LEMAITRE VASCULAR, INC. This Quarterly Report on Form 10-Q contains forward-looking statements (within the meaning of theU.S. Private Securities Litigation Reform Act of 1995) that involve substantial risks and uncertainties, particularly risks related to the regulatory environment, our common stock, fluctuations in our quarterly and annual results, our ability to successfully integrate acquisitions into our business, and risks related to our business and industry generally, such as risks inherent in the process of developing and commercializing products and services that are safe and effective for use in the peripheral vascular disease market. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales, gross margin expectations, 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. No forward-looking statement can be guaranteed and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. These risks and uncertainties include, but are not limited to: the duration and severity of the impact of COVID-19 on the global economy, our customers, our suppliers and our company; compliance with foreign regulatory requirements to market our products outsidethe United States ; the risk of significant fluctuations in our quarterly and annual results due to numerous factors; the risk that assumptions about the market for the Company's products and the productivity of the Company's direct sales force and distributors may not be correct; the risk that we may not be able to maintain our recent levels of profitability; the risk that the Company may not realize the anticipated benefits of its strategic activities; risks related to the integration of acquisition targets; the acceleration or deceleration of product growth rates; risks related to product demand and market acceptance of the Company's products and pricing; the risk that a recall of our products could result in significant costs or negative publicity; the risk that the Company is not successful in transitioning to a direct-selling model in new territories. Forward-looking statements reflect management's 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 theSecurities 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 otherSEC filings, including our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 12, 2021 . 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 toLeMaitre Vascular, Inc. and its subsidiaries. LeMaitre, AlboGraft, AlboSure, AnastoClip, Artegraft, CardioCel, Omniflow, RestoreFlow, TRIVEX, VascuCel and XenoSure are registered trademarks ofLeMaitre 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 global provider of medical devices and human tissue cryopreservation services largely used in the treatment of peripheral vascular disease, end-stage renal disease, and to a lesser extent cardiovascular disease. We develop, manufacture, and market vascular devices to address the needs of vascular surgeons and, to a lesser extent, other specialties such as cardiac surgeons, general surgeons and neurosurgeons. Our diversified portfolio of devices consists of brand name products that are used in arteries and veins and are well known to vascular surgeons. Our principal product offerings are sold throughout the world, primarily inthe United States ,Europe , theUnited Kingdom ,Canada andAsia Pacific . We estimate that the annual worldwide market for peripheral vascular devices exceeds$5 billion , within which we estimate that the market for our products is approximately$750 million . We have grown our business 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, to a lesser extent, developing complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue to pursue this strategy in the future. We currently manufacture most of our products in ourBurlington, Massachusetts headquarters. 25
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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, 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 to their patients. More recently, however, we have begun to explore adjacent market customers, or non-vascular surgeon customers, who can be served by our vascular device technologies, such as cardiac surgeons and neurosurgeons. SinceMarch 2020 , the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures, and many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has been restricted by hospitals or local governments. In some geographies, we have seen restrictions eased, however, the prevalence of COVID-19 variants has resulted in the re-imposition of restrictions in some areas. During 2020 and into 2021, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. In response to the COVID-19 pandemic, we have modified our manufacturing operations in order to adhere to social distancing requirements. In Q2 2020 we also undertook measures to reduce our operating costs, including temporary base salary cuts and a reduction in force of approximately 13% of our full-time employees. However, as sales normalized, we began rehiring personnel in many departments, including our sales force, and we expect to continue adding personnel in the second half of 2021. We ended our temporary base salary cuts onAugust 31, 2020 . Our principal product lines include the following: anastomotic clips, angioscopes, biologic vascular and dialysis grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy catheters, occlusion catheters, radiopaque marking tape, synthetic vascular grafts, and valvulotomes. Through our RestoreFlow allografts business, we also provide services related to the processing and cryopreservation of human vascular and cardiac tissue. Our principal biologic offerings include vascular and cardiac patches, vascular, and cardiac and dialysis grafts. In Q3 2021, biologics represented 49% of worldwide sales. We view the biologic device segment favorably, as we believe it contains differentiated and in some cases growing product segments. OnJune 22, 2020 , we acquired the Artegraft biologic graft business. The results of operations of this business have been included in our results of operations since the date of acquisition. 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:
• adding complementary products through acquisitions;
• growing our direct sales force in
and Asia Pacific ;
• introducing our products into new territories upon receipt of regulatory
approvals or registrations in these territories;
• consolidating and automating product manufacturing at our Burlington,
Massachusetts facilities, and
• updating existing products and introducing new products through research and
development.
Our ability to execute on these opportunities on a timely basis, or at all, may
be impacted by the COVID-19 pandemic, the duration and severity of which are
uncertain.
We sell our products and services primarily through a direct sales force. As of
September 30, 2021 , our sales force was comprised of 92 sales representatives in
North America , Europe , the United Kingdom and Asia Pacific , including three
export managers. Our worldwide headquarters is located in Burlington,
Massachusetts , and we also have North American sales offices in Chandler,
Arizona and Vaughan, Canada . Our European headquarters is located in Sulzbach,
Germany , with additional sales offices in Milan, Italy ; Madrid, Spain ; and
Hereford, England . Our Asia Pacific headquarters is located in Singapore , with
additional sales offices in Tokyo, Japan ; Shanghai, China ; and Kensington,
Australia . In Q3 2021, approximately 94% of our net sales were generated in
countries or regions in which we employ direct sales representatives. We also
sell our products in other countries through distributors.
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Historically we have experienced success in lower-rivalry niche segments, for example the markets for valvulotomes and carotid shunts. In the valvulotome market, our highly differentiated devices have historically allowed us to increase our selling prices while maintaining unit share. In contrast, we have experienced less success in highly competitive markets such as the polyester vascular graft market, where we face competition from larger companies with greater resources. While we believe these challenging market dynamics can be mitigated by our relationships with vascular surgeons, there can be no assurance that we will succeed in highly competitive markets. We have also experienced success in international markets, such asEurope , where we also have a significant sales force, and sometimes offer comparatively lower average selling prices. If we continue to seek growth opportunities outside ofNorth America , we may experience downward pressure on our gross margin.
Our strategy for growing our business includes the acquisition of complementary product lines and companies as well as the occasional discontinuance or divestiture of products that are no longer complementary:
• In
remaining assets of their valve cutter business, including distribution rights
in
• In
assets of their biologic patch business for
payments of up to
contingencies.
• In
the assets of their biologic graft business for
payments of up to $17.5 million , depending upon 2021 - 2023 unit sales.
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 into our direct sales organization:
• During 2020, we entered into definitive agreements with, or participated with
Admedus in concluding agreements with, several former Admedus distributors in
the
distribution of our biologic patches, and we began selling direct-to-hospital
in those geographies. The termination fees totaled approximately
• During 2020, we participated with Artegraft in concluding agreements with
several of their former U.S. distributors in order to terminate their
distribution of biologic grafts. We now sell Artegraft products
direct-to-hospital throughout the United States .
We also rely, to a lesser extent, on internal product development efforts to bring differentiated technology and next-generation products to market:
• In 2019, we launched DuraSure, a biologic patch indicated for closing or
repairing dural defects during open neurosurgical procedures.
• In 2020, we launched RestoreFlow cardiac allografts for use in cardiac repair
and restoration.
In addition to our sales growth strategies, we have also executed on several
operational initiatives designed to consolidate manufacturing into our
• In
from Applied Medical. We immediately initiated a project to transfer the
production to our Burlington facilities. This transfer is now complete.
• In late 2018 and into 2019, we expanded our
order to transfer the production of our Omniflow II vascular graft from our
substantially complete, and the
• In
In
devices to our
in 2023.
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Our execution of these initiatives may affect the comparability of our financial results and may cause fluctuations from period to period as we incur related process engineering and other charges. Fluctuations in the exchange rates between theU.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the nine months endedSeptember 30, 2021 approximately 39% of our sales took place outside theU.S. , largely in currencies other than theU.S. dollar. We expect foreign currencies will represent a significant percentage of future sales. Selling, marketing, and administrative costs related to these sales are also denominated in foreign currencies, thereby partially mitigating our bottom-line exposure to exchange rate fluctuations. However, if there is an increase in the rate at which a foreign currency is exchanged forU.S. dollars, it will require more of the foreign currency to equal a specified amount ofU.S. dollars than before the rate increase. In such cases we will record less revenue inU.S. dollars than we did before the exchange rate changed. For the nine months endedSeptember 30, 2021 , we estimate that the effects of changes in foreign exchange rates increased our reported sales by approximately$2.4 million , as compared to rates in effect for the nine months endedSeptember 30, 2020 .
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 those 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 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, sales meetings, 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 salaries, stock based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense and insurance expense.
Research and development. Research and development expense includes primarily costs associated with obtaining and maintaining regulatory approval of our products, principally salaries, laboratory testing and supply costs. It also includes costs associated with the design and execution of clinical studies, costs to register, maintain, and defend our intellectual property, and costs to transfer the manufacturing of acquired product lines to ourBurlington facility. Also included are costs associated with the design, development, testing and enhancement of new or existing products.
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 inthe 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) inthe United States and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill forUnited States tax reporting purposes. 28
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Table of Contents Results of Operations SinceMarch 2020 , the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures, and many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has been restricted by hospitals or local governments. In some geographies, we have seen restrictions eased, however, the prevalence of COVID-19 variants has resulted in the re-imposition of restrictions in some areas. During 2020 and into 2021, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. In particular, in Q3 2021, the delta variant of COVID-19 depressed demand for our products in some geographies. In response to the COVID-19 pandemic, we have modified our manufacturing operations in order to adhere to social distancing requirements. In Q2 2020 we also undertook measures to reduce our operating costs, including temporary base salary cuts and a reduction in force of approximately 13% of our full-time employees. However, as sales normalized, we began rehiring personnel in many departments, including our sales force, and we expect to add personnel in the second half of 2021. We ended our temporary base salary cuts onAugust 31, 2020 . For reasons described above, our results could be materially impacted in the near term. These financial statements and management's discussion and analysis of financial condition and results of operations should be read in that context.
Comparison of the three- and nine-month periods ended
The following tables set forth, for the periods indicated, our net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:
Three months ended September 30, Nine months ended September 30,
(unaudited) Percent Percent
2021 2020 change 2021 2020 change
($ in thousands) ($ in thousands)
Net sales $ 38,368 $ 36,416 5 % $ 114,921 $ 91,818 25 %
Net sales by
geography:
Americas $ 25,299 $ 24,184 5 % $ 76,327 $ 57,462 33 %
Europe, Middle East
and Africa 10,535 10,039 5 % 31,200 28,339 10 %
Asia Pacific 2,534 2,193 16 % 7,394 6,017 23 %
Total $ 38,368 $ 36,416 5 % $ 114,921 $ 91,818 25 %
As a general matter, the COVID-19 pandemic negatively impacted sales in the 2020 periods more acutely than in the 2021 periods in all geographies, though it still negatively impacted sales in Q3 2021 as compared to Q2 2021.
Net sales. Net sales increased$2.0 million , or 5%, to$38.4 million for the three months endedSeptember 30, 2021 , compared to$36.4 million for the three months endedSeptember 30, 2020 . The increase was driven primarily by Artegraft bovine grafts, with increased sales of$0.7 million , as well as higher allograft service revenues of$0.6 million . We also had higher valvulotome sales and bovine carotid patch sales of$0.3 million each. We estimate that the weakerU.S. dollar increased net sales by$0.2 million during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . Net sales increased$23.1 million , or 25%, to$114.9 million for the nine months endedSeptember 30, 2021 , compared to$91.8 million for the nine months endedSeptember 30, 2020 . The increase was driven largely by Artegraft bovine grafts, with increased sales of$13.0 million . We also had higher valvulotome sales of$3.2 million , higher carotid shunt and bovine carotid patch sales of$1.6 million each, and higher allografts service revenues of$1.5 million . We estimate that the weakerU.S. dollar increased sales by$2.4 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Direct-to-hospital net sales were 94% of our total net sales for the nine months endedSeptember 30, 2021 , and 95% for the nine-month period endedSeptember 30, 2020 . 29
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Net sales by geography. Net sales in theAmericas increased$1.1 million , or 5%, for the three months endedSeptember 30, 2021 as compared toSeptember 30, 2020 . The increase was driven mainly by Artegraft bovine grafts, with increased sales of$0.7 million , as well as higher allograft service revenue of$0.6 million . Offsetting these increases were lower bovine cardiac patch revenues of$0.3 million . Net sales in theAmericas increased$18.9 million , or 33%, for the nine months endedSeptember 30, 2021 as compared toSeptember 30, 2020 . The increase was driven mainly by Artegraft bovine grafts, with increased sales of$13.0 million . We also had higher valvulotome sales of$1.9 million , higher allografts service revenues of$1.5 million , higher bovine carotid patch sales of$1.3 million and higher carotid shunt sales of$1.0 million . Offsetting these increases were lower bovine cardiac patch revenues of$0.3 million . Revenues from all other products increase$0.5 million on a net basis.
EMEA net sales increased
EMEA net sales increased$2.9 million , or 10%, for the nine months endedSeptember 30, 2021 as compared toSeptember 30, 2020 . The increase was driven by higher valvulotome sales of$1.2 million , as well as higher carotid shunt, embolectomy catheter and bovine cardiac patch sales, all with increases of$0.5 million . Ovine graft sales were higher by$0.4 million . These increases were offset in part by a decrease in sales of bovine carotid patches of$0.5 million . InMay 2021 , our CE mark certifications were reinstated for five products. However, we also simultaneously received a change in CE mark requirements for certain bovine carotid patches and polyester grafts. For bovine carotid patches, only bovine pericardium sourced from certain of our suppliers are permitted to be sold under the new CE mark, which is causing our production costs to increase, and our gross margin to decrease. The company is pursuing a path to reinstate an additional lower-cost supplier, although no assurance can be given.Asia Pacific net sales increased$0.3 million , or 16%, for the three months endedSeptember 30, 2021 as compared toSeptember 30, 2020 , with bovine carotid patch sales increasing$0.3 million . Embolectomy catheter and ePTFE graft sales each increased by$0.1 million . These and other product sales increases were in part offset by lower sales of TRIVEX powered phlebectomy systems of$0.1 million .Asia Pacific net sales increased$1.4 million , or 23%, for the nine months endedSeptember 30, 2021 as compared toSeptember 30, 2020 , with bovine carotid patch sales increasing$0.8 million , and embolectomy catheter sales and ePTFE graft sales each increasing$0.1 million . These and other product sales increases were partially offset by lower sales of TRIVEX powered phlebectomy systems of$0.2 million .
The following table sets forth the change in our gross profit and gross margin for the periods indicated:
Three months ended September 30, Nine months ended September 30,
(unaudited) Percent Percent
2021 2020 Change change 2021 2020 Change change
($ in thousands) ($ in thousands)
Gross profit $ 24,866 $ 22,704 $ 2,162 10 % $ 75,426 $ 60,216 $ 15,210 25 %
Gross margin 64.8 % 62.3 % 2.5 % * 65.6 % 65.6 % 0.0 % *
*Not applicable
Gross Profit. Gross profit increased $2.1 million , or 10%, to $24.9 million for
the three months ended September 30, 2021 , and gross margin increased 250 basis
points to 64.8% in the period. The increase in gross profit and the gross margin
were driven primarily by the impact in the prior period of purchase accounting
from the Artegraft bovine graft acquisition that is no longer applicable in the
current period. Higher Artegraft and valvulotome sales in the current period
also contributed to the gross margin increase, as these products carry
comparatively higher gross margins. These favorable impacts were partly offset
by manufacturing inefficiencies and higher excess and obsolescence expense in
the current period.
Gross profit increased
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Operating Expenses
The following tables set forth changes in our operating expenses for the periods
indicated and the change between the specified periods expressed as a percentage
increase or decrease:
Three months ended September 30, Nine months ended September 30,
(unaudited) Percent Percent
2021 2020 $ Change change 2021 2020 $ Change change
Sales and
marketing $ 6,941 $ 5,157 $ 1,784 35 % $ 20,210 $ 17,788 $ 2,422 14 %
General and
administrative 6,004 5,901 103 2 % 18,748 16,425 2,323 14 %
Research and
development 2,848 2,098 750 36 % 8,344 7,230 1,114 15 %
Gain on sale of
building - (470 ) 470 * - (470 ) 470 *
Total $ 15,793 $ 12,686 $ 3,107 24 % $ 47,302 $ 40,973 $ 6,329 15 %
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
% of Net % of Net % of Net % of Net
Sales Sales Change Sales Sales Change
Sales and marketing 18 % 14 % 4 % 18 % 19 % (1% )
General and administrative 16 % 16 % (0% ) 16 % 18 % (2% )
Research and development 7 % 6 % 1 % 7 % 8 % (1% )
Gain on sale of building 0 % (1% ) 1 % 0 % (1% ) 1 %
* Not a meaningful percentage relationship.
Sales and marketing. For the three months endedSeptember 30, 2021 , sales and marketing expense increased 35% to$6.9 million . The increase was driven primarily by higher salaries and related expenses of$1.5 million , including higher commissions of approximately$0.4 million and higher recruiting costs of$0.3 million . Travel and related expenses were also higher by$0.2 million . Expense reduction programs implemented during the second quarter of 2020 in response to the COVID-19 global pandemic, including a reduction in force, lowered expenses for the three months endedSeptember 30, 2020 . Since the pandemic has abated, we have begun rehiring in most positions, including our sales force. As a percentage of net sales, sales and marketing expense increased to 18% for the three months endedSeptember 30, 2021 from 14% in the prior period. For the nine months endedSeptember 30, 2021 , sales and marketing expense increased 14% to$20.2 million . The increase was driven by higher salaries and related expenses of$2.5 million , including higher commissions due to increased sales, as well as higher recruiting costs. These increases were offset in part by lower travel and related expenses, including our annual sales meeting held each January, which took place virtually in 2021. As a percentage of net sales, sales and marketing expense decreased to 18% for the nine months endedSeptember 30, 2021 from 19% in the prior period. General and administrative. For the three months endedSeptember 30, 2021 , general and administrative expenses increased 2% to$6.0 million . Compensation and related expenses were higher by$0.6 million , as salaries were reinstated inSeptember 2020 and personnel were rehired following theApril 2020 reduction in force. Offsetting this increase was a gain recognized in the current period from an amendment of a contingent purchase obligation associated with our 2019 Admedus biologic patch acquisition. As a percentage of sales, general and administrative expense was unchanged at 16% for three month periods endedSeptember 30, 2021 and 2020. For the nine months endedSeptember 30, 2021 , general and administrative expenses increased 14% to$18.7 million . The increase was primarily due to higher compensation and related expenses, as salaries were reinstated inSeptember 2020 and personnel were rehired following theApril 2020 reduction in force. We also had higher insurance costs, banking fees and professional fees. As a percentage of sales, general and administrative expense decreased to 16% for the nine months endedSeptember 30, 2021 , from 18% in the prior period. Research and development. For the three months endedSeptember 30, 2021 , research and development expense increased$0.8 million , or 36%, to$2.8 million . Product development and process engineering expenses together increased$0.4 million or 57%, in large part due to projects related to the manufacturing transfer of acquired products to ourBurlington facilities. Clinical and regulatory expenses increased$0.3 million , or 23%, driven by higher compensation and other costs incurred in connection with reinstating or maintaining regulatory approvals, especially inEurope . As a percentage of sales, total research and development expense increased to 7% for the three months endedSeptember 30, 2021 , from 6% in the prior period. Product development expenses was unchanged at 1% of sales for the three month periods endedSeptember 30, 2021 and 2020. 31
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For the nine months endedSeptember 30, 2021 , research and development expense increased$1.1 million , or 15%, to$8.3 million . Product development and process engineering expenses decreased$0.3 million , or 8%, in large part due to the completion of certain manufacturing transfer projects. Clinical and regulatory expenses increased$1.4 million , or 38%, driven by higher compensation expenses as well as consulting and other costs incurred in connection with reinstating or maintaining regulatory approvals, especially inEurope . As a percentage of sales, total research and development expense decreased to 7% for the nine months endedSeptember 30, 2021 , from 8% in the prior period. Product development expenses decreased to 1% of sales for the nine months endedSeptember 30, 2021 , from 2% in the prior period. Gain on sale of building. During the first quarter of 2020, in connection with our planned manufacturing transfer of our Omniflow II ovine biologic graft toBurlington , management committed to a plan to sell our land and building located inNorth Melbourne, Australia . The sale was completed inSeptember 2020 . We recognized a gain on the sale during the three months endingSeptember 30, 2020 , net of applicable sales taxes and administrative costs, of$0.5 million . Income tax expense. We recorded a tax provision of$1.9 million on pre-tax income of$8.4 million for the three months endedSeptember 30, 2021 , compared to a$1.9 million tax provision on pre-tax income of$9.4 million for the three months endedSeptember 30, 2020 . We recorded a tax provision of$5.6 million on pre-tax income of$26.4 million for the nine months endedSeptember 30, 2021 , compared to$4.2 million on pre-tax income of$18.4 million for the nine months endedSeptember 30, 2020 . Our effective income tax rate was 22.6% and 21.3% for the three- and nine-month periods endedSeptember 30, 2021 . Our tax expense for the current period is based on an estimated annual effective tax rate of 24.3%, 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 federal and state tax credits, permanent items, different statutory rates from our foreign entities, and a discrete item for stock option exercises. Our effective income tax rate was 19.9% and 23.0% for the three- and nine-month periods endedSeptember 30, 2020 . Our 2020 provision was based on an estimated annual effective tax rate of 25.0%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2020 varied from the statutory rate mainly due to federal and state tax credits, permanent items, and different statutory rates from our foreign entities. 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 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 ofSeptember 30, 2021 , we have provided a valuation allowance of$1.8 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards andMassachusetts tax credit carry forwards that are not expected to be realized.
Liquidity and Capital Resources
AtSeptember 30, 2021 , our cash and cash equivalents were$17.4 million as compared to$26.8 million atDecember 31, 2020 . We also had$49.7 million in short-term marketable securities as ofSeptember 30, 2021 and$0.2 million as ofDecember 31, 2020 . Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, and consist primarily of operating bank accounts. Our short-term marketable securities consist of a managed income mutual fund investing mainly in short-term investment grade,U.S. -dollar denominated fixed and floating-rate debt, and a short-duration bond fund. All of our cash held outside ofthe United States is available for corporate use, with the exception of$3.4 million held by subsidiaries in jurisdictions for which earnings are planned to be permanently reinvested. OnJuly 16, 2021 , we closed an offering of 1,000,0000 shares of our common stock,$0.01 par value per share, at a price to the public of$54.50 per share less underwriting discounts. The net proceeds, after deducting the underwriting discounts and other offering expenses, were approximately$51.0 million . We used a portion of the proceeds from the offering to repay our outstanding debt. We plan to use the remaining proceeds for general corporate purposes, including working capital needs and capital expenditures, dividend payments, deferred payments related to prior acquisitions, and the funding of future acquisitions. OnAugust 4, 2021 , the
underwriters purchased an additional 150,000 shares pursuant to an option
granted to them in connection with the offering described above. The net
proceeds to the Company, after deducting underwriting discounts and other
offering expenses, were approximately
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OnFebruary 23, 2021 , our Board of Directors authorized the repurchase of up to$15.0 million of the Company's common stock through transactions on the open market, in privately negotiated purchases or otherwise untilFebruary 22, 2022 . The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program. InJune 2020 , in connection with the Artegraft acquisition, we incurred debt of$65 million including a five-year revolving line of credit of$25 million and a five-year term loan of$40 million . The loans bear interest at either the Base Rate as defined in the agreement plus an applicable margin of 1.25% to 1.75% depending on our consolidated leverage ratio, or the Eurodollar Rate plus an applicable margin of 2.25% to 2.75% depending on our consolidated leverage ratio. InJuly 2021 we repaid the balance under the term loan, plus accrued interest, in full. The term of the revolving line of credit is five years and allows re-borrowing up to$25 million during the term, with all outstanding amounts due onJune 22, 2025 . The revolving line of credit is currently undrawn and available for future drawdowns.
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 and long-term borrowings, and funds generated from our operations.
We recognized operating income of
• the revenues generated by sales of our products and services;
• payments associated with potential future quarterly cash dividends to our
common stockholders;
• future acquisition-related payments;
• payments associated with income and other taxes;
• payments for interest and principle on our long-term debt and revolving line
of credit;
• 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 for
our existing and future products;
• the costs associated with obtaining European MDR clearances for our existing
and future products;
• the number, timing, and nature of acquisitions, divestitures and other
strategic transactions, and
• potential future share repurchases.
Our cash balances may decrease as we continue to use cash to fund our
operations, make acquisitions, repay outstanding debt, pay dividends, repurchase
shares of our common stock 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 access our
available revolving credit facility. The sale of additional equity and debt
securities may result in dilution to our stockholders, as was the case with our
July 2021 equity offering. 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.
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Table of Contents Dividends InFebruary 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 on a quarterly basis. The dividend activity for the periods presented is as follows: Record Date Payment Date Per Share Amount Dividend Payment (in thousands) Fiscal Year 2021 March 9, 2021 March 25, 2021 $ 0.110 $ 2,262 May 19, 2021 June 3, 2021 $ 0.110 $ 2,267 August 26, 2021 September 9, 2021 $ 0.110 $ 2,401 Fiscal Year 2020 March 3, 2020 March 19, 2020 $ 0.095 $ 1,917 May 20, 2020 June 4, 2020 $ 0.095 $ 1,917 August 27, 2020 September 10, 2020 $ 0.095 $ 1,925 November 19, 2020 December 3, 2020 $ 0.095 $ 1,936 OnOctober 26, 2021 , our Board of Directors approved a quarterly cash dividend on our common stock of$0.11 per share payable onDecember 2, 2021 , to stockholders of record at the close of business onNovember 19, 2021 , which will total approximately$2.4 million . Cash Flows Nine months ended September 30, (in thousands) 2021 2020 Net Change Cash and cash equivalents$ 17,369 $ 29,279 $ (11,910 ) Cash flows provided by (used in): Operating activities$ 30,046 $ 20,648 $ 9,398 Investing activities (53,830 ) (56,564 ) 2,734 Financing activities 14,861 53,160 (38,299 ) Net cash provided by operating activities. Net cash provided by operating activities was$30.0 million for the nine months endedSeptember 30, 2021 , consisting of$20.7 million in net income, adjustments for non-cash or non-operating items of$13.8 million (including primarily depreciation and amortization of$8.2 million , stock-based compensation of$2.6 million , provisions for inventory write-offs and doubtful accounts of$3.2 million ), and also a net use of working capital of$4.5 million . The net cash used for working capital was driven by an increase in inventory and other deferred costs of$2.8 million , an increase in prepaid expenses and other assets of$0.7 million , payments of accounts payable and accrued liabilities of$0.6 million , and an increase in accounts receivable of$0.4 million . Net cash provided by operating activities was$20.6 million for the nine months endedSeptember 30, 2020 , consisting of$14.2 million in net income, adjustments for non-cash or non-operating items of$9.1 million (including depreciation and amortization of$5.9 million , stock-based compensation of$2.3 million , provisions for inventory write-offs and doubtful accounts of$1.0 million and$0.3 million , respectively, and a gain on the sale of a building of$0.5 million ) and also a net use of working capital of$2.7 million . The net cash used for working capital was driven by an increase in inventory and other deferred costs of$3.2 million and an increase in receivable of$1.3 million . These cash uses were offset by an increase in accounts payable and accrued liabilities of$1.9 million . 34
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Net cash used in investing activities. Net cash used in investing activities was
Net cash used in investing activities was$56.6 million for the nine months endedSeptember 30, 2020 , including acquisition-related payments of$72.6 million primarily associated with the purchase of the Artegraft biologic graft business and expenditures on equipment and technology of$1.2 million , offset by net sales and purchases of marketable securities of$15.8 million and proceeds from the sale of theNorth Melbourne, Australia building of$2.0 million . Net cash provided by financing activities. Net cash provided by financing activities was$14.9 million for the nine months endedSeptember 30, 2021 . Sources of cash included primarily net proceeds from an equity offering of$58.7 million and proceeds from stock option exercises of$2.5 million , net of shares repurchased to cover employee payroll taxes. These sources of cash were offset by payments made on our long-term debt of$39.0 million , dividend payments of$6.9 million and deferred payments for acquisitions of$0.4 million . Net cash provided by financing activities was$53.2 million for the nine months endedSeptember 30, 2020 , consisting primarily of borrowings of$63.2 million net of debt issuance costs incurred and proceeds from stock option exercises of$1.2 million , net of shares repurchased to cover employee payroll taxes. These increases to cash were partly offset by the payment of dividends of$5.8 million , payments of debt of$4.5 million and deferred payments for acquisitions of 1.0 million.
Critical Accounting Policies and Estimates
We have adopted various accounting policies to prepare our consolidated financial statements in accordance withU.S. generally accepted accounting principles, orU.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 endedDecember 31, 2020 . There have been no material changes in our critical accounting policies during the nine months endedSeptember 30, 2021 . The preparation of our consolidated financial statements in conformity withU.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 revenue recognition, inventory valuation, valuation of intangible assets and goodwill, contingent consideration and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results may differ from those estimates.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements that may impact our financial statements upon adoption in future periods can be found in Note 1 to our financial statements included under Part 1, Item 1 of this Quarterly Report on Form 10-Q.
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