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 status of our global regulatory approvals and compliance with regulatory requirements to market and sell our products both in the US and outside of the US; the duration and severity of the impact of COVID-19 on the global economy, our customers, our suppliers and our company; 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, 2021 , as filed with theSEC onFebruary 28, 2022 . 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, AnastoClip, Artegraft, CardioCel, Omniflow, RestoreFlow, 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. OverviewLeMaitre Vascular is 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 degree, 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 globally, 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 simple 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. 22
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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 therefore can 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 in response to the onset of the pandemic and then periodically when infection rates have increased. Many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has periodically been restricted by hospitals or local governments. More recently, however, in many geographies we have seen restrictions eased, although the prevalence of COVID-19 variants has not always resulted in the re-opening of hospital access. During 2020 and into 2022, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. Our principal product lines include the following: anastomotic clips, 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 as well as vascular and dialysis grafts. In Q2 2022, biologics represented 50% of worldwide sales. We view the biologic device offerings favorably, as we believe they represent differentiated and in some cases growing product segments. 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
Kingdom,
sales personnel;
• 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
June 30, 2022 , our sales force was comprised of 111 sales representatives in
North America , Europe , the United Kingdom and Asia Pacific , including two export
managers. Our worldwide headquarters is located in Burlington, Massachusetts ,
and we also have sales offices in Chandler, Arizona and Vaughan, Canada . Our
European headquarters is located in Sulzbach, Germany , and we also have sales
offices in Milan, Italy ; Madrid, Spain ; and Hereford, England . Our Asia Pacific
headquarters is located in Singapore , and we also have sales offices in Tokyo,
Japan ; Shanghai, China ; Kensington, Australia ; and Seoul, Korea . During the
current quarter, approximately 95% of our net sales were generated in
territories in which we employ direct sales representatives. We also sell our
products in other countries through distributors.
Historically we have experienced success in lower-rivalry niche segments. In the
valvulotome market, for example, 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 and lower per unit costs. 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.
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We have also experienced success in international markets, such asEurope , where we 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.
• In
remaining assets of their Eze-Sit valve cutter business, including
distribution rights, for
• In
assets of their CardioCel biologic patch business for
additional payments of up to
certain contingencies.
• In
assets of their bovine graft business for $72.5 million plus additional
payments of up to $17.5 million , depending upon 2021 - 2023 unit sales.
Occasionally we discontinue or divest products or product lines that are no longer complementary to our business or that are not commercially viable.
• During 2021, we made decisions to wind down or discontinue TRIVEX powered
phlebectomy systems, remote endarterectomy devices and surgical glue. These
product lines totaled approximately
• During 2022, we made the decision to wind down the ProCol graft, AlboSure
polyester patch and Latis graft cleaning catheter product lines. These
products totaled approximately $0.9 million in 2021 revenues.
From time to time we may undertake SKU reductions and transition sales to other
SKUs or products with similar features. For example, in 2022, we decided to
initiate the transition of sales of our Syntel spring tip catheter to our
NovaSil catheter. Any of these actions may result in inventory write-offs and
temporary or permanent negative impacts to our sales, gross margin and customer
relationships.
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
bovine cardiac and vascular patch products, and we began selling
direct-to-hospital in those geographies. The termination fees totaled
approximately $0.1 million .
• During 2020, we participated with Artegraft in concluding agreements with
several of their former
distribution of our bovine graft products. We now sell Artegraft products
direct-to-hospital throughout the United States .
• In
Korean distributor in order to sell products directly in
the existing distribution arrangement. We expect to begin selling
direct-to-hospital in
will total approximately $0.5 million .
We also rely, to a much lesser extent, on internal product development efforts to bring differentiated technology and next-generation products to market:
• In 2020, we launched RestoreFlow cardiac allografts for use in cardiac repair
and restoration.
• In
powered phlebotomy device used to remove varicose veins in the leg.
In addition to our sales growth strategies, we have also executed on several
operational initiatives designed to consolidate manufacturing into our
• In
In
devices to our
in 2023.
• In
manufacturing operations and to reduce expenses. The Cardial business
consisted of the manufacturing of polyester vascular grafts, valvulotomes,
surgical glue and select OEM devices. We expect to transition Cardial graft
sales to our
savings and improved margins. We acquired the Cardial business in 2018.
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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 six months endedJune 30, 2022 approximately 38% 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 six months endedJune 30, 2022 , we estimate that the effects of changes in foreign exchange rates decreased our reported sales by approximately$2.5 million , as compared to rates in effect for the six months endedJune 30, 2021 .
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 primarily includes costs associated with obtaining and maintaining regulatory approval of our products, 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 in theU.S. , which include operating losses or profits 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 theU.S. and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill forU.S. tax reporting purposes. 25
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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 at the onset of the pandemic and then periodically over the last two years when infection rates have increased. Many of our devices are used in elective procedures. Additionally, our sales representatives' access to hospitals and surgeons has periodically been restricted by hospitals or local governments. More recently, in many geographies we have seen restrictions eased, although the prevalence of COVID-19 variants has not always resulted in the re-opening of hospital access. During 2020 and into 2022, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales. As 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 six-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 June 30, Six months ended June 30,
(unaudited) Percent Percent
2022 2021 change 2022 2021 change
($ in thousands) ($ in thousands)
Net sales $ 42,108 $ 40,670 4 % $ 81,669 $ 76,553 7 %
Net sales by
geography:
Americas $ 28,854 $ 27,329 6 % $ 55,397 $ 51,028 9 %
Europe, Middle East
and Africa 10,749 10,803 (0 %) 21,243 20,665 3 %
Asia Pacific 2,505 2,538 (1 %) 5,029 4,860 3 %
Total $ 42,108 $ 40,670 4 % $ 81,669 $ 76,553 7 %
Net sales. Net sales increased by $1.4 million , or 4%, to $42.1 million for the
three months ended June 30, 2022 , compared to $40.7 million for the three months
ended June 30, 2021 . The increase was driven primarily by an increase in carotid
patch sales of $0.9 million , allograft preservation services of $0.7 million ,
and bovine graft sales of $0.6 million . Additionally, shunt and valvulotome
sales increased by $0.2 million and $0.1 million , respectively. We estimate that
the stronger U.S. dollar decreased net sales by $1.7 million during the three
months ended June 30, 2022 as compared to the three months ended June 30, 2021 .
Net sales increased by $5.1 million , or 7%, to $81.7 million for the six months
ended June 30, 2022 , compared to $76.6 million for the six months ended June 30,
2021 . The increase was driven primarily by an increase in carotid patch sales of
$1.6 million , bovine graft sales of $1.6 million and allograft preservation
services of $1.4 million . Additionally, shunt and valvulotome sales increased by
$0.9 million and $0.5 million , respectively. We estimate that the stronger U.S.
dollar decreased net sales by $2.5 million during the six months ended June 30,
2022 as compared to the six months ended June 30, 2021 .
Direct-to-hospital net sales were 95% of our total net sales for the six months
ended
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Net sales by geography. Net sales in theAmericas increased$1.5 million , or 6%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . The increase was driven primarily by increased allograft preservation services of$0.6 million , increased bovine graft sales of$0.6 million , and increased shunt sales of$0.3 million . Net sales in theAmericas increased$4.4 million , or 9%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . The increase was driven primarily by increased bovine graft sales of$1.6 million , increased allograft preservation services of$1.2 million , and increased shunt sales of$0.5 million . Additionally, valvulotome and carotid patch sales both increased by$0.4 million , respectively. EMEA net sales decreased$0.1 million , or 0.5%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . The decrease was driven primarily by decreased ovine graft sales of$0.4 million largely due to the lack of a CE mark forBurlington produced devices, and decreased surgical glue sales of$0.2 million , as surgical glue sales were discontinued during the most recent period. The decreased sales were offset by increased carotid patch sales of$0.4 million , and increased valvulotome sales of$0.2 million . EMEA net sales increased$0.6 million , or 3%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . The increase was driven primarily by increased carotid patch sales of$0.8 million , increased shunt sales of$0.5 million , and increased valvulotome sales of$0.3 million . The increased sales were partial offset by decreased ovine graft sales of$0.6 million largely due to the lack of a CE mark forBurlington -produced devices, and decreased surgical glue sales of$0.3 million .Asia Pacific net sales decreased$33,000 , or 1%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . The decrease was driven primarily by decreased occlusion catheter sales of$0.1 million , decreased shunt sales of$0.1 million , and decreased valvulotome sales of$0.1 million . The decreased sales were offset by increased carotid patch sales of$0.2 million .Asia Pacific net sales increased$0.2 million , or 3%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . The increase was driven primarily by increased carotid patch sales of$0.4 million offset by decreased shunt sales of$0.1 million . The following table sets forth the change in our gross profit and gross margin for the periods indicated: Three months ended June 30, Six months ended June 30, (unaudited) Percent Percent 2022 2021 Change change 2022 2021 Change change ($ in thousands) ($ in thousands) Gross profit$ 27,810 $ 26,761 $ 1,049 4 %$ 53,772 $ 50,560 $ 3,212 6 % Gross margin 66.0 % 65.8 % 0.2 % * 65.8 % 66.0 % (0.2 %) * *Not applicable Gross Profit. Gross profit increased$1.0 million , or 4%, to$27.8 million for the three months endedJune 30, 2022 , and gross margin increased 20 basis points to 66.0% in the period. The increase in gross profit was driven primarily by increased sales from carotid patch, allograft, and bovine grafts. The increase in gross margin was driven primarily by increased manufacturing efficiencies, lower charges for excess and obsolete inventory, and increased bovine graft sales which carry comparatively higher gross margins, partially offset by unfavorable changes in foreign currency exchange rates. Gross profit increased$3.2 million , or 6%, to$53.8 million for the six months endedJune 30, 2022 , and gross margin decreased 20 basis points to 65.8% in the period. The increase in gross profit was driven primarily by increased sales from carotid patch, bovine graft, and allografts. The decrease in the gross margin was driven primarily by an increase in labor costs, unfavorable product mix, including higher sales of comparatively low margin polyester grafts, unfavorable changes in foreign currency exchange rates and manufacturing inefficiencies largely related to bovine carotid patches. 27
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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 June 30, Six months ended June 30,
(unaudited) Percent Percent
2022 2021 $ Change change 2022 2021 $ Change change
Sales and
marketing $ 8,242 $ 6,803 $ 1,439 21 % $ 16,092 $ 13,269 $ 2,823 21 %
General and
administrative 7,331 6,200 1,131 18 % 14,583 12,744 1,839 14 %
Research and
development 3,346 2,652 694 26 % 6,278 5,496 782 14 %
Restructuring 3,107 - 3,107 * 3,107 - 3,107 *
Total $ 22,026 $ 15,655 $ 6,371 41 % $ 40,060 $ 31,509 $ 8,551 27 %
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
% of Net % of Net % of Net % of Net
Sales Sales Change Sales Sales Change
Sales and
marketing 20 % 17 % 3 % 20 % 17 % 3 %
General and
administrative 17 % 15 % 2 % 18 % 17 % 1 %
Research and
development 8 % 7 % 1 % 8 % 7 % 1 %
Restructuring 7 % 0 % 7 % 4 % 0 % 4 %
* Not a meaningful percentage
relationship.
Sales and marketing. For the three months ended June 30, 2022 , sales and
marketing expense increased 21% to $8.2 million . The increase was driven
primarily by higher salaries and related expenses of $1.1 million , including
higher commissions of approximately $0.3 million . The number of sales reps
increased from 88 to 111 from June 30, 2021 to June 30, 2022 . We also added 2
additional regional sales managers during this time. Travel and related expenses
were also higher by $0.2 million . Expense reduction programs implemented during
the second quarter of 2020 through the fourth quarter of 2021 in response to the
COVID-19 global pandemic, including a reduction in force, lowered expenses for
the three months ended June 30, 2021 . We have since rehired in many areas,
including our sales force. As a percentage of net sales, sales and marketing
expense increased to 20% for the three months ended June 30, 2022 , up from 17%
in the prior period.
For the six months ended June 30, 2022 , sales and marketing expense increased
21% to $16.1 million . The increase was driven by higher salaries and related
expenses of $2.2 million , including higher commissions of approximately $0.7
million . Travel and related expenses were also higher by $0.4 million . As a
percentage of net sales, sales and marketing expense increased to 20% for the
six months ended June 30, 2022 , up from 17% in the prior period.
General and administrative. For the three months ended June 30, 2022 , general
and administrative expenses increased 18% to $7.3 million . The increase was
driven primarily by higher salaries and related expenses of $0.6 million , as
well as an increase in personnel. Outside services expense also increased by
$0.4 million . As a percentage of sales, general and administrative expense
increased to 17% for the three months ended June 30, 2022 , up from 15% in the
prior period.
For the six months ended
Research and development. For the three months endedJune 30, 2022 , research and development expense increased 26% to$3.3 million . The increase was driven primarily by higher salaries and related expenses of$0.2 million , as well as an increase in personnel. Outside services and testing also increased by$0.5 million due to higher consulting and third-party costs associated with regulatory approvals, as well as testing related to our biologic products. As a percentage of sales, total research and development expense increased to 8% for the three months endedJune 30, 2022 , from 7% in the prior period. For the six months endedJune 30, 2022 , research and development expenses increased 14% to$6.3 million . The increase was driven primarily by higher salaries and related expenses of$0.6 million , as well as an increase in personnel. Outside services and testing also increased by$0.2 million . As a percentage of net sales, total research and development expense increased to 8% for the six months endedJune 30, 2022 , from 7% in the prior period. Restructuring. For the three and six months endedJune 30, 2022 , restructuring expense was$3.1 million . OnJune 30, 2022 we ceased operations at the St. Etienne,France factory and terminated most of the personnel at the site. The closure resulted in a restructuring charge of$3.1 million for the three and six months endedJune 30, 2022 . Charges primarily consisted of employment termination costs, impairment of fixed assets and inventory, and third-party costs. Total costs associated with the closure are expected to be approximately$3.5 million . 28
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Income tax expense. We recorded a tax provision of$2.0 million on pre-tax income of$5.5 million for the three months endedJune 30, 2022 , compared to a$2.2 million tax provision on pre-tax income of$10.5 million for the three months endedJune 30, 2021 . We recorded a tax provision of$4.0 million on pre-tax income of$13.5 million for the six months endedJune 30, 2022 , compared to a tax provision of$3.7 million on pre-tax income of$17.9 million for the six months endedJune 30, 2021 . Our effective income tax rate was 36.7% and 29.5% for the three and six month periods endedJune 30, 2022 . Generally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items, with any changes affecting the estimated annual effective tax rate recorded in the interim period in which the change occurs. There is an exception to the estimated annual income tax rate calculation when there are losses in a jurisdiction that have a valuation allowance. The Company incurred losses in 2022 that are not benefitted in connection with the closure of the St. Etienne,France factory. Accordingly, the company has removed the pre-tax losses of its French subsidiary to calculate the annual effective tax rate. As such, our tax expense for the current period is based on an estimated annual effective tax rate of 24.6%, 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 certain foreign losses not benefitted due to a valuation allowance. When the French subsidiary's ordinary pre-tax loss is removed, our effective income tax rate is 23.7% and 24.1% for the three and six month periods endedJune 30, 2022 . As noted above, the effective income tax rate on unadjusted pre-tax income of$5.5 million and$13.5 million for the three and six month periods endedJune 30, 2022 , results in effective tax rates of 36.7% and 29.5% for the three and six month periods endedJune 30, 2022 , respectively. The primary factors affecting the Company's recalculated effective tax rate for the three and six month periods endedJune 30, 2022 , were certain foreign losses not benefitted due to a valuation allowance. Our effective income tax rate was 20.6% and 20.7% for the three and six month periods endedJune 30, 2021 . Our 2021 provision was based on the estimated annual effective tax rate of 24.1%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for the six month period endedJune 30, 2021 varied 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. 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 that we believe is more likely than not to be realized. As ofJune 30, 2022 , we have provided a valuation allowance of$2.5 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards,Massachusetts tax credit carry forwards, andFrance (Cardial) net operating loss carry forwards that are not expected to be realized.
Liquidity and Capital Resources
AtJune 30, 2022 , our cash and cash equivalents were$20.8 million as compared to$13.9 million atDecember 31, 2021 . We also had$54.9 million in short-term marketable securities as ofJune 30, 2022 and$56.1 million as ofDecember 31, 2021 . 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. As ofJune 30, 2022 our short-term marketable securities reflected an unrealized loss of$1.8 million as a result of increasing market interest rates. 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$7.6 million . We plan to use the proceeds for general corporate purposes. OnFebruary 22, 2022 , our Board of Directors authorized the repurchase of up to$20.0 million of the Company's common stock through transactions on the open market, in privately negotiated purchases or otherwise untilFebruary 22, 2023 . The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program. 29
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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 bore 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.
In
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$13.7 million for the six months endedJune 30, 2022 . For the year endedDecember 31, 2021 , we had operating income of$36.4 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: • 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;
• 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 U.S. 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, 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 take out a loan. 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 2022 March 8, 2022 March 24, 2022 $ 0.125 $ 2,743 May 17, 2022 June 2, 2022 $ 0.125 $ 2,745 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
November 19, 2021 December 2, 2021 $ 0.110 $ 2,405
On
Cash Flows
Six months ended June 30,
(in thousands)
2022 2021 Net Change
Cash and cash equivalents $ 20,788 $ 21,541 $ (753 )
Cash flows provided by (used in):
Operating activities $ 13,959 $ 15,971 $ (2,012 )
Investing activities (1,509 ) (2,462 ) 953
Financing activities (4,965 ) (18,504 ) 13,539
Net cash provided by operating activities. Net cash provided by operating
activities was $14.0 million for the six months ended June 30, 2022 , consisting
of $9.6 million in net income, adjustments for non-cash or non-operating items
of $10.0 million (including primarily depreciation and amortization of
$4.8 million , stock-based compensation of $2.3 million , provisions for inventory
write-offs and doubtful accounts of $1.8 million , and loss on divestiture of
$2.0 million ), and also a net use of working capital of $5.6 million . The net
cash used for working capital was driven by an increase in inventory and other
deferred costs of $3.5 million and an increase in accounts receivable of $2.6
million . These cash uses were offset by a decrease in prepaid expenses and other
assets of $0.4 million and increase of accounts payable of $0.1 million .
Net cash provided by operating activities was $16.0 million for the six months
ended June 30, 2021 , consisting of $14.2 million in net income, adjustments for
non-cash or non-operating items of $9.4 million (including depreciation and
amortization of $5.3 million , stock-based compensation of $1.8 million ,
provisions for inventory write-offs and doubtful accounts of $2.3 million ), and
also a net use of working capital of $7.6 million . The net cash used for working
capital was driven by payments of accounts payable and accrued liabilities of
$4.6 million , an increase in inventory and other deferred costs of $2.0 million
and an increase in accounts receivable of $1.5 million . These cash uses were
offset by a decrease in prepaid expenses and other assets of $0.5 million .
Net cash used in investing activities. Net cash used in investing activities was
$1.5 million for the six months ended June 30, 2022 , consisting of expenditures
on equipment and technology.
Net cash used in investing activities was
Net cash used in financing activities. Net cash used in financing activities was$5.0 million for the six months endedJune 30, 2022 , consisting primarily of a dividend payment of$5.5 million . This use of cash was partly offset by proceeds from stock option exercises of$0.5 million , net of shares repurchased to cover employee payroll taxes. 31
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Net cash used in financing activities was$18.5 million for the six months endedJune 30, 2021 , consisting primarily of payments made on our long-term debt of$16.0 million and dividend payments of$4.5 million . These uses of cash were partly offset by proceeds from stock option exercises of$2.0 million , net of shares repurchased to cover employee payroll taxes.
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, 2021 . There have been no material changes in our critical accounting policies during the six months endedJune 30, 2022 . 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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