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LEMAITRE VASCULAR, INC.

(LMAT)
  Report
Real-time Estimate Cboe BZX  -  02:28:00 2023-02-01 pm EST
47.63 USD   +0.94%
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2022LEMAITRE VASCULAR, INC. : Ex-dividend day for
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2022LEMAITRE VASCULAR INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
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LEMAITRE VASCULAR INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/08/2022 | 04:38pm EST
This Quarterly Report on Form 10-Q contains forward-looking statements (within
the meaning of the U.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 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 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 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 the
Securities and Exchange Commission, including under the section headed "Risk
Factors" in our most recent Annual Report on Form 10-K. Given these risks,
uncertainties and other factors, you should not place undue reliance on these
forward-looking statements. The following discussion and analysis should be read
in conjunction with our consolidated financial statements and the related notes
included in this report and our other SEC filings, including our audited
consolidated financial statements and the related notes contained in our Annual
Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC
on February 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 to LeMaitre Vascular, Inc. and its
subsidiaries.



LeMaitre, AlboGraft, AnastoClip, Artegraft, CardioCel, Omniflow, RestoreFlow,
VascuCel and XenoSure are registered trademarks of LeMaitre Vascular or one of
its subsidiaries. This Quarterly Report on Form 10-Q also includes the
registered and unregistered trademarks of other persons, which are the property
of their respective owners.



Overview



LeMaitre 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 in the United States, Europe, Canada and Asia 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 our
Burlington, Massachusetts headquarters.



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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.



Since March 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. Since 2020, 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 Q3 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 the United States, Europe, the United

Kingdom, Canada and Asia Pacific, including replacing a distributor with our

    sales personnel;



• introducing our products into new territories upon receipt of regulatory

    approvals or registrations in these territories;

  • increasing the average selling prices of our devices;

  • 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, 2022, our sales force was comprised of 118 sales representatives
in North America, Europe 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 94% 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 as Europe, where
we have a significant sales force, and sometimes offer comparatively lower
average selling prices. If we continue to seek growth opportunities outside of
North 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, which can be difficult to identify, negotiate and
purchase, and there can be no assurance that we will be able to do so in the
future.


• In July 2019, we entered into an agreement with UreSil, LLC to purchase the

remaining assets of their Eze-Sit valve cutter business, including U.S.

distribution rights, for $8.0 million.

• In October 2019, we entered into an agreement with Admedus to purchase the

assets of their CardioCel biologic patch business for $15.5 million plus

additional payments of up to $7.8 million, depending upon the satisfaction of

certain contingencies.

• In June 2020, we entered into an agreement with Artegraft to purchase the

    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 $2.2 million in 2021 revenues.

• During 2022, we made the decision to wind down the ProCol graft, AlboSure

polyester patch, LeverEdge and Latis graft cleaning catheter product lines.

    These products totaled approximately $1.0 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 Syntel
regular tip 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

Europe and Canada, in order to terminate their distribution of our acquired

    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 U.S. distributors in order to terminate their

distribution of our bovine graft products. We now sell Artegraft products

    direct-to-hospital throughout the United States.



• In May 2022, we entered into a distribution transition agreement with our

Korean distributor in order to sell products directly in Korea and dissolve

the existing distribution arrangement. We expect to begin selling

direct-to-hospital in Korea in January 2023. The distribution termination fees

    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 March 2022, we received U.S. FDA clearance to market PhasTIPP, a portable

    powered phlebotomy device used to remove varicose veins in the leg.




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In addition to our sales growth strategies, we have also executed on several operational initiatives designed to consolidate manufacturing into our Burlington facilities. We expect these plant consolidations will result in improved control over production quality as well as reduced costs. Our most recent manufacturing transfers included:

• In October 2019, we acquired the biologic patch business assets from Admedus.

In July 2020, we initiated a project to transfer the production of these

devices to our Burlington facilities. We expect this transfer to be

substantially complete in 2023.

• In June 2022, we closed our St. Etienne, France factory in order to streamline

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 Burlington-manufactured AlboGraft product for additional cost

    savings and improved margins. We acquired the Cardial business in 2018.




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 the U.S. dollar and foreign
currencies, primarily the Euro, affect our financial results. For the nine
months ended September 30, 2022 approximately 38% of our sales took place
outside the U.S., largely in currencies other than the U.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 for U.S. dollars, it will require
more of the foreign currency to equal a specified amount of U.S. dollars than
before the rate increase. In such cases we will record less revenue in U.S.
dollars than we did before the exchange rate changed. For the nine months ended
September 30, 2022, we estimate that the effects of changes in foreign exchange
rates decreased our reported sales by approximately $4.4 million, as compared to
rates in effect for the nine months ended September 30, 2021.



Net Sales and Expense Components

The following is a description of the primary components of our net sales and expenses:




Net sales. We derive our net sales from the sale of our products and services,
less discounts and returns. Net sales include the shipping and handling fees
paid for by our customers. Most of our sales are generated by our direct sales
force and are shipped and billed to hospitals or clinics throughout the world.
In countries where we do not have a direct sales force, sales are primarily to
distributors, who in turn sell to hospitals and clinics. In certain cases our
products are held on consignment at a hospital or clinic prior to purchase; in
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 and cardiac 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 our Burlington 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 the U.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
the U.S. and foreign subsidiaries, permanent items, discrete items, unrecognized
tax benefits, and amortization of goodwill for U.S. tax reporting purposes.



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Results of Operations



Since March 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. 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 nine-month periods ended September 30, 2022 to the three- and nine-month periods ended September 30, 2021:

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
                       2022                2021             change             2022                2021             change
                                    ($ in thousands)                                        ($ in thousands)
Net sales          $      39,028       $      38,368                2 %    $     120,697       $     114,921                5 %

Net sales by
geography:
Americas           $      26,627       $      25,299                5 %    $      82,024       $      76,327                7 %
Europe, Middle
East and Africa            9,922              10,535               (6 %)          31,165              31,200               (0 %)
Asia Pacific               2,479               2,534               (2 %)           7,508               7,394                2 %
Total              $      39,028       $      38,368                2 %    $     120,697       $     114,921                5 %




Net sales. Net sales increased by $0.7 million, or 2%, to $39.0 million for the
three months ended September 30, 2022, compared to $38.4 million for the three
months ended September 30, 2021. The increase was driven primarily by increased
shunt sales of $0.7 million, bovine graft sales of $0.6 million, and allograft
preservation services of $0.3 million. The increased sales were partially offset
by decreased valvulotomes sales of $0.4 million, ovine graft sales of $0.2
million, clips sales of $0.2 million, and increased ovine graft backorders. We
estimate that the stronger U.S. dollar decreased net sales by $1.9 million
during the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021.



Net sales increased by $5.8 million, or 5%, to $120.7 million for the nine
months ended September 30, 2022, compared to $114.9 million for the nine months
ended September 30, 2021. The increase was driven primarily by increased bovine
graft sales of $2.2 million, carotid patch sales of $1.8 million, allograft
preservation services of $1.7 million, and shunt sales of $1.6 million. The
increased sales were partially offset by decreased ovine graft sales of $0.8
million and cardiac patch sales of $0.4 million. We estimate that the stronger
U.S. dollar decreased net sales by $4.4 million during the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021.



Direct-to-hospital net sales were 94% of our total net sales for the nine months ended September 30, 2022 and September 30, 2021.

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Net sales by geography. Net sales in the Americas increased $1.3 million, or 5%,
for the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021. The increase was driven primarily by increased bovine
graft sales of $0.6 million, shunt sales of $0.3 million, and allograft
preservation services of $0.3 million.



Net sales in the Americas increased $5.7 million, or 7%, for the nine months
ended September 30, 2022 as compared to the nine months ended September 30,
2021. The increase was driven primarily by increased bovine graft sales of $2.2
million, allograft preservation services of $1.4 million, and shunt sales of
$0.8 million.



EMEA net sales decreased $0.6 million, or 6%, for the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021. The
decrease was driven primarily by decreased valvulotomes sales of $0.4 million,
ovine graft sales of $0.2 million, and cardiac patch sales of $0.1 million. The
decreased sales were partially offset by increased shunt sales of $0.4 million.



EMEA net sales decreased less than $0.1 million, or 0.1%, for the nine months
ended September 30, 2022 as compared to the nine months ended September 30,
2021. The decrease was driven primarily by decreased ovine graft sales of $0.8
million largely due to the lack of CE mark for Burlington-produced devices
through June 30, 2022, surgical glue sales of $0.4 million, and cardiac patch
sales of $0.3 million. The decreased sales were partially offset by increased
shunt sales of $0.9 million and carotid patch sales of $0.8 million.



Asia Pacific net sales decreased $0.1 million, or 2%, for the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021. The
decrease was driven primarily by decreased powered phlebectomy and clip sales of
$0.1 million each. The decreased sales were partially offset by increased
carotid patch sales of $0.1 million.



Asia Pacific net sales increased $0.1 million, or 2%, for the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021. The
increase was driven primarily by increased carotid patch sales of $0.5 million
and embolectomy catheters sales of $0.1 million. The increased sales were
partially offset by decreased shunt sales of $0.1 million, clip sales of $0.1
million, and valvulotomes 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 September 30,                          Nine months ended September 30,
(unaudited)                                                      Percent                                                 Percent
                       2022            2021        Change         change          2022          2021       Change         change
                                       ($ in thousands)                                         ($ in thousands)
Gross profit        $   25,070       $ 24,866     $    204               1 %   $   78,842     $ 75,426     $ 3,416               5 %

Gross margin              64.2 %         64.8 %       (0.6 %)            *           65.3 %       65.6 %      (0.3 %)            *




*Not applicable




Gross Profit. Gross profit increased $0.2 million, or 1%, to $25.1 million for
the three months ended September 30, 2022, and gross margin decreased 60 basis
points to 64.2% in the period. The increase in gross profit was driven primarily
by increased sales from shunts, bovine grafts, 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 embolectomy
catheters and lower sales of comparatively high margin valvulotomes, unfavorable
changes in foreign currency exchange rates, and manufacturing inefficiencies
including higher inventory write-offs.



Gross profit increased $3.4 million, or 5%, to $78.8 million for the nine months
ended September 30, 2022, and gross margin decreased 30 basis points to 65.3% in
the period. The increase in gross profit was driven primarily by increased sales
from bovine grafts, carotid patches, 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 embolectomy catheters
and polyester grafts, unfavorable changes in foreign currency exchange rates,
and manufacturing inefficiencies including higher inventory write-offs.



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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
                     2022           2021        $ Change        change         2022          2021       $ Change        change

Sales and
marketing         $    8,229      $  6,941     $    1,288             19 %   $  24,321     $ 20,210     $   4,111             20 %
General and
administrative         7,229         6,004          1,225             20 %      21,812       18,748         3,064             16 %
Research and
development            3,462         2,848            614             22 %       9,740        8,344         1,396             17 %
Restructuring              -             -              -              *         3,107            -         3,107              *
Total             $   18,920      $ 15,793     $    3,127             20 %   $  58,980     $ 47,302     $  11,678             25 %




                                      Three months ended September 30,                         Nine months ended September 30,
                                2022                2021                                2022                2021
                              % of Net            % of Net                            % of Net            % of Net
                                Sales               Sales              Change           Sales               Sales              Change

Sales and marketing                   21 %                18 %                 3 %            20 %                18 %                 2 %
General and administrative            19 %                16 %                 3 %            18 %                16 %                 2 %
Research and development               9 %                 7 %                 2 %             8 %                 7 %                 1 %
Restructuring                          0 %                 0 %                 0 %             3 %                 0 %                 3 %



* Not a meaningful percentage relationship.





Sales and marketing. For the three months ended September 30, 2022, sales and
marketing expense increased 19% to $8.2 million. The increase was driven
primarily by higher salaries and related expenses of $0.9 million, including
higher sales commissions of approximately $0.3 million. From September 30, 2021
to September 30, 2022, we increased our sales representatives from 92 to 118. We
also added two additional regional sales managers in the period. Travel and
related expenses were also higher by $0.3 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 September 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 21% for the three months ended
September 30, 2022, up from 18% in the prior period.



For the nine months ended September 30, 2022, sales and marketing expense
increased 20% to $24.3 million. The increase was driven by higher salaries and
related expenses of $3.1 million, including higher commissions of approximately
$0.9 million. Travel and related expenses were also higher by $0.7 million. As a
percentage of net sales, sales and marketing expense increased to 20% for the
nine months ended September 30, 2022, up from 18% in the prior period.



General and administrative. For the three months ended September 30, 2022,
general and administrative expenses increased 20% to $7.2 million. The increase
was driven primarily by higher salaries and related expenses of $1.1 million, as
well as an increase in personnel. Additionally, in the prior year we recognized
a gain of $0.5 million related to the amendment of a contingent purchase
obligation associated with our 2019 Admedus biologic patch acquisition which
lowered our general and administrative expenses. The increased expenses were
partially offset by lower outside services expenses. As a percentage of sales,
general and administrative expense increased to 19% for the three months ended
September 30, 2022, up from 16% in the prior period.



For the nine months ended September 30, 2022, general and administrative
expenses increased 16% to $21.8 million. The increase was driven primarily by
higher salaries and related expenses of $2.3 million, as well as an increase in
personnel. Travel, general supplies, and office facility costs each increased
$0.2 million in the period. As a percentage of net sales, general and
administrative expense increased to 18% for the nine months ended September 30,
2022, up from 16% in the prior period.



Research and development. For the three months ended September 30, 2022,
research and development expense increased 22% to $3.5 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 primarily due to higher consulting and third-party costs associated
with European regulatory approvals. Our products are currently regulated in the
European Union (EU) and the United Kingdom under the European Medical Devices
Directive (MDD) and the EU Medical Device Regulation (MDR). In order to market
our medical devices in the EU and the United Kingdom, we are required to obtain
CE marks, which denote conformity to the essential requirements of the MDD or
MDR. As a percentage of sales, total research and development expense increased
to 9% for the three months ended September 30, 2022, from 7% in the prior
period.



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For the nine months ended September 30, 2022, research and development expenses
increased 17% to $9.7 million. The increase was driven primarily by higher
salaries and related expenses of $0.8 million, as well as an increase in
personnel. Outside services and testing also increased by $0.6 million. As a
percentage of net sales, total research and development expense increased to 8%
for the nine months ended September 30, 2022, from 7% in the prior period.



Restructuring. For the nine months ended September 30, 2022, restructuring
expense was $3.1 million. On June 30, 2022 we ceased operations at our 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 ended June 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. We did not record additional expenses related to the closure for
the three months ended September 30, 2022.



Income tax expense. We recorded a tax provision of $0.7 million on pre-tax
income of $6.1 million for the three months ended September 30, 2022, compared
to a $1.9 million tax provision on pre-tax income of $8.4 million for the three
months ended September 30, 2021. We recorded a tax provision of $4.7 million on
pre-tax income of $19.7 million for the nine months ended September 30, 2022,
compared to a tax provision of $5.6 million on pre-tax income of $26.4 million
for the nine months ended September 30, 2021. Our effective income tax rate was
11.3% and 23.8% for the three- and nine-month periods ended September 30, 2022.
Our effective income tax rate for the three-month period ended September 30,
2022 was impacted by the realization of tax benefits for losses incurred in
connection with the closure of the St. Etienne, France factory. 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. Our tax expense for the current period is based on an estimated
annual effective tax rate of 25.1%, 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 22.6% and 21.3% for the three- and nine-month
periods ended September 30, 2021. Our 2021 provision was based on the estimated
annual effective tax rate of 24.3%, adjusted in the applicable quarterly period
for discrete stock option exercises and other discrete items. Our income tax
expense for the nine-month period ended September 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 of September 30, 2022, we have provided a valuation allowance of $1.6 million
for deferred tax assets primarily related to Australian net operating loss and
capital loss carry forwards and Massachusetts tax credit carry forwards that are
not expected to be realized.



The Inflation Reduction Act ("IRA") was enacted into law on August 16, 2022.
Included in the IRA was a provision to implement a 15% corporate alternative
minimum tax on "adjusted financial statement income" for applicable corporations
and a 1% excise tax on repurchases of stock. These provisions are effective for
tax years beginning after December 31, 2022. We are in the process of evaluating
the provisions of the IRA, but we do not currently believe the IRA will have a
material impact on our reported results, cash flows or financial position when
it becomes effective.


Liquidity and Capital Resources




At September 30, 2022, our cash and cash equivalents were $16.9 million as
compared to $13.9 million at December 31, 2021. We also had $62.8 million in
short-term marketable securities as of September 30, 2022 and $56.1 million as
of December 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 of September 30, 2022 our short-term
marketable securities reflected an unrealized loss of $2.1 million as a result
of increasing market interest rates.



On July 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.
On August 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.



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On February 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 until February 22, 2023.
The repurchase program may be suspended or discontinued at any time. To date we
have not made any repurchases under this program.



In June 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. In July 2021 we repaid the balance under the term loan, plus accrued
interest, in full.



In November 2021, we terminated the credit agreement, including the revolving line of credit, as permitted under the original agreement.

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 $19.9 million for the nine months ended September 30, 2022. For the year ended December 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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Dividends



In February 2011, our Board of Directors approved a policy for the payment of
quarterly cash dividends on our common stock. Future declarations of quarterly
dividends and the establishment of future record and payment dates are subject
to approval by our Board of Directors 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
  August 25, 2022   September 8, 2022   $            0.125     $            2,750

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 October 25, 2022 our Board of Directors approved a quarterly cash dividend on our common stock of $0.125 per share payable on December 1, 2022, to stockholders of record at the close of business on November 17, 2022.



Cash Flows



                                  Nine months ended September 30,
                                          (in thousands)
                               2022            2021         Net Change
Cash and cash equivalents   $   16,913       $  17,369     $       (456 )

Cash flows provided by (used in):
Operating activities        $   21,301       $  30,046     $     (8,745 )
Investing activities            (9,969 )       (53,830 )         43,861
Financing activities            (7,112 )        14,861          (21,973 )






Net cash provided by operating activities. Net cash provided by operating
activities was $21.3 million for the nine months ended September 30, 2022,
consisting of $15.0 million in net income, adjustments for non-cash or
non-operating items of $14.2 million (including depreciation and amortization of
$7.1 million, stock-based compensation of $3.5 million, provisions for inventory
write-offs and doubtful accounts of $2.3 million, and loss on divestiture of
$1.4 million), and also a net use of working capital of $7.9 million. The net
cash used for working capital was driven by an increase in inventory and other
deferred costs of $5.0 million, an increase in accounts receivable of $1.7
million, and an increase in prepaid expenses and other assets of $1.3 million.
These cash uses were offset by an increase in accounts payable of $0.2 million.



Net cash provided by operating activities was $30.0 million for the nine months
ended September 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 used in investing activities. Net cash used in investing activities was
$10.0 million for the nine months ended September 30, 2022, consisting of
purchases of marketable securities of $8.0 million and expenditures on equipment
and technology of $2.0 million.



Net cash used in investing activities was $53.8 million for the nine months ended September 30, 2021, consisting of purchases of marketable securities of $49.6 million and expenditures on equipment and technology of $4.3 million.




Net cash used in financing activities. Net cash used in financing activities was
$7.1 million for the nine months ended September 30, 2022, consisting primarily
of a dividend payment of $8.2 million and deferred payments for acquisitions of
$0.4. This use of cash was partly offset by proceeds from stock option exercises
of $1.5 million, net of shares repurchased used to pay employee payroll taxes.



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Net cash provided by financing activities was $14.9 million for the nine months
ended September 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 used to pay 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.



Critical Accounting Policies and Estimates




We have adopted various accounting policies to prepare our consolidated
financial statements in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP. Our most significant accounting policies are described
in Note 1 to our consolidated financial statements included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2021. There have been no
material changes in our critical accounting policies during the nine months
ended September 30, 2022. The preparation of our consolidated financial
statements in conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our estimates and assumptions, including
those related to 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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