Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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This Quarterly Report on Form
10-Q
contains forward-looking statements (within the meaning of the
federal securities law) that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales,
projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words anticipates, believes, estimates, expects, intends,
may, plans, projects, will, would, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove
to be incorrect, and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections, or expectations prove incorrect, our actual results,
performance, or financial condition may vary materially and adversely from those anticipated, estimated, or expected. These risks and uncertainties include, but are not limited to: the risk that the Company may not realize the anticipated benefits
of its strategic activities; risks related to the integration of acquisition targets; the risk that assumptions about the market for the Companys products and the productivity of the Companys direct sales force and distributors may not
be correct; risks related to product demand and market acceptance of the Companys products; risks associated with our newly acquired tissue processing and preservation operations and the related services we now provide; risks related to
attracting, training and retaining sales representatives and other employees in new markets; adverse or fluctuating conditions in the general domestic and global economic markets; and the risk that the Company is not successful in transitioning to a
direct-selling model in new territories.
Forward-looking statements reflect managements analysis as of the date of this
quarterly report. Further information on potential risk factors that could affect our business and financial results is detailed in Part II, Item 1A, Risk Factors in this Quarterly Report on Form
10-Q
and in our other filings with the Securities and Exchange Commission, including under the section headed Risk Factors in our most recent Annual Report on Form
10-K.
Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included in this report and our other SEC filings, including our audited consolidated financial statements and the related notes contained in our Annual Report on Form
10-K
for the year ended December 31, 2016, as filed with the SEC on March 8, 2017. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future
events, or otherwise, except as required by law.
Unless the context indicates otherwise, references to LeMaitre
Vascular, we, our, and us in this Quarterly Report on Form
10-Q
refer to LeMaitre Vascular, Inc. and its subsidiaries.
LeMaitre, AnastoClip, Omniflow, ProCol, RestoreFlow and XenoSure are registered trademarks of LeMaitre Vascular or one of its subsidiaries.
This Quarterly Report on Form
10-Q
also includes the registered and unregistered trademarks of other persons, which are the property of their respective owners.
Overview
We are a medical device company
that develops, manufactures, and markets medical devices and implants for the treatment of peripheral vascular disease. We also provide processing and cryopreservation services of human tissue for implantation into patients. Our principal product
offerings are sold throughout the world, primarily in North America, Europe and, to a lesser extent, Asia and the Pacific Rim. We estimate that the annual worldwide market for all peripheral vascular devices approximates $5 billion, within
which our product lines address roughly $870 million. We have grown our business by using a three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of
low-rivalry
niche products,
and 3) expanding our worldwide direct sales force while acquiring and developing complementary vascular devices. We have used acquisitions as a primary means of further accessing the larger peripheral vascular device market, and we expect to pursue
this strategy in the future. Additionally, we have continued our efforts to expand our vascular device offerings through research and development. We currently manufacture most of our product lines at our Burlington, Massachusetts headquarters.
19
Our products and services are used primarily by vascular surgeons who treat peripheral vascular
disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, neither of whom are certified to perform open surgical procedures, vascular surgeons can perform
both open surgical and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wider range of treatment options.
Our principal product lines include the following: anastomotic clips, angioscopes, balloon catheters, biologic vascular grafts, biologic
vascular patches, carotid shunts, laparoscopic cholecystectomy devices, powered phlebectomy devices, radiopaque marking tape, remote endarterectomy devices, synthetic vascular grafts, and valvulotomes. With the November 10, 2016 acquisition of
the RestoreFlow allografts business, we also provide services related to the processing and cryopreservation of human vascular tissue.
To
assist us in evaluating our business strategies, we regularly monitor long-term technology trends in the peripheral vascular device market. Additionally, we consider the information obtained from discussions with the medical community in connection
with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the peripheral vascular device market and our manufacturing capacity requirements.
Our business opportunities include the following:
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the long-term growth of our direct sales force in North America, Europe, Asia and the Pacific Rim;
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the addition of complementary products through acquisitions;
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|
the updating of existing products and introduction of new products through research and development;
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the introduction of our products in new territories upon receipt of regulatory approvals or registrations in these territories; and
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the consolidation of, and automation of, product manufacturing at our facilities in our Burlington, Massachusetts corporate headquarters.
|
We sell our products and services primarily through a direct sales force. As of September 30, 2017 our sales force was comprised of 89
sales representatives in North America, Europe, Japan, China and Australia. We also sell our products in other countries through distributors. Our worldwide headquarters is located in Burlington, Massachusetts. Our international operations are
headquartered in Sulzbach, Germany. We also have sales offices located in Tokyo, Japan; Mississauga, Canada; Madrid, Spain; Milan, Italy; Shanghai, China; and North Melbourne, Australia, and we have processing facilities in Fox River Grove, Illinois
and North Melbourne, Australia. During the nine month periods ended September 30, 2017 and 2016, approximately 93% and 92%, respectively, of our net sales were generated in territories in which we employ direct sales representatives.
Historically, we have experienced success in lower-rivalry niche product segments, for example the market segments for biologic vascular
patches and valvulotomes. In the biologic vascular patch market the number of competitors is limited, and we believe that we have been able to increase segment share and increase selling prices, mainly due to the strength of our sales force. In the
valvulotome market, we have been able to increase our selling prices while maintaining our unit market share. In contrast, we have experienced less success in highly competitive markets such as laparoscopic cholecystectomy catheters and synthetic
grafts, where we face stronger competition from larger companies with greater resources and lower production costs. While we believe that these challenging market dynamics can be mitigated by our relationships with vascular surgeons, there can be no
assurance that we will be successful in these highly competitive markets.
We have also experienced success in international markets, such
as Europe, where we sometimes offer comparatively lower average selling prices. If we continue to seek growth opportunities outside of the North America, we will likely experience downward pressure on our gross margin.
Because we believe that
direct-to-hospital
sales engender
closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices to our direct sales organization:
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During 2015, we entered into definitive agreements with seven former UreSil, LLC distributors in Europe in order to terminate their distribution of our
Tru-Incise
valvulotome and
we began selling
direct-to-hospital
in those geographies. The total of these termination fees was approximately $0.2 million
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20
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|
|
In August 2015, we entered into a definitive agreement with Grex Medical Oy (Grex), our distributor in Finland, in order to terminate their distribution of our products and we began selling
direct-to-hospital
in Finland as of January 1, 2016. The termination fee was approximately $0.2 million.
|
We anticipate that the expansion of our direct sales organization in China will result in increased sales, marketing and regulatory expenses
during 2017. As of September 30, 2017 we had seven employees in China.
Our strategy for growing our business includes the
acquisition of complementary product lines and companies and occasionally the discontinuance or divestiture of products or activities that are no longer complementary:
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In May 2015, we acquired the production and distribution rights of UreSil LLCs
Tru-Incise
valvulotome for sales outside of the United States for $1.4 million.
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In July 2015, we entered into an asset sales agreement with Merit Medical Ireland Limited to sell our inventory, intellectual property and customer lists associated with The UnBalloon, our
non-occlusive
modeling catheter product line for $0.4 million.
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In December 2015, we terminated our InvisiGrip vein stripper product line, and wrote down $0.1 million of related inventory in Q3 2015.
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|
In March 2016, we acquired substantially all of the assets as well as the production and distribution rights of the ProCol business from Hancock Jaffe Laboratories and CryoLife, Inc. for $2.7 million plus 10% of
net sales for three years following the closing. ProCol is a biologic vascular graft used for dialysis access, and is approved for sale in the United States.
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|
In November 2016, we acquired substantially all of the assets related to the peripheral vascular allograft operations of Restore Flow Allografts, LLC for $12.0 million plus additional payments of up to
$6 million, depending upon the satisfaction of certain contingencies.
|
In addition to relying upon acquisitions to grow
our business, we also rely on our product development efforts to bring differentiated and next-generation products to market. These efforts have led to the following recent product developments:
|
|
|
In December 2015, we launched the
15-cm
AnastoClip AC.
|
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|
In October 2016, we launched additional sizes of our XenoSure patch.
|
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In December 2016, we launched the 7.0mm diameter Omniflow II graft.
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In October 2017, we launched XenoSure pledgets.
|
In addition to our sales growth strategies,
we have also executed several operational initiatives designed to consolidate and streamline manufacturing within our Burlington facility. We expect these plant consolidations will result in improved production control, as well as reduced costs over
the long-term. Our most recent manufacturing transitions included:
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In March 2015, we initiated a project to transfer the manufacturing of the newly acquired angioscope product line to our Burlington facility. We had been purchasing the devices from Applied Medical since the September
2014 acquisition and completed the transition of manufacturing to our Burlington facility in December 2015.
|
|
|
|
In May 2015, we initiated a project to transfer the manufacturing of the newly acquired
Tru-Incise
valvulotome product line to our Burlington facility. We have been purchasing the
devices from UreSil, LLC since the acquisition. We completed this transition in the first half of 2017.
|
|
|
|
In March 2016, we initiated a project to transfer the manufacturing of the newly acquired ProCol biologic product line to our Burlington facility. We have an agreement to purchase the product from Hancock Jaffe
Laboratories for up to three years following the closing. We initiated the transfer of the production line and transition of manufacturing in 2016, and we expect the transfer to be complete in 2018, subject to regulatory approval.
|
21
|
|
|
In the fourth quarter of 2017, we expect to complete the renovation of our Burlington facility, where we expect several of our biologic offerings, including the XenoSure patch and the ProCol biologic graft, will be
produced or processed. We believe the cost of the facility renovation will be approximately $2.3 million, of which approximately $1.8 million has been incurred through September 30, 2017.
|
Our execution of these business opportunities may affect the comparability of our financial results from period to period and may cause
substantial fluctuations from period to period as we incur related process engineering and other charges, as well as longer term impacts to revenues and operating expenditures.
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the
nine months ended September 30, 2017, approximately 42% of our sales were to customers located outside the United States. We expect that foreign currencies will continue to represent a significant percentage of our future sales. Selling,
marketing, and administrative costs related to these sales are largely denominated in the local currency, thereby partially mitigating our exposure to exchange rate fluctuations. However, as most of our foreign sales are denominated in local
currency, if there is a decrease in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars. In such cases we will record less revenue in U.S.
dollars than we did prior to the rate increase. For the nine months ended September 30, 2017, the effects of changes in foreign exchange rates decreased our reported sales by approximately $0.3 million.
Net Sales and Expense Components
The
following is a description of the primary components of our net sales and expenses:
Net sales.
We derive our net sales from
the sale of our products and services, less discounts and returns. Net sales include the shipping and handling fees paid for by our customers. Most of our sales are generated by our direct sales force and are shipped and billed to hospitals or
clinics throughout the world. In countries where we do not have a direct sales force, sales are primarily to distributors, who in turn sell to hospitals and clinics. In certain cases our products are held on consignment at a hospital or clinic prior
to purchase; in these instances we recognize revenue at the time the product is used in surgery rather than at shipment.
Cost of
sales.
We manufacture the majority of the products that we sell. Our cost of sales consists primarily of manufacturing personnel, raw materials and components, depreciation of property and equipment, and other allocated manufacturing
overhead, as well as the freight expense we pay to ship products to customers.
Sales and marketing.
Our sales and marketing
expense consists primarily of salaries, commissions, stock-based compensation, travel and entertainment, attendance at vascular congresses, training programs, advertising and product promotions, direct mail and other marketing costs.
General and administrative.
General and administrative expense consists primarily of executive, finance and human resource
expense, stock-based compensation, legal and accounting fees, acquisition-related charges, information technology expense, intangible asset amortization expense and insurance expense.
Research and development.
Research and development expense includes costs associated with the design, development, testing,
enhancement and regulatory approval of our products, principally salaries, laboratory testing and supply costs. It also includes costs associated with design and execution of clinical studies, regulatory submissions and costs to register, maintain,
and defend our intellectual property, and royalty payments associated with licensed and acquired intellectual property.
Other
income (expense).
Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses).
Income tax expense.
We are subject to federal and state income taxes for earnings generated in the United States, which include
operating losses in certain foreign jurisdictions for certain years depending on tax elections made, and foreign taxes on earnings of our wholly-owned foreign subsidiaries. Our consolidated tax expense is affected by the mix of our taxable income
(loss) in the United States and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill for U.S. tax reporting purposes.
22
Results of Operations
Comparison of the three and nine months ended September 30, 2017 to the three and nine months ended September 30, 2016.
The following tables set forth, for the periods indicated, our results of operations, net sales by geography, and the change
between the specified periods expressed as a percentage increase or decrease:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
Sept ember 30,
|
|
|
Nine months ended
September 30,
|
|
(unaudited)
|
|
2017
|
|
|
2016
|
|
|
Percent
change
|
|
|
2017
|
|
|
2016
|
|
|
Percent
change
|
|
|
|
($ in thousands)
|
|
Net sales
|
|
$
|
24,822
|
|
|
$
|
23,216
|
|
|
|
7
|
%
|
|
$
|
74,714
|
|
|
$
|
65,863
|
|
|
|
13
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
15,442
|
|
|
$
|
14,528
|
|
|
|
6
|
%
|
|
$
|
46,511
|
|
|
$
|
39,594
|
|
|
|
17
|
%
|
International
|
|
|
9,380
|
|
|
|
8,688
|
|
|
|
8
|
%
|
|
|
28,203
|
|
|
|
26,269
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,822
|
|
|
$
|
23,216
|
|
|
|
7
|
%
|
|
$
|
74,714
|
|
|
$
|
65,863
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales.
Net sales increased $1.6 million or 7% to $24.8 million for the three
months ended September 30, 2017, compared to $23.2 million for the three months ended September 30, 2016. Sales increases for the three months ended September 30, 2017 were due in large part to sales of our RestoreFlow service
offering (acquired in the fourth quarter of 2016) of $1.6 million. Other products with increased sales included carotid shunts of $0.4 million and Omniflow II biosynthetic vascular grafts of $0.2 million, which were offset by lower
sales of valvulotomes of $0.6 million.
Net sales increased $8.8 million or 13% to $74.7 million for the nine months ended
September 30, 2017, compared to $65.9 million for the nine months ended September 30, 2016. Sales increases for the nine months ended September 30, 2017 were due in large part to sales of our RestoreFlow service offering of
$4.4 million. Other products with increased sales included biologic vascular patches of $2.8 million, carotid shunts of $0.9 million, Omniflow II biosynthetic vascular grafts of $0.6 million, and vessel closure systems of
$0.6 million, which were offset by lower sales of valvulotomes of $0.7 million.
Direct-to-hospital
net sales were 93% and 92% for the nine months ended September 30, 2017 and September 30, 2016, respectively.
Net sales by geography.
Net sales in the Americas increased $0.9 million or 6% for the three months ended
September 30, 2017. The increase was due in large part to sales of our RestoreFlow service offering of $1.6 million, and increased sales of carotid shunts of $0.3 million. These increases were partially offset by lower valvulotome
sales of $0.8 million and biologic vascular patches of $0.3 million. International net sales for the three months ended September 30, 2017 increased $0.7 million or 8% due mainly to higher sales of biologic vascular patches of
$0.2 million and valvulotomes of $0.2 million, as well as carotid shunts, biosynthetic vascular grafts and polyester vascular grafts, each of $0.1 million.
Net sales in the Americas increased $6.9 million for the nine months ended September 30, 2017. The increase was due in large part to
sales of our RestoreFlow service offering of $4.4 million, as well as our ProCol biologic grafts of $0.4 million. We also recorded increased sales of our biologic vascular patches of $1.8 million, vessel closure systems of
$0.5 million and carotid shunts of $0.6 million. These increases were partially offset by lower sales of valvulotomes of $0.8 million. International net sales for the nine months ended September 30, 2017 increased
$1.9 million, or 7%, due mainly to higher sales of biologic vascular patches, Omniflow II biosynthetic grafts and powered phlebectomy devices, partially offset by decreased sales of catheters and ePTFE vascular grafts.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(unaudited)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Percent
change
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Percent
change
|
|
|
|
($ in thousands)
|
|
Gross profit
|
|
$
|
17,577
|
|
|
$
|
17,019
|
|
|
$
|
558
|
|
|
|
3
|
%
|
|
$
|
52,446
|
|
|
$
|
46,742
|
|
|
$
|
5,704
|
|
|
|
12
|
%
|
Gross margin
|
|
|
70.8
|
%
|
|
|
73.3
|
%
|
|
|
*
|
|
|
|
(2.5
|
%)
|
|
|
70.2
|
%
|
|
|
71.0
|
%
|
|
|
*
|
|
|
|
(0.8
|
%)
|
23
Gross Profit.
Gross profit increased $0.6 million to $17.6 million
for the three months ended September 30, 2017, while gross margin decreased by 250 basis points to 70.8%. The gross margin decrease was mainly the result of the addition of our RestoreFlow service offering in November 2016, which carries
comparatively lower gross margins than our other products, as well as lower valvulotome sales and an unfavorable geographic mix of our revenues. These factors were offset partially by pricing increases in 2017 as well as the effects of foreign
exchange.
Gross profit increased $5.7 million to $52.4 million for the nine months ended September 30, 2017, while gross
margin decreased by 80 basis points to 70.2% in the period. The gross margin decrease was mainly the result of the addition of our RestoreFlow service offering in November 2016, which carries comparatively lower gross margins than our other
products, as well as lower valvulotome sales, which were partially offset by pricing increases, favorable geographic and product mix, and the effects of foreign exchange.
Operating Expenses
Our operating
expenses for the three and nine month periods ended September 30, 2017 and 2016 consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(unaudited)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Percent
change
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Percent
change
|
|
Sales and marketing
|
|
$
|
6,201
|
|
|
$
|
6,541
|
|
|
$
|
(340
|
)
|
|
|
(5
|
%)
|
|
$
|
19,754
|
|
|
$
|
19,353
|
|
|
$
|
401
|
|
|
|
2
|
%
|
General and administrative
|
|
|
4,562
|
|
|
|
3,595
|
|
|
|
967
|
|
|
|
27
|
%
|
|
|
12,857
|
|
|
|
10,343
|
|
|
|
2,514
|
|
|
|
24
|
%
|
Research and development
|
|
|
1,761
|
|
|
|
1,539
|
|
|
|
222
|
|
|
|
14
|
%
|
|
|
5,053
|
|
|
|
4,619
|
|
|
|
434
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,524
|
|
|
$
|
11,675
|
|
|
$
|
849
|
|
|
|
7
|
%
|
|
$
|
37,664
|
|
|
$
|
34,315
|
|
|
$
|
3,349
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
% of Net
Sales
|
|
|
2016
% of Net
Sales
|
|
|
Change
|
|
|
2017
% of Net
Sales
|
|
|
2016
% of Net
Sales
|
|
|
Change
|
|
Sales and marketing
|
|
|
25
|
%
|
|
|
28
|
%
|
|
|
(3
|
%)
|
|
|
26
|
%
|
|
|
29
|
%
|
|
|
(3
|
%)
|
General and administrative
|
|
|
18
|
%
|
|
|
15
|
%
|
|
|
3
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
1
|
%
|
Research and development
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
Sales and marketing
.
Sales and marketing expenses for the three months ended
September 30, 2017 decreased $0.3 million or 5% vs. the September 30, 2016 period. Decreases were mainly driven by a decline in compensation-related costs of $0.2 million related to fewer direct sales representatives as well as
the vacancy in the position of Vice President Sales, The Americas. Sales meeting expense also decreased $0.1 million due to an event held in the 2016 period that was not held in the 2017 period.
For the nine months ended September 30, 2017, sales and marketing expenses increased $0.4 million or 2% to $19.8 million. The
increase was primarily driven by increased compensation-related expenses, related to an increase in the average number of sales representatives during the comparative periods, from 91 in 2016 to 93 in 2017. As a percentage of net sales, sales and
marketing expense decreased to 26% in the nine months ended September 30, 2017 from 29% in the prior year period due to higher sales in the current period.
24
General and administrative.
For the three months ended September 30, 2017,
general and administrative expenses increased $1.0 million or 27% to $4.6 million. Included in the current period is a charge of $0.5 million related to a stock option award modification associated with the recent departure of
our President of International Operations. We also had higher compensation costs of $0.2 million, acquisition-related charges of $0.2 million, and recruiting fees of $0.1 million.
For the nine months ended September 30, 2017, general and administrative expenses increased $2.5 million, or 24%, to
$12.9 million. Increases included the aforementioned stock option award modification charge, higher compensation costs of $0.5 million, acquisition-related charges of $0.6 million, facility-related costs of $0.5 million in
connection with expanding our Burlington manufacturing operations, and professional service fees of $0.3 million. As a percentage of net sales, general and administrative expenses increased to 17% for the nine months ended September 30,
2017 as compared to 16% for the year-earlier period.
Research and development.
Research and development expenses for the
three months ended September 30, 2017 increased $0.2 million or 14% to $1.8 million, primarily due to higher professional services and testing costs.
For the nine months ended September 30, 2017, research and development expenses increased $0.4 million or 9%, to
$5.1 million. Increases were primarily due to higher compensation costs as well as higher product testing expenses related to clinical and regulatory.
Income tax expense.
We recorded a tax provision of $31,000 on
pre-tax
income of
$5.1 million for the three months ended September 30, 2017, compared to a $2.1 million tax provision on
pre-tax
income of $5.3 million for the three months ended September 30, 2016. We
recorded a tax provision of $1.9 million on
pre-tax
income of $14.8 million for the nine months ended September 30, 2017, compared to $4.4 million on
pre-tax
income of $12.4 million for the nine months ended September 30, 2016. Our effective income tax rate was 0.6% and 12.8% for the three and nine month periods ended September 30, 2017. Our
tax expense for the current period is based on an estimated annual effective tax rate of 36.8%, adjusted in the applicable quarterly periods for discrete stock option exercises and other discrete items. Our income tax expense for the current period
varies from the statutory rate mainly due to certain permanent items, offset by lower statutory rates from our foreign entities and a discrete item for stock option exercises.
Our effective income tax rate was 39.2% and 35.6% for the three and nine month periods ended September 30, 2016. Our 2016 provision was
based on the estimated annual effective tax rate of 34.8%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2016 varied from the statutory rate mainly due to certain
permanent items, offset by lower statutory rates from our foreign entities and a discrete item for stock option exercises.
We monitor the
mix of profitability by tax jurisdiction and adjust our annual expected rate on a quarterly basis as needed. While it is often difficult to predict the final outcome or timing of the resolution for any particular tax matter, we believe that our tax
reserves reflect the probable outcome of known contingencies.
We assess the likelihood that our deferred tax assets will be realized
through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As of September 30, 2017, we have provided a valuation allowance of
$1.9 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.
We expect that our effective tax rate will remain somewhat inconsistent for the remainder of 2017 due to the timing of exercises of certain
employee stock options. We expect our 2017 effective tax rate will be lower than our 2016 effective tax rate mainly due to exercises of stock options in 2017.
25
Liquidity and Capital Resources
At September 30, 2017, our cash and cash equivalents were $37.5 million as compared to $24.3 million at December 31, 2016.
Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, consist of operating bank accounts and money market funds, and are stated at cost, which approximates fair value. All of our
cash held outside of the United States is available for corporate use, with the exception of $7.8 million held by certain international subsidiaries where earnings are planned to be permanently reinvested.
On July 25, 2016, our Board of Directors approved a stock repurchase program under which the Company was authorized to repurchase up to
$5 million of its common stock through transactions on the open market, in privately negotiated purchases or otherwise. We did not make any repurchases under this program prior to its July 25, 2017 expiration.
On July 25, 2017, our Board of Directors approved a stock repurchase program under which the Company is authorized to repurchase up to
$7.5 million of its common stock through transactions on the open market, in privately negotiated purchases or otherwise. This program may be suspended or discontinued at any time, and expires on the earlier of July 25, 2018 or when the
authorized aggregate $7.5 million repurchase limit is reached, unless extended by our Board of Directors. To date we have not made any repurchases under this program.
Operating and Capital Expenditure Requirements
We require cash to pay our operating expenses, make capital expenditures, and pay our long-term liabilities. Since our inception, we have
funded our operations through public offerings and private placements of equity securities, short-term borrowings, and funds generated from our operations.
We recognized operating income of $14.8 million for the nine months ended September 30, 2017. For the year ended December 31,
2016, we had operating income of $16.3 million. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but
are not limited to, the following:
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|
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the revenues generated by sales of our products and services;
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|
|
|
payments associated with potential future quarterly cash dividends to our common stockholders;
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|
|
|
future acquisition-related payments;
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|
|
|
payments associated with income and other taxes;
|
|
|
|
the costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;
|
|
|
|
the costs associated with our initiatives to sell
direct-to-hospital
in new countries;
|
|
|
|
the costs of obtaining and maintaining FDA and other regulatory clearances of our existing and future products;
|
|
|
|
the number, timing, and nature of acquisitions and other strategic transactions, and
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|
|
|
potential future share repurchases.
|
Our cash balances may decrease as we continue to use cash
to fund our operations, make acquisitions, make payments under our quarterly dividend program, make share repurchases, and make deferred payments related to prior acquisitions. We believe that our cash, cash equivalents, investments and the interest
we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next twelve months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond the next twelve months, we may seek to
sell additional equity or debt securities or borrow funds from, or establish a revolving credit facility with a financial institution. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise
additional funds through the issuance of debt securities, such securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations and possibly our ability to pay dividends. We may require
additional capital beyond our currently-forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.
26
Dividends
In February 2011, our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations
of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors. The dividend activity for the periods presented is as follows:
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|
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|
|
|
|
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|
|
Record Date
|
|
Payment Date
|
|
|
Per Share Amount
|
|
|
Dividend Payment
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
March 22, 2017
|
|
|
April 6, 2017
|
|
|
$
|
0.055
|
|
|
$
|
1,029
|
|
May 24, 2017
|
|
|
June 8, 2017
|
|
|
$
|
0.055
|
|
|
$
|
1,036
|
|
August 23, 2017
|
|
|
September 6, 2017
|
|
|
$
|
0.055
|
|
|
$
|
1,055
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
March 21, 2016
|
|
|
April 4, 2016
|
|
|
$
|
0.045
|
|
|
$
|
825
|
|
May 25, 2016
|
|
|
June 8, 2016
|
|
|
$
|
0.045
|
|
|
$
|
829
|
|
August 22, 2016
|
|
|
September 2, 2016
|
|
|
$
|
0.045
|
|
|
$
|
833
|
|
November 21, 2016
|
|
|
December 5, 2016
|
|
|
$
|
0.045
|
|
|
$
|
836
|
|
On October 24, 2017 our Board of Directors approved a quarterly cash dividend on our common stock of
$0.055 per share payable on December 7, 2017 to stockholders of record at the close of business on November 22, 2017, which will total approximately $1.0 million.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
(in thousands)
|
|
|
|
2017
|
|
|
2016
|
|
|
Net Change
|
|
Cash and cash equivalents
|
|
$
|
37,514
|
|
|
$
|
34,650
|
|
|
$
|
2,864
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
16,098
|
|
|
$
|
12,702
|
|
|
$
|
3,396
|
|
Investing activities
|
|
|
(4,780
|
)
|
|
|
(4,198
|
)
|
|
|
(582
|
)
|
Financing activities
|
|
|
1,146
|
|
|
|
(1,535
|
)
|
|
|
2,681
|
|
Net cash provided by (used in) operating activities.
Net cash provided by operating activities
was $16.1 million for the nine months ended September 30, 2017, consisting of $12.9 million in net income adjusted for
non-cash
items of $5.2 million (including depreciation and
amortization of $3.0 million, stock-based compensation of $1.8 million, and provisions for inventory write-offs and doubtful accounts of $0.4 million) and offset by changes in working capital of $2.0 million. The net cash used for
working capital was driven by increases in inventory of $1.3 million, accounts receivable of $0.1 million and prepaid expenses and other current assets of $1.4 million, offset by a decrease in accounts payable and other liabilities of
$0.8 million.
27
Net cash provided by operating activities was $12.7 million for the nine months ended
September 30, 2016, and consisted of $8.0 million net income, adjusted for
non-cash
items of $4.2 million (including depreciation and amortization of $2.7 million, stock-based compensation
of $1.2 million, and provisions for inventory write-offs and doubtful accounts of $0.3 million), as well as changes in working capital of $0.5 million. The net cash used by changes in working capital was driven by increases in accounts
payable and other liabilities of $1.2 million offset by decreases in other current assets of $0.4 million, inventory of $0.2 million and accounts receivable of $0.1 million.
Net cash used in investing activities.
Net cash used in investing activities was $4.8 million for the nine months ended
September 30, 2017. This was primarily driven by expenditures on leasehold improvements and equipment associated with the expansion of our Burlington facility.
Net cash used in investing activities was $4.2 million for nine months ended September 30, 2016, driven by $2.4 million of cash
paid in connection with our acquisition of the ProCol biologic vascular grafts, as well as purchases of property and equipment of $1.8 million primarily associated with the expansion of our Burlington facility
Net cash provided by (used in) financing activities.
Net cash provided by financing activities was $1.1 million for the
nine months ended September 30, 2017, consisting of proceeds from stock option exercises of $5.5 million, offset by dividend payments of $3.1 million, shares withheld to satisfy employee taxes on restricted stock vesting of
$0.8 million and payments related to prior acquisitions of $0.4 million.
Net cash used in financing activities was
$1.5 million for the nine months ended September 30, 2016, driven primarily by payments of common stock dividends of $2.5 million, partially offset by proceeds from stock option exercises, net of shares withheld to satisfy employee
taxes on restricted stock vesting of $1.2 million. We also made payments related to our prior acquisitions of $0.2 million.
Contractual obligations
.
Our principal contractual obligations consist of operating leases and inventory purchase
commitments, and have not changed significantly since December 31, 2016 as reported in our Annual Report on Form
10-K.
Off-Balance
Sheet Arrangements
We did not have any
off-balance
sheet arrangements as of September 30, 2017. We do not currently
have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating
off-balance
sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving
non-exchange
traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies and Estimates
We have adopted various accounting policies to prepare our consolidated financial statements in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP. Our most significant accounting policies are described in note 1 to our consolidated financial statements included in our Annual Report on
Form 10-K
for the fiscal
year ended December 31, 2016. There have been no material changes in our critical accounting policies during the nine months ended September 30, 2017. The preparation of our consolidated financial statements in conformity with U.S. GAAP
requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets,
sales returns and discounts, share-based compensation, and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results may differ from those estimates.
28
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2017-09
which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under ASC 718, Compensation Stock
Compensation. The new standard is effective for us beginning January 1, 2018, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.
In January 2017, FASB issued ASU
2017-04,
which, among other provisions, eliminates step 2
from the goodwill impairment test. The annual, or interim, goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for us beginning January 1, 2020, with
early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.
In January
2017, the FASB issued ASU
2017-01
which changes the definition of a business for purposes of determining whether a business has been acquired or sold. The amendment is intended to help companies evaluate
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for us beginning January 1, 2018, with early adoption permitted. The adoption of this standard is not expected to
have a material impact on our financial statements.
In August 2016, the FASB issued ASU
2016-15,
which changes the classification of certain cash receipts and cash payments within the statement of cash flows. The new standard is effective for us beginning January 1, 2018, with early adoption permitted. The adoption of this standard is not
expected to have a material impact on our financial statements.
In May 2014, the FASB and the International Accounting Standards
Board issued substantially converged final standards on revenue recognition. The FASBs ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606), as amended from time to time, outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance
becomes effective for us on January 1, 2018, with early adoption permitted on January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. Our assessment of
the impact to our financial statements of adopting this standard is underway. We engaged external consultants to assist us with our analysis, which included evaluating our standard arrangements with customers, as well as arrangements specific to
certain customer bases or product offerings, and reviewing a sample of actual contracts to determine whether there are additional attributes to consider beyond our standard arrangements. Although our assessment is not complete, we do not currently
expect that adoption of Topic 606 will have a material impact on our consolidated financial statements. However, there will likely be changes to our revenue recognition accounting policy as well as other disclosures.
Additionally, we have preliminarily determined that we will use the modified retrospective method of adoption.