional variants; the availability of vaccinations, personal protective equipment, intensive care unit (“ICU”) and operating room capacity, and medical staff; and government interventions to reduce the spread of the virus. When COVID-19 infection rates spike in a particular region, the Company’s patient utilization volumes have generally been negatively impacted as hospitals face capacity limitations, staffing shortages and some in-patient treatments have been deferred.

During the first quarter of fiscal year 2022, the Company experienced varying levels of recovery across its product lines and geographic locations from the challenges caused by the pandemic.

However, in the second quarter of fiscal year 2022, patient utilization of Impella heart pump devices was negatively impacted by an increase in COVID-19 hospitalizations and ongoing shortage of hospital workers that limited ICU capacity which contributed to some deferral of elective procedures.

As the Company started the third quarter of fiscal year 2022, patient utilization of Impella heart pump devices continued to be negatively impacted by an increase in COVID-19 hospitalizations in certain geographies due to the Delta variant and ongoing shortage of hospital workers, that limited ICU capacity and contributed to some deferral of elective procedures. However, as Delta cases moderated, patient utilization of Impella heart pump devices increased during the last two months of the third quarter, despite on-going hospital labor shortages and the emergence of the Omicron variant.

During the fourth quarter of fiscal year 2022, the Omicron variant had a pronounced impact on hospital capacity, resources, and procedure volumes in January 2022. While the Company experienced improvements in overall patient utilization in the fourth quarter, the Company continues to closely monitor the impact of COVID-19 on all aspects of its business and geographies, including any impact on the Company’s customers, including the ongoing hospital labor shortages, employees, suppliers, vendors, business partners and distribution channels, as well as on procedures and the demand for its products by keeping apprised of local, regional, and global COVID-19 surges (including new variants of the virus).

While the Company cannot reliably estimate the extent to which the COVID-19 pandemic may impact patient utilization and revenues of its products, the Company's focus is to increase patient utilization of its Impella devices. As of the date of issuance of

these financial statements, the extent to which the COVID-19 pandemic may materially adversely affect the Company’s financial condition, liquidity or results of operations is uncertain.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, property and equipment, goodwill, intangible and other long-lived assets, other investments, accrued expenses, stock-based compensation, income taxes including deferred tax assets and liabilities, contingencies and litigation. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions.

Cash Equivalents and Marketable Securities

The Company classifies any marketable security with an original maturity date of 90 days or less at the time of purchase as a cash equivalent. Cash equivalents are carried on the balance sheet at fair market value. The Company classifies any marketable security with a maturity date of greater than 90 days at the time of purchase as a marketable security and classifies marketable securities with a maturity date of greater than one year from the balance sheet date as long-term marketable securities.

The Company invests in U.S. Treasury securities, government-back securities, corporate debt securities, and commercial paper which are classified as available-for-sale and carried at fair value. The Company records unrealized gains and, to the extent deemed temporary, unrealized losses in stockholders’ equity. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate whether the decline is “other than temporary” and, if so, marks the marketable security to market through a charge reflected on the consolidated statements of operations.

Major Customers and Concentrations of Credit Risk

The Company primarily sells its products to hospitals and distributors. No individual customer accounted for more than 10% of total revenues in fiscal years ended March 31, 2022, 2021 or 2020. No individual customer had an accounts receivable balance greater than 10% of total accounts receivable as of March 31, 2022 and 2021.

Credit is extended based on an evaluation of a customer’s historical financial condition and generally collateral is not required. The Company’s history of credit losses has not been significant and the Company maintains an allowance for credit losses based on its assessment of the collectability of accounts receivable. Accounts receivables are geographically dispersed, primarily throughout the U.S., as well as in Europe and other foreign countries where formal distributor agreements exist in certain countries. The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with macroeconomic pressures or uncertainty, or other customer-specific factors.

Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short and long-term marketable securities and accounts receivable. Management mitigates credit risk by limiting the investment type and maturity to securities that preserve capital, maintain liquidity and have a high credit quality.

Financial Instruments

The Company’s financial instruments are comprised of cash and cash equivalents, marketable securities, accounts receivable, investments, accounts payable, derivative instruments and contingent consideration. The carrying amounts of accounts receivable and accounts payable are considered reasonable estimates of their fair value due to the short-term nature of those instruments.

Derivative Instruments

The Company uses a foreign-exchange-related derivative instrument to manage its exposure related to changes in the exchange rate on its intercompany loan. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments. The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. Changes in the fair value of the cross-currency swap designated as a hedging instrument that effectively offsets the variability of cash flows are reported in accumulated other comprehensive income (loss). These amounts subsequently are reclassified into the consolidated income statement in the same period in which the related hedged item affects earnings. For more information, see “Note 5. Financial Instruments—Derivative Instruments.”

Inventories, net

Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method. The Company regularly reviews inventory quantities on hand and writes down to its net realizable value any inventory that it believes to be impaired. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back up if demand increases.

Property and Equipment, net

Property and equipment are recorded at cost less accumulated depreciation. Land is carried at cost and is not depreciated. Depreciation is computed using the straight-line method based on estimated useful lives of three to seven years for machinery and equipment, computer software, and furniture and fixtures. Building and building improvements are depreciated using the straight-line method over estimated useful lives of seven to thirty-three years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the costs and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operating expenses.

Other Investments

The Company periodically makes investments in medical device companies that focus on heart failure and heart pumps and other medical device technologies. For equity investments that do not have readily determinable market values, the Company measures these equity investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. The Company monitors any events or changes in circumstances that may have a significant effect on the fair value of investments, either due to impairment or based on observable price changes, and makes any necessary adjustments.

Leases

At the inception of a contractual arrangement, the Company determines whether it contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement.

Operating lease assets and liabilities are recognized based on the present value of minimum lease payments over the lease term using an appropriate discount rate. Right-of-use assets also include any lease payments made at or before lease commencement and any initial direct costs incurred and exclude any lease incentives received. The discount rate used is the rate that the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment.

At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability, if readily determinable. If not readily determinable or if the lease does not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate. Discount rates are updated when there is a new lease or a modification to an existing lease, and the methodology is reassessed annually. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company’s leases.

The Company records operating lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets as long-term assets. Leases with an initial term of 12 months or less are not recognized on the consolidated balance sheet. The Company elected the practical expedient where lease agreements with lease and non-lease components are accounted for as a single lease component for all assets.

Lease expense is recognized on a straight-line basis over the lease term.

The Company does not have any finance leases.

Goodwill

Goodwill is recorded when consideration for an acquisition exceeds the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized. The Company evaluates goodwill for impairment at least annually on October 31, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

In applying the goodwill impairment test, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies and overall financial

performance. If, after assessing these qualitative factors, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative impairment test. The Company performed its annual impairment review as of October 31, 2021 and concluded that it was more likely than not that the fair value of its reporting unit substantially exceeds its carrying amount.

Indefinite-Lived Intangibles

In-process research and development ("IPR&D") assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. IPR&D assets represent the fair value assigned to technologies that are acquired, which at the time of acquisition have not reached technological feasibility and have no alternative future use. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis on October 31, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying values. If and when development is complete, which generally occurs upon regulatory approval and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may record a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value. The Company performed its annual impairment review as of October 31, 2021 and concluded that it was more likely than not that the fair value of the IPR&D assets substantially exceeds their carrying amounts.

Acquired In-Process Research and Development

Costs of IPR&D assets acquired as part of an asset acquisition that have no alternative future use are expensed when incurred. Cash payments related to acquired IPR&D with no future alternative use are reflected as an investing cash flow in the Company's consolidated statement of cash flows.

Finite-Lived Intangible Assets

The Company records finite-lived intangible assets at historical cost and amortizes them over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. The approximate useful life used to amortize the Company’s finite-lived intangible asset, the developed technology associated with the Breethe OXY-1 System, is 15 years.

Long-lived Assets

The Company evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows that the asset or asset group is expected to generate. Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment. If an asset or asset group is considered to be impaired, the impairment to be recognized is calculated as the amount by which the carrying amount of the asset or asset group exceeds its fair market value.

Contingent Consideration

Contingent consideration represents potential milestones that the Company could pay as additional consideration for a business acquisition and is recorded as a liability and is measured at fair value using a combination of (1) an income approach, based on various revenue and cost assumptions and applying a probability to each outcome and (2) a Monte-Carlo valuation model that simulates outcomes based on management estimates. With the income approach, probabilities are applied to each potential scenario and the resulting values are discounted using a rate that considers the weighted average cost of capital, the related projections, and the overall business. The Monte-Carlo valuation model simulates estimated future revenues during the earn out-period using management's best estimates. Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these milestones could result in a significantly higher or lower fair value of the contingent consideration liability. The fair value of the contingent consideration at each reporting date is updated by reflecting the changes in fair value reflected within research and development expenses in the Company’s consolidated statement of operations.

Accrued Expenses

As part of the process of preparing its financial statements, the Company is required to estimate accrued expenses. This process includes identifying services that third parties have performed and estimating the level of service performed and the associated cost incurred on these services as of each balance sheet date in its financial statements. Examples of estimated accrued expenses include estimates for certain payroll costs, such as bonuses and commissions; contract service fees, such as amounts due to clinical research organizations and investigators in conjunction with clinical trials; professional service fees, such as attorneys and accountants, and third-party expenses relating to marketing efforts associated with commercialization of the Company’s products. The dates in which certain services commence and end, the level of services performed on or before a given date and the cost of services is often subject to the Company’s judgment. The Company makes these judgments and estimates based upon known facts and circumstances.

Revenue Recognition

See “Note 4. Revenue Recognition” for a discussion of key accounting policies and elections related to revenue recognition.

Product Warranty

The Company generally provides a one-year warranty for certain products sold in which estimated contractual warranty obligations are recorded as an expense at the time of shipment. The Company’s products are subject to regulatory and quality standards. Future warranty costs are estimated based on historical product performance rates and related costs to repair given products. The accounting estimate related to product warranty expense involves judgment in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required.

Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income, plus all changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including any foreign currency translation adjustments. These changes in equity are recorded as adjustments to accumulated other comprehensive income (loss) in the Company’s consolidated balance sheet. The components of accumulated other comprehensive income (loss) consist of foreign currency translation adjustments, unrealized gains (losses) on marketable securities, and unrealized gains (losses) on derivative instruments. There were no reclassifications out of accumulated other comprehensive income (loss) during the fiscal years ended March 31, 2022, 2021 and 2020.

Translation of Foreign Currencies

The functional currency of the Company’s foreign subsidiaries is their local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items in the Company’s consolidated statements of operations are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity.

The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany transactions that the Company considers to be of a long-term investment nature are recorded in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany transactions from those foreign subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statement of operations.

Net foreign currency gains and losses recorded in the consolidated statements of operations for the fiscal year ended March 31, 2022, were $3.0 million and were not material for the fiscal year ended March 31, 2021 and 2020.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the fiscal year. Diluted net income per share is computed using the treasury stock method by dividing net income by the weighted average number of dilutive common shares outstanding during the fiscal year. Diluted shares outstanding is calculated by adding to the weighted average shares outstanding any potential dilutive securities outstanding for the fiscal year. Potential dilutive securities include stock options, restricted stock units, performance-based stock awards and shares to be purchased under the Company’s employee stock purchase plan.

For purposes of the diluted net income per share calculation, potential dilutive securities are excluded from the calculation if their effect would be anti-dilutive.

The Company’s basic and diluted net income per share were as follows:

	Fiscal Years Ended March 31,
	2022		2021		2020
Basic Net Income Per Share	(in thousands, except per share data)
Net income	$	136,505	$	225,525	$	203,009
Weighted average shares - basic		45,445		45,140		45,179
Net income per share - basic	$	3.00	$	5.00	$	4.49

	Fiscal Years Ended March 31,
	2022		2021		2020
Diluted Net Income Per Share	(in thousands, except per share data)
Net income	$	136,505	$	225,525	$	203,009
Weighted average shares - basic		45,445		45,140		45,179
Effect of dilutive securities		436		534		637
Weighted average shares - diluted		45,881		45,674		45,816
Net income per share - diluted	$	2.98	$	4.94	$	4.43

For the fiscal years ended March 31, 2022, 2021 and 2020, approximately 101,000, 168,000 and 232,000 shares of common stock underlying outstanding securities related to out-of-the-money stock options and performance-based awards where milestones were not met were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive or such shares are contingently issuable upon meeting performance criteria in the periods presented.

Stock-Based Compensation

The Company’s stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period.

The fair value of stock option grants is estimated using the Black-Scholes option pricing model. Use of the valuation model requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on historical volatility of the Company’s stock. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. In addition, an expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future. Forfeitures are recorded as they occur. The fair value of market-based restricted stock units is determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements.

For awards with service conditions only, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. For awards with service and performance-based conditions, the Company recognizes stock-based compensation expense using the graded vesting method over the requisite service period. For awards with market-based conditions, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Estimates of stock-based compensation expense for an award with performance conditions are based on the probable outcome of the performance conditions and the cumulative effect of any changes in the probability outcomes are recorded in the period in which the changes occur.

Income Taxes

The Company’s provision for income taxes is comprised of a current and deferred provision. The current income tax provision is calculated as the estimated taxes payable or refundable on income tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future income tax effects attributable to temporary differences and carryforwards using expected tax rates in effect in the years during which the temporary differences are expected to reverse.

Deferred income taxes are recognized for the tax consequences in future years as the differences between the tax bases of assets and liabilities and their financial reporting amounts at each fiscal year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to impact taxable income.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized.

The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit at the largest amount that is more likely than not of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on an ongoing basis, when applicable. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, new information and technical insights, and changes in tax laws. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. When applicable, the Company accrues for the effects of uncertain tax positions and the related potential penalties and interest through income tax expense.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Simplifying the Accounting for Income Taxes (ASC 740).” The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This guidance was effective for the Company for annual and interim periods beginning after December 31, 2020 and early adoption was permitted. The Company adopted this standard as of April 1, 2021 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic323), and Derivatives and Hedging (Topic 815),” an amendment clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivative instruments. The guidance was effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of April 1, 2021 and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Effective

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” an amendment focused on increasing transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. ASU 2021-10 will become effective for the Company in fiscal year 2023. The Company has the option to apply the amendments retrospectively, to all transactions within the scope of the amendment, or prospectively. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

No other new accounting pronouncements issued or effective during the year had, or are expected to have, a material impact on the consolidated financial statements.