Quarterly Report (10-q)

Date : 11/08/2019 @ 9:07PM
Source : Edgar (US Regulatory)
Stock : Merit Medical Systems Inc (MMSI)
Quote : 40.91  0.38 (0.94%) @ 11:00PM
After Hours
Last Trade
Last $ 40.91 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED                           September 30, 2019

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                TO                     .

Commission File Number   0-18592

GRAPHIC

MERIT MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Utah

    

87-0447695

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

1600 West Merit Parkway, South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (801) 253-1600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, no par

MMSI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

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

Common Stock

    

55,208,840

Title or class

Number of Shares
Outstanding at November 5, 2019

TABLE OF CONTENTS

PART I.

   

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

3

Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018

5

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018

6

Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018

7

Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

9

Condensed Notes to Consolidated Financial Statements

11

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

45

PART II.

OTHER INFORMATION

47

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 6.

Exhibits

48

SIGNATURES

49

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(In thousands)

    

September 30, 

    

December 31, 

    

2019

    

2018

ASSETS

 

(unaudited)

 

  

CURRENT ASSETS:

 

  

 

  

Cash and cash equivalents

$

37,315

$

67,359

Trade receivables — net of allowance for uncollectible accounts — 2019 — $2,848 and 2018 — $2,355

 

144,683

 

137,174

Other receivables

 

11,751

 

11,879

Inventories

 

216,766

 

197,536

Prepaid expenses and other current assets

 

17,610

 

11,326

Prepaid income taxes

 

3,611

 

3,627

Income tax refund receivables

 

9,566

 

933

Total current assets

 

441,302

 

429,834

PROPERTY AND EQUIPMENT:

 

  

 

  

Land and land improvements

 

27,412

 

26,801

Buildings

 

152,782

 

151,251

Manufacturing equipment

 

234,121

 

221,029

Furniture and fixtures

 

59,487

 

54,765

Leasehold improvements

 

36,992

 

33,678

Construction-in-progress

 

85,703

 

53,491

Total property and equipment

 

596,497

 

541,015

Less accumulated depreciation

 

(229,596)

 

(209,563)

Property and equipment — net

 

366,901

331,452

OTHER ASSETS:

 

  

 

  

Intangible assets:

 

  

 

  

Developed technology — net of accumulated amortization —2019 — $137,551 and 2018 — $102,357

 

390,796

 

383,147

Other — net of accumulated amortization — 2019 — $62,378 and 2018 — $49,136

 

68,111

 

79,566

Goodwill

 

352,158

 

335,433

Deferred income tax assets

 

2,944

 

3,001

Right-of-use operating lease assets

79,757

Other assets

 

59,735

 

57,579

Total other assets

 

953,501

 

858,726

TOTAL

$

1,761,704

$

1,620,012

See condensed notes to consolidated financial statements.

(continued)

3

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(In thousands)

    

September 30, 

    

December 31, 

    

2019

    

2018

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

(unaudited)

    

  

CURRENT LIABILITIES:

 

  

  

Trade payables

$

52,387

$

54,024

Accrued expenses

 

80,486

 

96,173

Current portion of long-term debt

 

7,500

 

22,000

Short-term operating lease liabilities

11,652

Income taxes payable

 

1,188

 

3,146

Total current liabilities

 

153,213

 

175,343

LONG-TERM DEBT

 

432,456

 

373,152

DEFERRED INCOME TAX LIABILITIES

 

58,290

 

56,363

LONG-TERM INCOME TAXES PAYABLE

 

392

 

392

LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS

 

3,013

 

3,013

DEFERRED COMPENSATION PAYABLE

 

13,497

 

11,219

DEFERRED CREDITS

 

2,157

 

2,261

LONG-TERM OPERATING LEASE LIABILITIES

72,056

 

OTHER LONG-TERM OBLIGATIONS

 

77,389

 

65,494

Total liabilities

 

812,463

 

687,237

COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 14 and 15)

 

  

 

  

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock — 5,000 shares authorized as of September 30, 2019 and December 31, 2018; no shares issued

 

 

Common stock, no par value; shares authorized — 2019 and 2018 - 100,000; issued and outstanding as of September 30, 2019 - 55,208 and December 31, 2018 - 54,893

 

584,161

 

571,383

Retained earnings

 

373,174

 

363,425

Accumulated other comprehensive loss

 

(8,094)

 

(2,033)

Total stockholders’ equity

 

949,241

 

932,775

TOTAL

$

1,761,704

$

1,620,012

See condensed notes to consolidated financial statements.

(concluded)

4

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands, except per share amounts - unaudited)

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

NET SALES

$

243,049

$

221,659

$

736,930

$

649,504

COST OF SALES

 

138,913

 

119,620

 

416,194

 

359,400

GROSS PROFIT

 

104,136

 

102,039

 

320,736

 

290,104

OPERATING EXPENSES:

 

  

 

  

 

  

 

  

Selling, general and administrative

 

86,936

 

66,382

 

245,183

 

200,389

Research and development

 

16,987

 

14,525

 

49,361

 

44,163

Intangible asset impairment charge

 

2,702

 

657

 

3,250

 

657

Contingent consideration expense (benefit)

 

392

 

(661)

 

3,573

 

(442)

Acquired in-process research and development

 

 

75

 

525

 

382

Total operating expenses

 

107,017

 

80,978

 

301,892

 

245,149

INCOME (LOSS) FROM OPERATIONS

 

(2,881)

 

21,061

 

18,844

 

44,955

OTHER INCOME (EXPENSE):

 

  

 

  

 

  

 

  

Interest income

 

328

 

359

 

1,027

 

847

Interest expense

 

(3,415)

 

(2,329)

 

(9,295)

 

(8,064)

Other income (expense) - net

 

278

 

294

 

(421)

 

(429)

Total other expense — net

 

(2,809)

 

(1,676)

 

(8,689)

 

(7,646)

INCOME (LOSS) BEFORE INCOME TAXES

 

(5,690)

 

19,385

 

10,155

 

37,309

INCOME TAX EXPENSE (BENEFIT)

 

(2,292)

 

2,766

 

499

 

4,481

NET INCOME (LOSS)

$

(3,398)

$

16,619

$

9,656

$

32,828

EARNINGS (LOSS) PER COMMON SHARE:

 

  

 

  

 

  

 

  

Basic

$

(0.06)

$

0.31

$

0.18

$

0.64

Diluted

$

(0.06)

$

0.30

$

0.17

$

0.62

AVERAGE COMMON SHARES:

 

  

 

  

 

  

 

  

Basic

 

55,152

 

53,431

 

55,029

 

51,434

Diluted

 

55,152

 

55,103

 

56,393

 

53,096

See condensed notes to consolidated financial statements.

5

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands - unaudited)

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Net income (loss)

$

(3,398)

$

16,619

$

9,656

$

32,828

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Cash flow hedges

 

(207)

 

667

 

(3,938)

 

3,541

Income tax benefit (expense)

 

53

 

(172)

 

1,014

 

(910)

Foreign currency translation adjustment

 

(2,779)

 

(1,637)

 

(3,120)

 

(3,241)

Income tax benefit (expense)

 

(14)

 

 

(17)

 

Total other comprehensive (loss)

 

(2,947)

 

(1,142)

 

(6,061)

 

(610)

Total comprehensive income (loss)

$

(6,345)

$

15,477

$

3,595

$

32,218

See condensed notes to consolidated financial statements.

6

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands - unaudited)

Accumulated Other

Common Stock

Retained

Comprehensive

    

Total

    

Shares

    

Amount

    

Earnings

    

Loss

BALANCE — January 1, 2019

$

932,775

 

54,893

$

571,383

$

363,425

$

(2,033)

Net income

 

6,195

 

  

 

  

 

6,195

 

  

Reclassify deferred gain on sale-leaseback upon adoption of ASC 842

93

93

Other comprehensive loss

 

(2,515)

 

  

 

  

 

  

 

(2,515)

Stock-based compensation expense

 

1,766

 

  

 

1,766

 

  

 

  

Options exercised

 

1,365

 

95

 

1,365

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

432

 

7

 

432

 

  

 

  

BALANCE — March 31, 2019

 

940,111

 

54,995

 

574,946

 

369,713

 

(4,548)

Net income

 

6,859

 

  

 

  

 

6,859

 

  

Other comprehensive loss

 

(599)

 

  

 

  

 

  

 

(599)

Stock-based compensation expense

 

2,523

 

  

 

2,523

 

  

 

  

Options exercised

 

1,441

 

78

 

1,441

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

340

 

6

 

340

 

  

 

  

BALANCE — June 30, 2019

 

950,675

 

55,079

 

579,250

 

376,572

 

(5,147)

Net loss

 

(3,398)

 

  

 

  

 

(3,398)

 

  

Other comprehensive loss

 

(2,947)

 

  

 

  

 

  

 

(2,947)

Stock-based compensation expense

 

2,626

 

  

 

2,626

 

  

 

  

Options exercised

 

2,037

 

120

 

2,037

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

341

 

12

 

341

 

  

 

  

Shares surrendered in exchange for exercise of stock options

(93)

(3)

(93)

BALANCE — September 30, 2019

$

949,241

 

55,208

$

584,161

$

373,174

$

(8,094)

See condensed notes to consolidated financial statements.

(continued)

7

MERIT MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands - unaudited)

Accumulated Other

Common Stock

Retained

Comprehensive

    

Total

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

BALANCE — January 1, 2018

$

676,334

50,248

$

353,392

$

321,408

$

1,534

Net income

 

5,269

 

  

 

  

 

5,269

 

  

Other comprehensive income

 

4,072

 

  

 

  

 

  

 

4,072

Stock-based compensation expense

 

1,256

 

  

 

1,256

 

  

 

  

Options exercised

 

1,286

 

91

 

1,286

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

294

 

7

 

294

 

  

 

  

BALANCE — March 31, 2018

688,511

 

50,346

356,228

326,677

5,606

Net income

 

10,941

 

  

 

  

 

10,941

 

  

Other comprehensive loss

 

(3,540)

 

  

 

  

 

  

 

(3,540)

Stock-based compensation expense

 

1,565

 

  

 

1,565

 

  

 

  

Options exercised

 

5,307

 

357

 

5,307

 

  

 

  

Issuance of common stock under Employee Stock Purchase Plan

 

220

 

4

 

220

 

  

 

  

Shares surrendered in exchange for payment of payroll tax liabilities

 

(2,065)

 

(40)

 

(2,065)

 

  

 

  

Shares surrendered in exchange for exercise of stock options

 

(1,685)

 

(32)

 

(1,685)

 

  

 

  

BALANCE — June 30, 2018

699,254

50,635

359,570

337,618

2,066

Net income

 

16,619

 

  

 

  

 

16,619

 

  

Other comprehensive loss

 

(1,142)

 

  

 

  

 

  

 

(1,142)

Stock-based compensation expense

 

1,673

 

  

 

1,673

 

  

 

  

Options exercised

 

2,624

 

158

 

2,624

 

  

 

Issuance of common stock under Employee Stock Purchase Plan

 

282

 

5

 

282

 

  

 

  

Issuance of common stock, net of offering costs

205,030

4,025

205,030

Shares surrendered in exchange for payment of payroll tax liabilities

 

(551)

 

(10)

 

(551)

 

  

 

  

Shares surrendered in exchange for exercise of stock options

 

(577)

 

(11)

 

(577)

 

  

 

  

BALANCE — September 30, 2018

$

923,211

54,802

$

568,051

$

354,236

$

924

Note: Retained earnings and total equity do not total for the nine months ended September 30, 2018 due to the rounding of net income in previously reported periods.

See condensed notes to consolidated financial statements.

(concluded)

8

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands - unaudited)

Nine Months Ended

September 30, 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

 

Net income

$

9,656

$

32,828

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

68,507

 

50,436

Loss on sales and/or abandonment of property and equipment

 

637

 

425

Amortization of right-of-use operating lease assets

9,226

Write-off of patents and intangible assets

 

3,492

 

744

Acquired in-process research and development

 

525

 

382

Amortization of deferred credits

 

(104)

 

(106)

Amortization of long-term debt issuance costs

 

570

 

603

Stock-based compensation expense

 

6,915

 

4,494

Changes in operating assets and liabilities, net of effects from acquisitions:

 

  

 

  

Trade receivables

 

(6,786)

 

(25,482)

Other receivables

 

72

 

255

Inventories

 

(19,302)

 

(19,375)

Prepaid expenses and other current assets

 

(3,859)

 

(2,719)

Prepaid income taxes

 

 

(120)

Income tax refund receivables

 

(8,680)

 

134

Other assets

 

(3,832)

 

(1,370)

Trade payables

 

(3,775)

 

15,936

Accrued expenses

 

66

 

7,707

Income taxes payable

 

(928)

 

(1,528)

Deferred compensation payable

 

2,276

 

994

Operating lease liabilities

(8,956)

Other long-term obligations

 

5,184

 

(1,381)

Total adjustments

 

41,248

 

30,029

Net cash provided by operating activities

 

50,904

 

62,857

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Capital expenditures for:

 

  

 

  

Property and equipment

 

(58,104)

 

(47,024)

Intangible assets

 

(2,560)

 

(2,234)

Proceeds from the sale of property and equipment

 

262

 

7

Issuance of note receivable

 

 

(10,750)

Cash paid in acquisitions, net of cash acquired

 

(53,512)

 

(122,770)

Net cash used in investing activities

 

(113,914)

 

(182,771)

See condensed notes to consolidated financial statements.

(continued)

9

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In thousands - unaudited)

    

Nine Months Ended

September 30, 

2019

2018

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

 

Proceeds from issuance of common stock

$

5,863

$

213,276

Offering costs

 

 

(366)

Proceeds from issuance of long-term debt

 

194,477

 

380,825

Payments on long-term debt

 

(149,477)

 

(450,575)

Long-term debt issuance costs

 

(1,479)

 

Contingent payments related to acquisitions

 

(15,684)

 

(184)

Payment of taxes related to an exchange of common stock

 

 

(2,616)

Net cash provided by financing activities

 

33,700

 

140,360

EFFECT OF EXCHANGE RATES ON CASH

 

(734)

 

(827)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(30,044)

 

19,619

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

67,359

 

32,336

End of period

$

37,315

$

51,955

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest (net of capitalized interest of $896 and $468, respectively)

$

9,319

$

8,018

Income taxes

$

10,071

$

6,069

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

  

 

  

Property and equipment purchases in accounts payable

$

7,481

$

3,058

Acquisition purchases in accrued expenses and other long-term obligations

$

9,583

$

Merit common stock surrendered (3 and 43 shares, respectively) in exchange for exercise of stock options

$

93

$

2,262

Right-of-use operating lease assets obtained in exchange for operating lease liabilities

$

7,431

$

See condensed notes to consolidated financial statements.

(concluded)

10

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation. The interim consolidated financial statements of Merit Medical Systems, Inc. ("Merit," "we" or "us") for the three and nine-month periods ended September 30, 2019 and 2018 are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2019 and December 31, 2018, and our results of operations and cash flows for the three and nine-month periods ended September 30, 2019 and 2018. The results of operations for the three and nine-month periods ended September 30, 2019 and 2018 are not necessarily indicative of the results for a full-year period. Within the financial statements and tables presented, certain columns and rows may not total due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. These interim consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K (the "2018 Form 10-K") for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission (the "SEC") on March 1, 2019.

2.   Inventories. Inventories at September 30, 2019 and December 31, 2018, consisted of the following (in thousands):

    

September 30, 2019

    

December 31, 2018

Finished goods

$

126,699

$

117,703

Work-in-process

 

24,368

 

14,380

Raw materials

 

65,699

 

65,453

Total Inventories

$

216,766

$

197,536

3.   Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for three and nine months ended September 30, 2019 and 2018 consisted of the following (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Cost of sales

$

346

$

241

$

953

$

657

Research and development

 

277

 

141

 

750

 

412

Selling, general and administrative

 

2,003

 

1,291

 

5,212

 

3,425

Stock-based compensation expense before taxes

$

2,626

$

1,673

$

6,915

$

4,494

We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of September 30, 2019, the total remaining unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was approximately $30.8 million and was expected to be recognized over a weighted average period of 3.13 years.

During the three and nine months ended September 30, 2019, we granted stock-based awards representing approximately 107,000 and 1.2 million shares of our common stock, respectively. During the three and nine-month periods ended September 30, 2018, we granted stock-based awards representing 0 and 692,002 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the

11

Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

Nine Months Ended

September 30, 

2019

2018

Risk-free interest rate

    

1.39% - 2.56%

  

2.63% - 2.77%

Expected option term

 

3 - 5 years

 

5.0 years

Expected dividend yield

 

 

Expected price volatility

 

28.66% - 35.79%

  

34.06% - 34.32%

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock options. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option term and implied volatility based on recent trends of the daily historical volatility. For options with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.

4.   Earnings (Loss) Per Common Share (EPS). The computation of weighted average shares outstanding and the basic and diluted earnings (loss) per common share consisted of the following (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2019

2018

2019

2018

Net income (loss)

$

(3,398)

$

16,619

$

9,656

$

32,828

Average common shares outstanding

 

55,152

 

53,431

 

55,029

 

51,434

Basic EPS

$

(0.06)

$

0.31

$

0.18

$

0.64

Average common shares outstanding

55,152

53,431

55,029

51,434

Effect of dilutive stock options

1,672

1,364

1,662

Total potential shares outstanding

55,152

55,103

56,393

53,096

Diluted EPS

$

(0.06)

$

0.30

$

0.17

$

0.62

Stock options excluded as the impact was anti-dilutive

4,299

667

1,361

462

5.   Acquisitions. On August 1, 2019, we entered into a share purchase agreement to acquire Fibrovein Holdings Limited, which is the owner of 100% of the capital stock of STD Pharmaceutical Products Limited, a UK private company engaged in the manufacture, distribution and sale of pharmaceutical sclerotherapy products (“STD Pharmaceutical”). The purchase consideration consisted of an upfront payment of approximately $13.7 million. We accounted for this acquisition as a business combination. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were not material. Acquisition-related costs associated with the STD

12

Pharmaceutical acquisition, which were included in selling, general and administrative expenses, were not material. The purchase price was preliminarily allocated as follows (in thousands):

Assets Acquired

    

  

Trade receivables

$

200

Inventories

 

843

Prepaid expenses and other assets

 

49

Intangibles

 

Developed technology

10,148

Goodwill

4,390

Total assets acquired

 

15,630

Liabilities Assumed

 

  

Trade payables

 

(53)

Accrued expenses

 

(29)

Deferred income tax liabilities

 

(1,875)

Total liabilities assumed

 

(1,957)

Total net assets acquired

$

13,673

We are amortizing the developed technology intangible asset acquired from STD Pharmaceutical over 12 years.

On June 14, 2019, we consummated an acquisition transaction contemplated by a merger agreement to acquire Brightwater Medical, Inc. ("Brightwater"). The purchase consideration consisted of an upfront payment of $35 million plus an initial working capital adjustment of approximately $104,000 in cash, with potential earn-out payments of up to an additional $5 million for achievement of CE certification with respect to the Brightwater device and up to an additional $10 million for the achievement of sales milestones specified in the merger agreement. Brightwater developed and commercialized the ConvertX®, a single-use device used to replace a series of devices and procedures used to treat severe obstructions of the ureter. The ConvertX system is designed to be implanted once and converted from a nephroureteral catheter to a nephroureteral stent without requiring sedation or local anesthesia. Brightwater recently received FDA clearance for the ConvertX biliary stent system. We accounted for this acquisition as a business combination. The sales and results of operations related to the acquisition have been included in our cardiovascular segment since the acquisition date and were

13

not material. Acquisition-related costs associated with the Brightwater acquisition, which were included in selling, general and administrative expenses, were not material. The purchase price was preliminarily allocated as follows (in thousands):

Preliminary Allocation

Adjustments (1)

Revised Preliminary Allocation

Assets Acquired

    

  

Trade receivables

$

94

$

(39)

$

55

Inventories

 

349

349

Property and equipment

 

409

409

Other long-term assets

 

30

30

Intangibles

 

  

Developed technology

 

31,680

280

31,960

Customer lists

 

83

83

Trademarks

 

250

250

Goodwill

 

16,950

959

17,909

Total assets acquired

 

49,845

1,200

51,045

Liabilities Assumed

 

  

Trade payables

 

(58)

(58)

Accrued expenses

 

(261)

(261)

Other long-term obligations

 

(1,522)

(1,522)

Deferred income tax liabilities

 

(4,590)

(4,590)

Total liabilities assumed

 

(6,431)

(6,431)

Total net assets acquired

$

43,414

$

1,200

$

44,614

(1) Amounts represent adjustments to the preliminary purchase price allocation first presented in our June 30, 2019 Form 10-Q resulting from our ongoing activities, including reassessment of the assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition. The larger adjustments primarily relate to the valuation of contingent consideration and intangible assets acquired.

We are amortizing the developed technology intangible asset acquired from Brightwater over 13 years, the related trademarks over five years and the customer list on an accelerated basis over one year. The total weighted-average amortization period for these acquired intangible assets is approximately 12.9 years.

On March 28, 2019, we paid $2 million to acquire convertible participating preferred shares of Fluidx Medical Technology, LLC ("Fluidx"), owner of certain technology proposed to be used in the development of embolic and adhesive agents for use in arterial, venous, vascular graft and cardiovascular applications inside and outside the heart and related appendages. Our investment in Fluidx has been recorded as an equity investment accounted for at cost and reflected within other assets in our accompanying consolidated balance sheet because we are not able to exercise significant influence over the operations of Fluidx. Our total current investment in Fluidx represents an ownership of approximately 12.7% of the outstanding equity interests of Fluidx.

On December 14, 2018, we consummated an acquisition transaction contemplated by an asset purchase agreement with Vascular Insights, LLC and VI Management, Inc. (combined "Vascular Insights") and acquired Vascular Insights’ intellectual property rights, inventory and certain other assets, including the ClariVein® IC system and the ClariVein OC system. The ClariVein systems are specialty infusion and occlusion catheter systems with rotating wire tips designed for the controlled 360-degree dispersion of physician-specified agents to the targeted treatment area. We accounted for this acquisition as a business combination. The purchase consideration included an upfront payment of $40 million and a final working capital adjustment of approximately $15,000 paid in the third quarter of 2019. We are also obligated to pay up to an additional $20 million based on achieving certain revenue milestones specified in the asset purchase agreement. The sales and results of operations related to this acquisition have been included in our cardiovascular segment. During the three and nine-month periods ended September 30, 2019, net sales of products acquired from Vascular Insights were approximately $2.0 million and $5.2 million, respectively. It is not practical to separately report earnings related to the

14

products acquired from Vascular Insights, as we cannot split out sales costs related solely to the products we acquired from Vascular Insights, principally because our sales representatives sell multiple products (including the products we acquired from Vascular Insights) in our cardiovascular business segment. Acquisition-related costs associated with the Vascular Insights acquisition, which were included in selling, general and administrative expenses during the year ended December 31, 2018, were not material. The purchase price was preliminarily allocated as follows (in thousands):

Inventories

    

$

1,353

Intangibles

 

  

Developed technology

 

32,750

Customer list

 

840

Trademarks

 

1,410

Goodwill

 

21,832

Total net assets acquired

$

58,185

We are amortizing the developed technology intangible asset acquired from Vascular Insights over 12 years, the related trademarks over nine years and the customer list on an accelerated basis over eight years. The total weighted-average amortization period for these acquired intangible assets is approximately 11.8 years.

On November 13, 2018, we consummated an acquisition transaction contemplated by a merger agreement to acquire Cianna Medical, Inc. ("Cianna Medical"). The purchase consideration consisted of an upfront payment of $135 million plus a final working capital adjustment of approximately $1.2 million in cash, with earn-out payments of $15 million for achievement of supply chain and scalability metrics paid in the third quarter of 2019 and potential payments up to an additional $50 million for the achievement of sales milestones specified in the merger agreement. Cianna Medical developed the first non-radioactive, wire-free breast cancer localization system. Its SCOUT® and SAVI® Brachy technologies are FDA-cleared and address unmet needs in the delivery of radiation therapy, tumor localization and surgical guidance. We accounted for this acquisition as a business combination. During the three and nine-month periods ended September 30, 2019, net sales of Cianna Medical products were approximately $11.6 million and $35.7 million, respectively. It is not practical to separately report earnings related to the products acquired from Cianna Medical, as we cannot split out sales costs related solely to the products we acquired from Cianna Medical, principally because our sales representatives sell multiple products (including the products we acquired from Cianna Medical) in our cardiovascular segment. Acquisition-related costs associated with the Cianna Medical acquisition, which were included in selling, general

15

and administrative expenses during the year ended December 31, 2018, were approximately $3.5 million. The following table summarizes the preliminary purchase price allocated to the net assets acquired from Cianna Medical (in thousands):

    

Preliminary Allocation

Adjustments (1)

Revised Preliminary Allocation

Assets Acquired

Trade receivables

$

6,151

$

$

6,151

Inventories

 

5,803

5,803

Prepaid expenses and other current assets

 

315

315

Property and equipment

 

1,047