PART 1. FINANCIAL INFORMATION
VASCULAR SOLUTIONS, INC.
Consolidated Balance Sheets
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(unaudited)
|
|
|
(see note)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,046,000
|
|
|
$
|
30,785,000
|
|
Accounts receivable, net of reserves of $315,000 and $200,000 in 2014 and 2013, respectively
|
|
|
15,697,000
|
|
|
|
14,481,000
|
|
Inventories
|
|
|
15,596,000
|
|
|
|
14,002,000
|
|
Prepaid expenses and other
|
|
|
3,184,000
|
|
|
|
2,472,000
|
|
Current portion of deferred tax assets
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Total current assets
|
|
|
76,523,000
|
|
|
|
67,740,000
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
16,920,000
|
|
|
|
16,187,000
|
|
Goodwill
|
|
|
10,510,000
|
|
|
|
10,532,000
|
|
Intangible assets, net
|
|
|
11,108,000
|
|
|
|
11,943,000
|
|
Deferred tax assets, net of current portion and liabilities
|
|
|
2,056,000
|
|
|
|
1,739,000
|
|
Total assets
|
|
$
|
117,117,000
|
|
|
$
|
108,141,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,026,000
|
|
|
$
|
3,762,000
|
|
Accrued compensation
|
|
|
4,325,000
|
|
|
|
4,365,000
|
|
Accrued expenses
|
|
|
3,364,000
|
|
|
|
2,467,000
|
|
Accrued royalties
|
|
|
202,000
|
|
|
|
235,000
|
|
Current portion of deferred revenue and contingent consideration
|
|
|
515,000
|
|
|
|
556,000
|
|
Total current liabilities
|
|
|
12,432,000
|
|
|
|
11,385,000
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue and contingent consideration, net of current portion
|
|
|
304,000
|
|
|
|
406,000
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: Authorized shares – 40,000,000 Issued and outstanding shares – 17,181,767 – 2014; 16,964,953 – 2013
|
|
|
172,000
|
|
|
|
170,000
|
|
Additional paid-in capital
|
|
|
94,573,000
|
|
|
|
92,346,000
|
|
Accumulated other comprehensive earnings
|
|
|
(202,000
|
)
|
|
|
(1,000
|
)
|
Retained earnings
|
|
|
9,838,000
|
|
|
|
3,835,000
|
|
Total shareholders’ equity
|
|
|
104,381,000
|
|
|
|
96,350,000
|
|
Total liabilities and shareholders’ equity
|
|
$
|
117,117,000
|
|
|
$
|
108,141,000
|
|
See accompanying notes
.
Note: The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date.
VASCULAR SOLUTIONS, INC.
Consolidated Statements of Earnings
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
30,606,000
|
|
|
$
|
27,294,000
|
|
|
$
|
60,451,000
|
|
|
$
|
53,271,000
|
|
License and collaboration revenue
|
|
|
71,000
|
|
|
|
59,000
|
|
|
|
133,000
|
|
|
|
147,000
|
|
Total revenue
|
|
|
30,677,000
|
|
|
|
27,353,000
|
|
|
|
60,584,000
|
|
|
|
53,418,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
10,283,000
|
|
|
|
8,538,000
|
|
|
|
19,867,000
|
|
|
|
17,235,000
|
|
Collaboration expenses
|
|
|
20,000
|
|
|
|
8,000
|
|
|
|
31,000
|
|
|
|
8,000
|
|
Research and development
|
|
|
3,228,000
|
|
|
|
3,482,000
|
|
|
|
6,518,000
|
|
|
|
6,887,000
|
|
Clinical and regulatory
|
|
|
1,275,000
|
|
|
|
1,099,000
|
|
|
|
2,575,000
|
|
|
|
2,262,000
|
|
Sales and marketing
|
|
|
7,344,000
|
|
|
|
6,784,000
|
|
|
|
15,080,000
|
|
|
|
13,756,000
|
|
General and administrative
|
|
|
2,731,000
|
|
|
|
2,269,000
|
|
|
|
5,590,000
|
|
|
|
4,509,000
|
|
Medical device excise taxes
|
|
|
353,000
|
|
|
|
339,000
|
|
|
|
698,000
|
|
|
|
656,000
|
|
Amortization of purchased technology and intangibles
|
|
|
412,000
|
|
|
|
392,000
|
|
|
|
823,000
|
|
|
|
759,000
|
|
Total product costs and operating expenses
|
|
|
25,646,000
|
|
|
|
22,911,000
|
|
|
|
51,182,000
|
|
|
|
46,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
5,031,000
|
|
|
|
4,442,000
|
|
|
|
9,402,000
|
|
|
|
7,346,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earnings (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
–
|
|
|
|
(3,000
|
)
|
|
|
–
|
|
|
|
(6,000
|
)
|
Foreign exchange gain (loss)
|
|
|
(1,000
|
)
|
|
|
4,000
|
|
|
|
1,000
|
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
5,030,000
|
|
|
|
4,443,000
|
|
|
|
9,403,000
|
|
|
|
7,331,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(1,825,000
|
)
|
|
|
(1,635,000
|
)
|
|
|
(3,400,000
|
)
|
|
|
(2,398,000
|
)
|
Net earnings
|
|
$
|
3,205,000
|
|
|
$
|
2,808,000
|
|
|
$
|
6,003,000
|
|
|
$
|
4,933,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share – basic
|
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.36
|
|
|
$
|
0.31
|
|
Net earnings per share – diluted
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
See accompanying notes.
VASCULAR SOLUTIONS, INC.
Consolidated Statements of Comprehensive Earnings
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,205,000
|
|
|
$
|
2,808,000
|
|
|
$
|
6,003,000
|
|
|
$
|
4,933,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (losses), net of $0 tax: Foreign currency translation adjustments
|
|
|
102,000
|
|
|
|
75,000
|
|
|
|
(202,000
|
)
|
|
|
(131,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
$
|
3,307,000
|
|
|
$
|
2,883,000
|
|
|
$
|
5,801,000
|
|
|
$
|
4,802,000
|
|
See accompanying notes.
VASCULAR SOLUTIONS, INC.
Consolidated Statements of Cash Flows
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
Operating activities
|
|
|
|
|
|
|
Net earnings
|
|
$
|
6,003,000
|
|
|
$
|
4,933,000
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,564,000
|
|
|
|
1,374,000
|
|
Amortization
|
|
|
823,000
|
|
|
|
759,000
|
|
Stock-based compensation
|
|
|
2,144,000
|
|
|
|
1,787,000
|
|
Deferred taxes, net
|
|
|
(317,000
|
)
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
–
|
|
|
|
(887,000
|
)
|
Change in fair value of contingent consideration
|
|
|
–
|
|
|
|
(79,000
|
)
|
Gain on disposal of equipment
|
|
|
(6,000
|
)
|
|
|
–
|
|
Change in accounts receivable allowance
|
|
|
115,000
|
|
|
|
–
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,332,000
|
)
|
|
|
(514,000
|
)
|
Inventories
|
|
|
(1,596,000
|
)
|
|
|
(67,000
|
)
|
Prepaid expenses and other
|
|
|
(715,000
|
)
|
|
|
(109,000
|
)
|
Accounts payable
|
|
|
266,000
|
|
|
|
596,000
|
|
Accrued expenses and compensation
|
|
|
670,000
|
|
|
|
(129,000
|
)
|
Amortization of deferred license fees and other deferred revenue
|
|
|
(144,000
|
)
|
|
|
181,000
|
|
Net cash provided by operating activities
|
|
|
7,475,000
|
|
|
|
8,921,000
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,302,000
|
)
|
|
|
(2,820,000
|
)
|
Proceeds from the sale of equipment
|
|
|
10,000
|
|
|
|
–
|
|
Net cash used in investing activities
|
|
|
(2,292,000
|
)
|
|
|
(2,820,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(2,290,000
|
)
|
|
|
(1,126,000
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
775,000
|
|
|
|
887,000
|
|
Proceeds from the exercise of stock options and sale of stock, net of expenses
|
|
|
1,600,000
|
|
|
|
2,293,000
|
|
Net cash provided by financing activities
|
|
|
85,000
|
|
|
|
2,054,000
|
|
Increase in cash and cash equivalents
|
|
|
5,268,000
|
|
|
|
8,155,000
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(7,000
|
)
|
|
|
(4,000
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
30,785,000
|
|
|
|
11,554,000
|
|
Cash and cash equivalents at end of period
|
|
$
|
36,046,000
|
|
|
$
|
19,705,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,000
|
|
|
$
|
6,000
|
|
Cash paid for taxes
|
|
$
|
2,892,000
|
|
|
$
|
1,220,000
|
|
See accompanying notes.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements
(1)
|
Basis of Presentation
|
The accompanying unaudited consolidated financial statements of Vascular Solutions, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods.
(2)
|
Net Earnings per Share
|
In accordance with Accounting Standards Codification (ASC) 260,
Earnings Per Share
, basic net earnings per share for the three and six months ended June 30, 2014 and 2013 is computed by dividing net earnings by the weighted average common shares outstanding during the periods presented. Diluted net earnings per weighted average common share is computed by dividing net earnings by the weighted average common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options and restricted stock awards that were outstanding during the period.
Weighted average common shares outstanding for the three and six months ended June 30, 2014 and 2013 were as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Weighted average shares outstanding – basic
|
|
|
16,807,000
|
|
|
|
16,246,000
|
|
|
|
16,761,000
|
|
|
|
16,167,000
|
|
Weighted average shares outstanding – diluted
|
|
|
17,589,000
|
|
|
|
16,855,000
|
|
|
|
17,585,000
|
|
|
|
16,771,000
|
|
In the United States, the Company sells its products and services directly to hospitals and clinics. Revenue is recognized in accordance with generally accepted accounting principles as outlined in ASC 605-10-S99,
Revenue Recognition
, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped and title passes to customers based on FOB shipping point terms. The Company negotiates credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
In all international markets, the Company sells its products to international distributors which subsequently resell the products to hospitals and clinics. The Company has agreements with each of its distributors which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor. The Company warrants that its products are free from manufacturing defects at the time of shipment to the distributor. Revenue is recognized upon shipment of products to distributors following the receipt and acceptance of a distributor’s purchase order. Allowances are provided for estimated returns and costs at the time of shipment. Sales and use taxes are reported on a net basis, excluding them from revenue.
The Company’s revenues from license agreements and research collaborations are recognized when earned. In accordance with ASC 605, for revenues which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit. Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily ASC 605.
The Company currently has a license agreement with King Pharmaceuticals, Inc. (King), now a subsidiary of Pfizer, Inc., under which the Company licensed the exclusive rights of Thrombi-Pad
®
, Thrombi-Gel
®
and Thrombi-Paste
TM
products to King in exchange for a license fee. The Company is amortizing the license fees on a straight-line basis over the projected 10 year economic life of the products. The Company determines the economic life of the products under its license agreements by evaluating similar products the Company has launched or other similar products in the medical industry. In addition, the Company had a five-year license agreement with Nicolai, GmbH in which the Company was amortizing the license fee on a straight-line basis over the five-year life of the agreement. This agreement was fully amortized during 2013.
Starting in January 2012, the Company began to generate revenue from selling a reprocessing service for ClosureFAST
®
radiofrequency catheters. In accordance with ASC 605-45, the Company recognizes this revenue gross, with the amount paid to the supplier of the reprocessing service reflected as cost of sales.
In addition, the Company has reviewed the provisions of ASC 808,
Collaborative Arrangements
, and the adoption of this ASC has had no impact on the amounts recorded under these agreements. In accordance with ASC 605-45-45, the Company includes shipping and handling revenues in net revenue, and shipping and handling costs in cost of sales.
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2017, given that early adoption is not an option. The Company will further study the implications of this statement in order to evaluate the expected impact on the consolidated financial statements.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
Inventories are stated at the lower of cost (weighted average first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories are comprised of the following:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
7,163,000
|
|
|
$
|
6,386,000
|
|
Work-in-process
|
|
|
1,423,000
|
|
|
|
926,000
|
|
Finished goods
|
|
|
7,010,000
|
|
|
|
6,690,000
|
|
|
|
$
|
15,596,000
|
|
|
$
|
14,002,000
|
|
(5)
|
Goodwill and Other Intangible Assets
|
The changes in the carrying amount of goodwill and acquired intangible assets for the six months ended June 30, 2014 are as follows:
|
|
Goodwill
|
|
|
Acquired
Intangibles
|
|
|
|
(unaudited)
|
|
Balance at December 31, 2013
|
|
$
|
10,532,000
|
|
|
$
|
11,943,000
|
|
Amortization
|
|
|
–
|
|
|
|
(823,000
|
)
|
Foreign currency translation adjustments
|
|
|
(22,000
|
)
|
|
|
(12,000
|
)
|
Balance at June 30, 2014
|
|
$
|
10,510,000
|
|
|
$
|
11,108,000
|
|
(6)
|
Credit Risk and Allowance for Doubtful Accounts
|
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on an individual credit evaluation and the specific circumstances of the customer. At June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $245,000 and $150,000, respectively.
All product returns must be pre-approved, and if approved, customers are subject to a 20% restocking charge. The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At June 30, 2014 and December 31, 2013, the sales and return allowance was $70,000 and $50,000, respectively.
Accounts receivable are shown net of the combined total of the allowance for doubtful accounts and allowance for sales returns of $315,000 and $200,000 at June 30, 2014 and December 31, 2013, respectively.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
(7)
|
Concentrations of Credit and Other Risks
|
In the United States, the Company sells its products and services directly to hospitals and clinics. In all international markets, the Company sells its products to distributors who, in turn, sell to hospitals and clinics.
With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral. No single customer represented greater than 10% of gross accounts receivable as of either June 30, 2014 or December 31, 2013. There have been no material losses on customer receivables.
Revenue by geographic destination as a percentage of total net revenue for the six month periods ended June 30, 2014 and 2013 was 83% and 85% in the United States and 17% and 15% in international markets, respectively. Revenues are attributable to countries based on location of the customer. No single customer represented greater than 10% of the total net revenue for the three and six months ended June 30, 2014 and 2013.
(8)
|
Dependence on Key Suppliers
|
The Company purchases certain key components from single-source suppliers. Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company’s financial condition and results of operations.
King Pharmaceuticals
The Company purchases its requirements for thrombin (a component in the Hemostat products) under a Thrombin-JMI Supply Agreement entered into with King on January 9, 2007. Under the terms of the Thrombin-JMI Supply Agreement, King agrees to manufacture and supply thrombin to the Company on a non-exclusive basis. The Thrombin-JMI Supply Agreement does not contain any minimum purchase requirements. King agrees to supply the Company with such quantity of thrombin as the Company may order at a fixed price throughout the term of the Thrombin-JMI Supply Agreement as adjusted for inflation, variations in potency and other factors. The Thrombin-JMI Supply Agreement has an initial term of 10 years, followed by successive automatic one-year extensions, subject to termination by the parties under certain circumstances, including: (i) termination by King without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to the Company, and (ii) termination by the Company without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to King provided that the Device Supply Agreement, which the Company also entered into with King on January 9, 2007, has expired on its terms or the parties have agreed to terminate it.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
(9)
|
Commitments and Contingencies
|
Boston Scientific Corporation Litigation
On May 16, 2013, the Company filed a patent infringement complaint in the United States District Court for the District of Minnesota against Boston Scientific Corporation (Boston Scientific). The complaint alleges that Boston Scientific has infringed three of the Company’s patents concerning rapid exchange guide extension technology by manufacturing and selling its Guidezilla™ guide extension catheter, which received FDA 510(k) clearance in March 2013. The Company is seeking an injunction against Boston Scientific prohibiting the manufacture and sale of its Guidezilla catheter, as well as damages for lost profits and legal costs. On June 10, 2013, the Company filed a motion for preliminary injunction asking the court to enjoin Boston Scientific’s manufacture and sale of the Guidezilla catheter during the pendency of the litigation. On July 11, 2013, Boston Scientific filed its answer and counterclaim, alleging the Company’s patents are invalid, that the Guidezilla catheter does not infringe, and that the Company’s manufacture and sale of its GuideLiner catheter violates a U.S. patent owned by Boston Scientific that expired in June 2013. The counterclaim seeks unspecified damages and payment of Boston Scientific’s attorney’s fees, expenses and costs. On December 9, 2013, the District Court granted the Company’s motion for a preliminary injunction prohibiting Boston Scientific from making, using, offering for sale or selling its Guidezilla catheter during the pendency of the parties’ on-going patent infringement litigation. The District Court delayed the effectiveness of the preliminary injunction until January 13, 2014. On December 27, 2013, Boston Scientific appealed the District Court’s preliminary injunction order to the United States Court of Appeals for the Federal Circuit. On April 15, 2014, the Federal Circuit vacated the preliminary injunction on appeal, holding that “at this stage of the case the record is too incomplete . . . to warrant the grant of a preliminary injunction.” The Federal Circuit’s ruling on the preliminary injunction does not affect the underlying patent litigation, which is currently scheduled to be ready for trial on or after March 2015 in the District Court.
Governmental Proceedings
On June 28, 2011, the Company received a subpoena from the U.S. Attorney’s Office for the Western District of Texas under the Health Insurance Portability & Accountability Act of 1996 (HIPAA) requesting the production of documents related to Vari-Lase products, and in particular the use of the Vari-Lase Short Kit for the treatment of perforator veins. Subsequently, the Company learned that the U.S. Attorney’s Office has commenced a criminal investigation of the same matter. The Vari-Lase Short Kit has been sold under a 510(k) clearance for the treatment of incompetence and reflux of superficial veins in the lower extremity since 2007 with total U.S. sales through June 30, 2014 of approximately $532,000 (0.1% of the Company’s total U.S. sales for such period) and has not been the subject of any reported serious adverse clinical event. On August 14, 2012, the United States District Court for the Western District of Texas unsealed a
qui tam
complaint that had been filed on November 19, 2010 by Desalle Bui, a former sales employee of the Company, which is the basis for the U.S. Attorney’s civil investigation, to which the federal government, after three extensions of time, elected to intervene. The complaint contains allegations of off-label promotion of Vari-Lase products for the treatment of perforator veins, re-use of single-use Vari-Lase products and kickbacks to physicians, resulting in alleged damages to the government of approximately $20 million. An amended complaint limited to allegations of off-label promotion of the Vari-Lase Short Kit resulting in an unspecified amount of damages and penalties was filed by the U.S. Attorney’s Office in December 2012. On January 22, 2014, the Company agreed with the U.S. Attorney’s Office to settle the civil lawsuit. The terms of the settlement are that the Company will make a payment of $520,000, the Company will make no admission of fault or liability, and the U.S. Attorney’s Office will dismiss the civil lawsuit with prejudice and release all civil claims brought against the Company in the civil lawsuit. The formal settlement agreement has been completed but has not yet been signed by the government, and therefore the $520,000 settlement payment is included in accrued expenses as of June 30, 2014 and December 31, 2013. Settlement of the civil lawsuit has no effect upon the criminal investigation, which is continuing.
From time to time, the Company is involved in additional legal proceedings arising in the normal course of business. As of the date of this report, the Company is not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on the Company’s results of operations or financial condition.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
King Agreements
On January 9, 2007, the Company entered into a License Agreement and a Device Supply Agreement with King. Under the License Agreement, the Company licensed the exclusive rights to the Company’s products Thrombi-Pad, Thrombi-Gel and Thrombi-Paste to King in exchange for a one-time license fee. Under the Device Supply Agreement, the Company agreed to manufacture the licensed products for sale to King in exchange for an initial payment. The unamortized license fee was $508,000 and $610,000 at June 30, 2014 and December 31, 2013, respectively. Amortization of the deferred revenue will be $51,000 per quarter for the remainder of the 10-year license period. The amortization of license fee was $102,000 and $103,000 for the six months ended June 30, 2014 and 2013, respectively.
The Company is subject to income tax in numerous jurisdictions and at various rates and the use of estimates is required in determining the provision for income taxes. For the six month periods ended June 30, 2014 and 2013, the Company recorded a provision for taxes of $3,400,000 and $2,398,000 on earnings before tax of $9,403,000 and $7,331,000 resulting in an effective income tax rate of 36% and 33%, respectively. The difference between the effective tax rate of 36% for the six months ended June 30, 2014 and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of state taxes. The difference between the effective tax rate of 33% for the six months ended June 30, 2013 and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of recognizing $300,000 of research and development credits in the first quarter of 2013
that had been deferred from 2012 pending Congressional action which was completed in January 2013 and the recognition of $53,000 of refundable Ireland research and development credits in the second quarter of 2013.
The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable earnings. The Company considers projected future taxable earnings and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized.
The Company applies ASC 740,
Income Taxes
, which clarifies the accounting for uncertainty in tax positions recognized in the financial statements. These provisions create a single model to address uncertainty in tax positions and clarify the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has recorded an unrecognized tax benefit of $1,268,000 as of both June 30, 2014 and December 31, 2013. The impact of tax related interest and penalties is recorded as a component of income tax expense. As of June 30, 2014, the Company has recorded $-0- for the payment of tax related interest and there were no tax penalties or interest recognized in the statements of operations.
The Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as in the Republic of Ireland and various state jurisdictions. At June 30, 2014, tax years 2010 through 2013 remain open to examination.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
(11)
|
Business Combinations and Asset Acquisitions
|
Northeast Scientific
On September 17, 2013, the Company entered into an eight-year reprocessing services agreement with Northeast Scientific, Inc. (NES), a FDA-registered reprocessor of medical devices, whereby the Company paid NES a non-refundable amount of $500,000 for the exclusive right to offer NES’ reprocessing services in the United States for a commercial medical device. NES is pursuing FDA approval for its reprocessing services for the device. If FDA approval is obtained, the Company is required to pay NES a non-refundable amount of $400,000. The agreement has an annual minimum unit termination clause, allowing NES to terminate the agreement if the Company does not meet certain annual minimums following FDA approval.
The Company accounted for the transaction as a non-business asset acquisition in the third quarter of 2013. In accordance with ASC 805, the purchase price of $900,000 was assigned to an intangible asset and no goodwill was recognized. The Company recorded a $400,000 accrual in the third quarter of 2013 for the payment to be made upon FDA approval, in addition to the $500,000 initial payment. The Company will begin amortizing the intangible asset on a per unit basis over the remaining term of the agreement once the Company begins to send units to NES to be reprocessed following FDA approval.
(12)
|
Products and Services
|
The Company has three product categories as follows:
|
·
|
Catheter products
consist principally of catheters used in minimally invasive medical procedures for the diagnosis or treatment of vascular conditions, such as the GuideLiner
®
catheter used to access discrete regions of the coronary anatomy and the Pronto
®
extraction catheters used in treating acute myocardial infarction. This category also includes products used in connection with gaining percutaneous access to the vasculature to perform minimally invasive procedures, such as micro-introducer kits.
|
|
·
|
Hemostat products
consist principally of blood clotting products, such as the D-Stat
®
Dry hemostat, a topical thrombin-based pad with a bandage used to control surface bleeding, and the D-Stat Flowable, a thick yet flowable thrombin-based mixture for preventing bleeding in subcutaneous pockets. This category also includes our line of devices used in radial artery procedures, such as our Accumed
™
wrist positioning splints and Vasc
™
Band inflatable compression bands.
|
|
·
|
Vein products and services
consist principally of the Vari-Lase
®
endovenous laser, a laser console and procedure kit used for the treatment of varicose veins, and a reprocessing service for the ClosureFAST radiofrequency vein ablation catheter.
|
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
The following tables set forth, for the periods indicated, net revenue by product category along with the percent change from the previous period:
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Net
Revenue
|
|
|
Percent
Change
|
|
|
Net
Revenue
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catheter products
|
|
$
|
39,560,000
|
|
|
|
16
|
%
|
|
$
|
34,066,000
|
|
|
|
12
|
%
|
Hemostat products
|
|
|
12,197,000
|
|
|
|
3
|
%
|
|
|
11,806,000
|
|
|
|
1
|
%
|
Vein products and services
|
|
|
8,694,000
|
|
|
|
17
|
%
|
|
|
7,399,000
|
|
|
|
16
|
%
|
Total product revenue
|
|
|
60,451,000
|
|
|
|
13
|
%
|
|
|
53,271,000
|
|
|
|
10
|
%
|
License
|
|
|
133,000
|
|
|
|
(9
|
%)
|
|
|
147,000
|
|
|
|
(16
|
%)
|
Total revenue
|
|
$
|
60,584,000
|
|
|
|
13
|
%
|
|
$
|
53,418,000
|
|
|
|
10
|
%
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Executive Level Overview
Vascular Solutions, Inc. (we, us or Vascular) is focused on bringing clinically advanced solutions to interventional cardiologists, interventional radiologists, electrophysiologists, and vein practices worldwide. As a vertically-integrated medical device company, we generate ideas, create new minimally invasive medical devices, and then deliver these products and related services to physicians through our direct domestic sales force and our international distribution network. We continue to develop new products and new applications for our existing products.
During the past few years, the number of catheterization procedures performed worldwide has been declining gradually due to a number of factors – among them, the effects of weak economies on overall health care utilization rates, efforts by third-party payers to lower costs associated with medical procedures, investigations by government agencies into potential over-utilization of procedures, the implementation by hospitals of policies designed to reduce the incidence of unnecessary procedures in the wake of these outside investigations, and new diagnostic imaging and functional assessment modalities that more effectively screen patients to determine the need for treatment. Although worldwide demographic factors, including the growing incidence of obesity, diabetes, and cardiovascular disease, seem to favor long-term growth in the number of interventional procedures, we believe these recent pressures on utilization rates are likely to result in relatively flat catheterization volumes for the foreseeable future. We intend to remain competitive in this market through the continued introduction of new products and services. We expect to originate these new products and services primarily through our internal research and development and clinical efforts, but we may supplement them with targeted acquisitions or other external collaborations. Additionally, our growth has been, and will continue to be, impacted by our expansion and penetration into new geographic markets, the expansion and penetration of our direct sales organization in existing geographic markets, and our continuing focus on increasing the efficiency of our existing direct sales organization.
Our product portfolio includes a broad spectrum of over 80 products consisting of over 600 stock keeping units (SKUs) covering a wide array of blood clotting devices, extraction catheters, access catheters, guide catheters, micro-introducer kits, guidewires, snare and retrieval devices, a reprocessing service for radiofrequency catheters and endovenous laser and procedure kits for the treatment of varicose veins. Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations in three main categories based on similarities in the products or services sold. We have corporate infrastructure and direct sales capabilities in the United States and have established distribution relationships in most major international markets. In order to drive sales growth, we have invested not only in the expansion of our global distribution system, but also new product development and clinical trials to obtain regulatory approvals. A significant portion of our net revenue historically has been, and we expect to continue to be, attributable to new and enhanced products and services. We expect to continue to further validate the clinical and competitive benefits of our technology platforms to drive utilization of our current products and the development of new and enhanced products and services.
The interventional medical device industry is characterized by intense competition, rapidly evolving technology, and a high degree of government regulation. To grow our business, we have focused on continually developing and commercializing new products. Looking ahead, we expect our business may be impacted by the following trends and opportunities:
|
·
|
The future regulatory approval of newly-developed products
. Any new product that we develop must be approved by the Food and Drug Administration (FDA) in the United States and by similar regulatory bodies in other countries before they can be sold. The requirements for obtaining product approval have undergone change, and the FDA frequently implements changes to the product approval process. We monitor the changing regulatory landscape and modify our regulatory submissions as necessary to obtain product approvals.
|
|
·
|
Successfully integrating acquired products and services into our existing operations
. The acquisition of products and services complementary to our existing product portfolio and customer call points provides an additional business opportunity, but is dependent on the successful integration of the acquired products into our existing business structure.
|
In September 2013, we made an initial payment to Northeast Scientific, Inc. (NES) for the acquisition of exclusive eight-year rights to sell reprocessing services in the U.S. for an existing commercial medical device, pending FDA approval of the reprocessing procedure, which NES is pursuing in 2014. For additional information on this transaction, see Note 11 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q.
|
·
|
Managing intellectual property
. The interventional medical device industry is characterized by numerous patent filings and litigation claims made to protect new and evolving product ideas. To maximize the profitability of new product ideas, we seek patent protection for those product design and method concepts which we believe have the potential to provide substantial product revenue. On October 14, 2013, we reached an agreement with Terumo Corporation and Terumo Medical Corporation (Terumo) to settle a patent and trademark infringement lawsuit brought by Terumo against us related to a prior version of our Vasc Band radial compression device in exchange for a one-time payment to Terumo in the amount of $812,500. On May 16, 2013, we filed a patent and copyright infringement complaint in the U.S. District Court for the District of Minnesota against Boston Scientific Corporation alleging that it is infringing three of our United States patents related to our GuideLiner guide extension product. Boston Scientific filed a counterclaim alleging that our GuideLiner catheter infringes a Boston Scientific patent that expired in June 2013. The Boston Scientific patent litigation is ongoing. Managing intellectual property assets and claims is a significant challenge for our business (For further discussion of the Boston Scientific, see Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q). Managing intellectual property assets and claims is a significant challenge for our business.
|
Results of Operations
The following table sets forth, for the periods indicated, certain items from our statements of earnings expressed as a percentage of net revenue:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
License and collaboration revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
32
|
%
|
Collaboration expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research and development
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
Clinical and regulatory
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Sales and marketing
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
26
|
%
|
General and administrative
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
Medical device excise taxes
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Amortization of purchased technology and intangibles
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Total product costs and operating expenses
|
|
|
84
|
%
|
|
|
84
|
%
|
|
|
84
|
%
|
|
|
86
|
%
|
Operating earnings
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
Other earnings and expenses, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Earnings before income taxes .
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
Income taxes
|
|
|
(6
|
%)
|
|
|
(6
|
%)
|
|
|
(6
|
%)
|
|
|
(5
|
%)
|
Net earnings
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
Three and six months ended June 30, 2014, compared to three and six months ended June 30, 2013
Net revenue increased 12% to $30,677,000 for the quarter ended June 30, 2014 from $27,353,000 for the quarter ended June 30, 2013. This increase in revenue is comprised of the following components:
|
|
% Change
|
|
Volume of existing product and service revenue
|
|
|
14
|
%
|
New product or service introductions, which consist of any product or service that had no revenue in the comparable period in 2013
|
|
|
-
|
%
|
Product and service pricing
|
|
|
(2
|
%)
|
|
|
|
12
|
%
|
Approximately 82% and 85% of our net revenue was earned in the United States and 18% and 15% of our net revenue was earned in international markets for the three month periods ended June 30, 2014 and June 30, 2013, respectively.
Net revenue increased 13% to $60,584,000 for the six months ended June 30, 2014 from $53,418,000 for the six months ended June 30, 2013. This increase in revenue is comprised of the following components:
|
|
% Change
|
|
Volume of existing product and service revenue
|
|
|
15
|
%
|
New product or service introductions, which consist of any product or service that had no revenue in the comparable period in 2013
|
|
|
-
|
%
|
Product and service pricing
|
|
|
(2
|
%)
|
|
|
|
13
|
%
|
Approximately 83% and 85% of our net revenue was earned in the United States and 17% and 15% of our net revenue was earned in international markets for the six month periods ended June 30, 2014 and June 30, 2013, respectively.
We recognized $71,000 and $59,000 of license and collaboration revenue during the three month periods ended June 30, 2014 and 2013, respectively, and $133,000 and $147,000 of license and collaboration revenue during the six month periods ended June 30, 2014 and 2013, respectively, due to our license and device supply agreements with King and our distribution agreement with Nicolai. The 5-year term of the distribution agreement with Nicolai expired on March 31, 2013. Collaboration revenue of $20,000 and $8,000 was recognized during the three months ended June 30, 2014 and 2013, respectively, and collaboration revenue of $31,000 and $8,000 was recognized during the six months ended June 30, 2014 and 2013, respectively, as a result of an agreement we entered into in April 2013 to develop a new hemostatic device for a third party. License and collaboration revenue is expected to be approximately $110,000 for the remainder of 2014.
Gross margin decreased to 66.5% for the quarter ended June 30, 2014, compared to 68.8% for the quarter ended June 30, 2013. The decrease in gross margin was due to a 3% shift in selling mix from United States to international markets, which have lower gross margins, compared to the second quarter of 2013 and approximately $360,000 of costs incurred in the second quarter of 2014 in connection with a worldwide recall of Langston
®
dual lumen catheters, which had no equivalent in the second quarter of 2013. We expect gross margins to be between 67.5% and 68.5% per quarter for the remainder of 2014, subject to variations in our selling mix between United States and international markets and between our lower margin products such as the Vari-Lase products and our higher margin products such as the D-Stat Dry and GuideLiner products. Gross margin decreased to 67.2% for the six month period ended June 30, 2014, compared to 67.7% for the six month period ended June 30, 2013.
Research and development expense for the second quarter of 2014 totaled $3,228,000, or 11% of revenue, compared to $3,482,000, or 13% of revenue, for the second quarter of 2013. Research and development expense for the six month period ended June 30, 2014 totaled $6,518,000 or 11% of revenue, compared to $6,887,000, or 13% of revenue, for the six month period ended June 30, 2013. Research and development expenses have remained constant on a dollar basis compared to the three and six month periods ended June 30, 2013. We expect our continuing research and development expenses to be approximately 11.5% to 12.5% of revenue for the remainder of 2014.
Clinical and regulatory expense for the second quarter of 2014 totaled $1,275,000, or 4% of revenue, compared to $1,099,000, or 4% of revenue, for the second quarter of 2013. Clinical and regulatory expense for the six month period ended June 30, 2014 totaled $2,575,000 or 4% of revenue, compared to $2,262,000, or 4% of revenue, for the six month period ended June 30, 2013. Clinical and regulatory expenses have increased on a dollar basis for the three and six month periods ended June 30, 2014, compared to the three and six month periods ended June 30, 2013, due to additional expenses relating to anticipated future clinical studies. We expect clinical and regulatory expenses to continue to be approximately 4% of revenue for the remainder of 2014.
Sales and marketing expense for the second quarter of 2014 totaled $7,344,000, or 24% of revenue, compared to $6,784,000, or 25% of revenue, for the second quarter of 2013. Sales and marketing expense for the six month period ended June 30, 2014 totaled $15,080,000 or 25% of revenue, compared to $13,756,000, or 26% of revenue, for the six month period ended June 30, 2013. The decrease in sales and marketing expenses as a percentage of revenue for the three and six month periods ended June 30, 2014, compared to the three and six month periods ended June 30, 2013, was due to our ability to continue to increase sales while maintaining our number of field sales employees relatively constant. We expect to maintain the same relative size of our direct U.S. sales force for the remainder of 2014. As result, we expect our sales and marketing expenses as a percentage of revenue to be approximately 23% to 24% for the remainder of 2014.
General and administrative expense for the second quarter of 2014 totaled $2,731,000, or 9% of revenue, compared to $2,269,000, or 9% of revenue, for the second quarter of 2013. General and administrative expense for the six month period ended June 30, 2014 totaled $5,590,000 or 9% of revenue, compared to $4,509,000, or 9% of revenue, for the six month period ended June 30, 2013. General and administrative expenses increased on a dollar basis for the three and six month periods ended June 30, 2014 compared to the three and six month periods ended June 30, 2013 as a result of a $350,000 and $870,000 increase in legal expenses, respectively, primarily related to the patent infringement lawsuit filed against Boston Scientific in May 2013 and the U.S. Attorney’s
qui tam
litigation and criminal investigation (see Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q). While litigation and investigation expenses are difficult to forecast, we expect legal fees to remain at an elevated level for the remainder of 2014 due to these two on-going items. As a result, we expect general and administrative expense to be approximately 8% to 9% of revenue for the remainder of 2014.
Medical device excise taxes for the second quarter of 2014 totaled $353,000, or 1.2% of revenue, compared to $339,000, or 1.2% of revenue, for the second quarter of 2013. Medical device excise taxes for the six month period ended June 30, 2014 totaled $698,000, or 1.2% of revenue, compared to $656,000, or 1.2% of revenue, for the six month period ended June 30, 2013. The statutory rate of the medical device excise tax is 2.3% of revenues on initial sales of finished medical products sold in the United States. The tax does not apply to service revenues or international sales. The Company’s effective rate for this tax is less than the statutory rate due to international sales, service revenues and sales of purchased finished goods (where the seller is responsible for paying the tax). We expect our medical device excise taxes to be approximately 1.2% of revenue for the remainder of 2014.
Amortization of purchased technology and other intangibles was $412,000 and $392,000 for the three months ended June 30, 2014 and 2013, respectively. Amortization of purchased technology and other intangibles was $823,000 and $759,000 for the six months ended June 30, 2014 and 2013, respectively. The amortization resulted from our product and license acquisitions. As part of these asset purchases and licensing agreements, we allocated $16,000,000 to purchased technology and other intangibles that are being amortized over a period of 9 to 11 years. For a complete discussion of the most recent acquisition, see Note 11 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. We expect amortization expense to be approximately $410,000 per quarter for the remainder of 2014.
Income tax expense was $1,825,000 and $3,400,000 for the three and six months ended June 30, 2014, respectively, on earnings before tax of $5,030,000 and $9,403,000, respectively, resulting in an effective income tax rate of 36% for both periods. The difference between the effective tax rate of 36% and the statutory rate of 34%, relates primarily to the impact of state taxes. We expect our effective income tax rate will be approximately 36% per quarter for the remainder of 2014.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $36,046,000 at June 30, 2014 compared to $30,785,000 at December 31, 2013, an increase of $5,261,000. The majority of our cash is maintained in our operating accounts. A portion of our cash equivalents are invested in a money market fund invested in high quality, short-term money market instruments denominated in U.S. dollars such as debt instruments guaranteed by the governments of the United States, Western Europe, Australia, Japan and Canada, high quality corporate issuers and bank obligations. The money market fund’s assets are rated in the highest short-term category by nationally recognized rating agencies, such as Moody’s or Standard & Poor’s.
Cash provided by operations.
We generated $7,475,000 of cash from operations for the six months ended June 30, 2014, primarily resulting from our net earnings of $6,003,000, non-cash depreciation and amortization expense of $2,387,000 and non-cash stock-based compensation of $2,144,000. Cash from operations was reduced by a $1,596,000 increase in inventory, a $1,332,000 increase in our accounts receivable, and a $715,000 increase in prepaid expenses for the six months ended June 30, 2014. These cash reductions were partially off-set by a combined $936,000 increase in accounts payable and accruals. The increase in inventory was consistent with our expectations. The increase in net accounts receivable of 8% for the six month period since December 31, 2013 was due to a 13% increase in net revenue over the same period and days sales outstanding at June 30, 2014 and December 31, 2013 were 49 days and 48 days, respectively.
Cash used for investing activities.
We used $2,292,000 of cash in investing activities for the six months ended June 30, 2014, primarily consisting of the $2,302,000 of capital expenditures relating to the purchase of manufacturing and computer equipment, as well as the purchase of additional research and development equipment.
On February 18, 2014, we entered into a purchase agreement with IRET – Plymouth, LLC (“IRET”) to acquire a manufacturing and office building of approximately 79,300 square feet located at 6464 Sycamore Court North, Maple Grove, Minnesota, for a total purchase price of $7,200,000 (the “Purchase Agreement”). Subject to the satisfaction of certain terms and closing conditions customary for a real estate transaction of this type, the closing is expected to take place on December 1, 2014. Under the terms of the Purchase Agreement, in February 2014, we deposited $400,000 into escrow to be held as earnest money until the closing of the transaction. We currently lease the building and intend to continue to do so until the transaction closes. The building houses our principal manufacturing, research and development and regulatory operations. We intend to expand the manufacturing capacity of the building and move our research and development and regulatory operations into an adjoining office building that we currently own during the remainder of 2014.
Cash provided by financing activities.
We generated $85,000 of cash in financing activities for the six months ended June 30, 2014. This amount was primarily due to the receipt of $895,000 upon the exercise of outstanding stock options and sale of stock, the recognition of $775,000 of excess tax benefits from stock based compensation, and the receipts of $705,000 in exchange for the sale of common stock pursuant to our Employee Stock Purchase Plan. These amounts were reduced by the $2,290,000 of cash used to repurchase 99,644 shares of our common stock that vested under outstanding restricted stock awards to satisfy income tax withholding obligations.
We currently anticipate that we will experience positive cash flow from our normal operating activities for the foreseeable future. We currently believe that our working capital of $64.1 million at June 30, 2014 will be sufficient to meet all of our operating and capital requirements for the foreseeable future.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2014.
Contractual Obligations
The following table summarizes our contractual cash commitments as of June 30, 2014:
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than
5 years
|
|
Purchase of building
|
|
$
|
6,800,000
|
|
|
$
|
6,800,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Facility operating leases
|
|
|
1,136,000
|
|
|
|
909,000
|
|
|
|
227,000
|
|
|
|
-
|
|
|
|
-
|
|
Product license rights
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,336,000
|
|
|
$
|
8,109,000
|
|
|
$
|
227,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We do not have any other significant cash commitments related to supply agreements, nor do we have any other significant commitments for capital expenditures.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are 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. Actual results may differ from these estimates under different assumptions or conditions.
The material accounting policies that we believe are most critical to an investor’s understanding of our financial results and condition and which require complex management judgment are discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Critical Accounting Policies.”
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will likely,” “is expected,” “will continue,” “is anticipated,” “believe,” “estimate,” “projected,” “forecast,” or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Forward-looking statements such as these are based on management’s current expectations as of the date of this report but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: risks associated with patent infringement lawsuits and government criminal investigations, adoption of our new products, limited profitability, exposure to possible product liability claims, the development of new products by others, dependence on third party distributors in international markets, doing business in international markets, the availability of third party reimbursement, actions by the FDA related to our products, the loss of key vendors, and those factors set forth under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Annual Report on Form 10-Q. This list is not exhaustive, and we may supplement this list in any future filing with the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement. We undertake no obligation to, and do not intend to, revise or update publicly any forward-looking statement for any reason.