The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and related notes which appear
elsewhere in this document and with our 2020 Form 10-K. Our discussion and
analysis may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" in Item 1A of our 2020 Form 10-K, as
updated and supplemented by our Quarterly Reports on Form 10-Q, including in
Part 2, Item 1A and elsewhere in this Quarterly Report on Form 10-Q.
The capitalized terms used below have been defined in the notes to our condensed
consolidated financial statements. In the following text, the terms "LivaNova,"
"the Company," "we," "us" and "our" refer to LivaNova PLC and its consolidated
subsidiaries.
COVID-19
Our business, operations and financial condition and results have been and may
continue to be impacted by the COVID-19 pandemic. We have experienced
significant and unpredictable reductions in the demand for our products due to
healthcare customers diverting medical resources and priorities towards the
treatment of COVID-19. In addition, public health organizations have regularly
delayed or suspended elective procedures during the COVID-19 pandemic, which has
negatively impacted the usage of our products, including the number of
Neuromodulation procedures. Further, there has been a decline in treatment for
non-COVID-19 emergency procedures, which has also negatively impacted the demand
for our products.
Procedure volumes in Neuromodulation continue to recover, especially replacement
implant volumes. Across our business, certain countries in our Europe and Rest
of World regions remain challenged by COVID-19. Despite shifting market dynamics
resulting from the pandemic, we continue to gain momentum in Neuromodulation
sales growth across all regions.
Our business operations have been affected by a range of external factors
related to the COVID-19 pandemic that are not within our control. For example,
many jurisdictions have imposed, and in some cases reimposed, a wide range of
restrictions on the physical movement of our employees and vendors to limit the
spread of COVID-19. If the COVID-19 pandemic has a substantial impact on our
employee or vendor attendance or productivity, our operations may suffer, and in
turn our results of operations and overall financial performance may be harmed.
During the second quarter of 2020, LivaNova paused RECOVER study patients in
progressing beyond the first baseline depression scale measurement because the
majority of our study sites and their corresponding surgical centers were
closed. In order to maintain momentum, we continued activating new sites and
identifying, educating and consenting patients at existing sites. During the
third quarter of 2020, certain sites and surgical centers began to open and we
re-initiated movement within RECOVER. We expect the number of patient implants
to accelerate through fiscal year 2021 as study sites are able to progress
consented patients and the impact of COVID-19 diminishes. With an increase in
the reopening of psychiatrist offices and surgical centers in the second quarter
of 2021, we have accelerated site activations, patient consents and implants.
However, there can be no assurance that there will not be closures of sites in
the future should COVID-19 reemerge.
Additionally, our ANTHEM-HFrEF international pivotal trial was temporarily
paused in March 2020 due to COVID-19 restrictions after randomizing just over
200 patients. During the second quarter of 2020, we were able to re-initiate
enrollment and screening activities in more than half of the sites, and in April
2021 we randomized the 300th patient in the trial. We continue to monitor
relevant conditions at medical centers participating in the trial.
We have taken numerous steps, and will continue to take further actions, in our
approach to addressing the COVID-19 pandemic. We have successfully implemented
our business continuity plans, and our management team is responding to changes
in our environment quickly and effectively. We have not closed any of our
manufacturing plants. Additionally, the supply of raw materials and the
distribution of finished products remain operational with no known or foreseen
constraints relating to COVID-19. As a result of the COVID-19 pandemic, we
instructed the majority of our employees at many of our facilities across the
globe to work from home on a temporary basis and have implemented company-wide
travel restrictions. For our manufacturing, operations, and other personnel
remaining on site due to the essential nature of their work, we have implemented
safety measures such as the use of personal protective equipment and social
distancing measures. We have incurred additional expenses in connection with our
response to the COVID-19 pandemic, including manufacturing inefficiencies and
costs related to enabling our employees to support our customers while working
remotely.
We continue to implement cost reduction efforts to mitigate the impact of
reduced revenues on our operating income. We have reduced expenses by evaluating
whether projects and initiatives are critical to meet the needs of the Company,
protecting strategic priorities for future growth, reducing discretionary
spending and tightening management of personnel costs.
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The extent to which the COVID-19 pandemic continues to impact the Company's
results of operations and financial condition will depend on future developments
that are highly uncertain and cannot be predicted, including new information
that may emerge concerning the severity and longevity of COVID-19 and its
variants, the resurgence of COVID-19 in regions that have begun to recover from
the initial impact of the pandemic, the impact of COVID-19 on economic activity
and the actions to contain its impact on public health and the global economy.
Business Overview
We are a public limited company organized under the laws of England and Wales
and headquartered in London, England. We are a global medical device company
focused on the development and delivery of important therapeutic solutions for
the benefit of patients, healthcare professionals and healthcare systems
throughout the world. Working closely with medical professionals in the fields
of Cardiovascular and Neuromodulation, we design, develop, manufacture and sell
innovative therapeutic solutions that are consistent with our mission to improve
our patients' quality of life, increase the skills and capabilities of
healthcare professionals and minimize healthcare costs.
LivaNova is comprised of two reportable segments: Cardiovascular and
Neuromodulation, corresponding to our primary therapeutic areas. Other corporate
activities include corporate shared service expenses for finance, legal, human
resources, information technology and corporate business development.
For further information regarding our business segments, historical financial
information and our methodology for the presentation of financial results,
please refer to the condensed consolidated financial statements and accompanying
notes of this Quarterly Report on Form 10-Q.
Cardiovascular
Our Cardiovascular segment is engaged in the development, production and sale of
cardiopulmonary products and advanced circulatory support. Cardiopulmonary
products include oxygenators, heart-lung machines, autotransfusion systems,
perfusion tubing systems, cannulae and other related accessories. Advanced
circulatory support products include temporary life support controllers and
product kits that can include a combination of pumps, oxygenators, and cannulae.
Divestiture of Heart Valve Business
On December 2, 2020, LivaNova entered into a Purchase Agreement with Purchaser,
a company incorporated under the laws of Luxembourg and wholly owned and
controlled by funds advised by Gyrus Capital S.A., a Swiss private equity firm.
The Purchase Agreement provides for the divestiture of certain of LivaNova's
subsidiaries as well as certain other assets and liabilities relating to the
Company's Heart Valve business and site management operations conducted by the
Company's subsidiary LSM at the Company's Saluggia campus for €60.0 million
(approximately $71.2 million as of June 30, 2021). On April 9, 2021, LivaNova
and the Purchaser entered into an A&R Purchase Agreement which amends and
restates the original Purchase Agreement to, among other things, defer the
closing of the sale and purchase of LSM by up to two years and include or amend
certain additional terms relating to such deferral, including certain amendments
relating to the potential hazardous substances liabilities of LSM and the
related expense reimbursement provisions. The initial closing of the sale of the
Heart Valve business occurred on June 1, 2021 and we received €34.8 million
(approximately $42.5 million as of June 1, 2021), subject to customary trade
working capital and net indebtedness adjustments, as set forth in the Purchase
Agreement. An additional €2.5 million (approximately $3.0 million as of June 30,
2021) is payable to LivaNova during the fourth quarter of 2021 and €10.0 million
(approximately $11.9 million as of June 30, 2021) is payable to LivaNova on
December 30, 2022.
Cardiopulmonary Product Approval
In April 2021, the FDA provided 510(k) clearance for B-Capta, the new in-line,
blood-gas monitoring system integrated into the Company's S5 heart-lung machine.
The system is designed to easily and accurately monitor arterial and venous
blood gas parameters even during long and complex pediatric and adult
cardiopulmonary bypass procedures. B-Capta, which received CE Mark in May 2020
and completed a successful limited commercial release in Europe, is now
available globally.
Product Remediation
On December 29, 2015, the FDA issued a Warning Letter alleging certain
violations of FDA regulations applicable to medical device manufacturers at our
Munich, Germany and Arvada, Colorado facilities and issued inspectional
observations on FDA's Form-483 applicable to our Munich, Germany facility.
The Warning Letter further stated that our 3T Heater-Cooler devices (the "3T
devices") and other devices we manufactured at our Munich facility were subject
to refusal of admission into the U.S. until resolution of the issues set forth
by the FDA in the Warning Letter. The FDA informed us that the import alert was
limited to the 3T devices, but that the agency reserved the right to expand the
scope of the import alert if future circumstances warranted such action. The
Warning Letter did not request that
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existing users cease using the 3T device, and manufacturing and shipment of all
our products other than the 3T device were unaffected by the import limitation.
To help clarify these issues for current customers, we issued an informational
Customer Letter in January 2016 and that same month agreed with the FDA on a
process for shipping 3T devices to existing U.S. users pursuant to a certificate
of medical necessity program.
Finally, the Warning Letter stated that premarket approval applications for
Class III devices to which certain Quality System regulation deviations
identified in the Warning Letter were reasonably related would not be approved
until the violations had been corrected; however, this restriction applied only
to the Munich and Arvada facilities, which do not manufacture or design devices
subject to Class III premarket approval.
On February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the
3T devices that addressed issues contained in the 2015 Warning Letter along with
design changes that further mitigate the potential risk of aerosolization.
Concurrent with this clearance, (1) 3T devices manufactured in accordance with
K191402 will not be subjected to the import alert and (2) LivaNova initiated a
correction to distribute the updated Operating Instructions cleared under
K191402. With this 510(k) clearance, all actions to remediate the FDA's
inspectional observations in the Warning Letter are complete, and at this time,
LivaNova is awaiting the FDA's close-out inspection.
Product Liability
The Company is currently involved in litigation involving our 3T device. The
litigation includes federal multi-district litigation in the U.S. District Court
for the Middle District of Pennsylvania, various U.S. state court cases and
cases in jurisdictions outside the U.S. A class action, filed in February 2016
in the U.S. District Court for the Middle District of Pennsylvania, consisting
of all Pennsylvania residents who underwent open heart surgery at WellSpan York
Hospital and Penn State Milton S. Hershey Medical Center between 2011 and 2015
and who currently are asymptomatic for NTM infection, was dismissed on July 16,
2021.
On March 29, 2019, we announced a settlement framework that provides for a
comprehensive resolution of the personal injury cases pending in the
multi-district litigation in U.S. federal court, the related class action in
federal court, as well as certain cases in state courts across the United
States. The agreement, which makes no admission of liability, is subject to
certain conditions, including acceptance of the settlement by individual
claimants and provides for a total payment of up to $225 million to resolve the
claims covered by the settlement. Per the agreed-upon terms, the first payment
of $135 million was paid into a qualified settlement fund in July 2019 and the
second payment of $90 million was paid in January 2020. Cases covered by the
settlement are being dismissed as amounts are disbursed to individual plaintiffs
from the qualified settlement fund.
Cases in state courts in the U.S. and in jurisdictions outside the U.S. continue
to progress. As of July 28, 2021, including the cases encompassed in the
settlement framework described above that have not yet been dismissed, we are
aware of approximately 85 filed and unfiled claims worldwide, with the majority
of the claims in various federal or state courts throughout the United States.
This number includes 10 cases that have settled but have not yet been dismissed.
The complaints generally seek damages and other relief based on theories of
strict liability, negligence, breach of express and implied warranties, failure
to warn, design and manufacturing defect, fraudulent and negligent
misrepresentation or concealment, unjust enrichment, and violations of various
state consumer protection statutes.
In the second quarter of 2021, we recorded an additional liability of
$29.4 million due to new information received about the nature of certain
claims. At June 30, 2021, the provision for these matters was $60.2 million.
While the amount accrued represents our best estimate for those filed and
unfiled claims that are both probable and estimable, the actual liability for
resolution of these matters may vary from our estimate.
Neuromodulation
Our Neuromodulation segment designs, develops and markets Neuromodulation
therapy for the treatment of drug-resistant epilepsy, DTD and obstructive sleep
apnea. We are also developing and conducting clinical testing of the VITARIA
System for treating heart failure through vagus nerve stimulation.
DTD UNCOVER Study
In April 2021, LivaNova and Verily, a subsidiary of Alphabet, announced that the
first patient had been enrolled in their collaborative UNCOVER study, a subset
of the RECOVER study. Data obtained from Verily-developed digital tools will
complement the clinical outcomes collected in RECOVER, providing clinicians a
more comprehensive view of depression patient biomarkers.
Obstructive Sleep Apnea
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In June 2021, LivaNova received approval from the FDA to proceed with its
investigational device exemption clinical study, "Treating Obstructive Sleep
Apnea using Targeted Hypoglossal Neurostimulation (OSPREY)." The OSPREY study
seeks to demonstrate the safety and effectiveness of the Aura6000® System, the
LivaNova implantable hypoglossal neurostimulator intended to treat adult
patients with moderate to severe obstructive sleep apnea.
Significant Accounting Policies and Critical Accounting Estimates
In addition to our critical accounting policies provided in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our 2020 Form 10-K, refer to "Significant Accounting
Policies" within "Note 1. Unaudited Condensed Consolidated Financial Statements"
included in this Quarterly Report on Form 10-Q.
The accompanying unaudited condensed consolidated financial statements of
LivaNova and its consolidated subsidiaries have been prepared in accordance with
U.S. GAAP on an interim basis.
New accounting pronouncements are disclosed in "Note 15. New Accounting
Pronouncements" contained in the condensed consolidated financial statements in
this Quarterly Report on Form 10-Q.
Results of Operations
The following table summarizes our condensed consolidated results of operations
(in thousands):
                                                       Three Months Ended June 30,                 Six Months Ended June 30,
                                                         2021                  2020                 2021                  2020
Net sales                                          $      264,483          $ 182,206          $      512,086          $ 424,603
Cost of sales                                              90,803             65,730                 173,723            141,631
Gross profit                                              173,680            116,476                 338,363            282,972
Operating expenses:
Selling, general and administrative                       122,748            102,743                 238,429            227,675
Research and development                                   52,557             25,152                  97,182             61,054

Other operating expenses                                   33,236              3,818                  42,036              8,872
Operating loss from continuing operations                 (34,861)           (15,237)                (39,284)           (14,629)
Interest income                                               189                287                     115                435
Interest expense                                          (16,515)            (5,715)                (32,451)           (10,564)
Foreign exchange and other gains (losses)                      50               (999)                 (6,319)            (2,913)
Loss from continuing operations before tax                (51,137)           (21,664)                (77,939)           (27,671)
Income tax expense                                          4,140             66,285                   6,996             21,571
Losses from equity method investments                         (41)               (44)                    (81)              (173)
Net loss from continuing operations                       (55,318)           (87,993)                (85,016)           (49,415)
Net loss from discontinued operations, net
of tax                                                          -                  -                       -               (995)
Net loss                                           $      (55,318)         $ (87,993)         $      (85,016)         $ (50,410)



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Net Sales
The table below presents net sales by operating segment and geographic region
(in thousands, except for percentages):
                                                       Three Months Ended June 30,                             Six Months Ended June 30,
                                                      2021                  2020                     % Change               2021               2020                     % Change

Cardiopulmonary
United States                                   $       37,388          $  25,816                         44.8  %       $  73,147          $  62,674                         16.7  %
Europe                                                  35,133             23,294                         50.8  %          65,759             57,528                         14.3  %
Rest of World                                           45,355             51,946                        (12.7) %          87,689             97,221                         (9.8) %
                                                       117,876            101,056                         16.6  %         226,595            217,423                          4.2  %
Heart Valves
United States                                            2,212              2,488                        (11.1) %           4,929              5,861                        (15.9) %
Europe                                                   6,123              5,348                         14.5  %          14,407             14,877                         (3.2) %
Rest of World                                            6,389              9,630                        (33.7) %          16,843             21,939                        (23.2) %
                                                        14,724             17,466                        (15.7) %          36,179             42,677                        (15.2) %
Advanced Circulatory Support
United States                                           12,964              5,668                        128.7  %          25,524             15,744                         62.1  %
Europe                                                     178                303                        (41.3) %             406                673                        (39.7) %
Rest of World                                              133                 42                        216.7  %             337                 87                        287.4  %
                                                        13,275              6,013                        120.8  %          26,267             16,504                         59.2  %
Cardiovascular
United States                                           52,564             33,972                         54.7  %         103,600             84,279                         22.9  %
Europe                                                  41,434             28,945                         43.1  %          80,572             73,078                         10.3  %
Rest of World                                           51,877             61,618                        (15.8) %         104,869            119,247                        (12.1) %
                                                       145,875            124,535                         17.1  %         289,041            276,604                          4.5  %
Neuromodulation
United States                                           91,779             44,215                        107.6  %         174,079            117,491                         48.2  %
Europe                                                  14,604              6,416                        127.6  %          26,283             16,999                         54.6  %
Rest of World                                           11,253              6,581                         71.0  %          20,973             12,379                         69.4  %
                                                       117,636             57,212                        105.6  %         221,335            146,869                         50.7  %
Other                                                      972                459                        111.8  %           1,710              1,130                         51.3  %
Totals
United States                                          144,343             78,187                         84.6  %         277,679            201,770                         37.6  %
Europe (1)                                              56,038             35,361                         58.5  %         106,855             90,077                         18.6  %
Rest of World                                           64,102             68,658                         (6.6) %         127,552            132,756                         (3.9) %
Total                                           $      264,483          $ 182,206                         45.2  %       $ 512,086          $ 424,603                         20.6  %

(1)Europe sales include those countries in which we have a direct sales presence, whereas European countries in which we sell through distributors are included in "Rest of World."


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The table below presents segment (loss) income from continuing operations (in thousands, except for percentages):


                                                   Three Months Ended June 30,                           Six Months Ended June 30,
                                                 2021                 2020                     % Change               2021              2020                     % Change
Cardiovascular                            $       (28,343)         $ (9,407)                       201.3  %       $ (22,715)         $   (726)                      3,028.8  %
Neuromodulation                                    38,084            27,282                         39.6  %          72,123            61,140                          18.0  %
Other                                             (34,228)          (20,876)                        64.0  %         (64,897)          (47,486)                         36.7  %
Total reportable segment (loss)
income from continuing operations
(1)                                       $       (24,487)         $ (3,001)                       716.0  %       $ (15,489)         $ 12,928                        (219.8) %


(1)For a reconciliation of segment (loss) income from continuing operations to
loss from continuing operations before tax refer to "Note 13. Geographic and
Segment Information" in the condensed consolidated financial statements in this
Quarterly Report on Form 10-Q.
Cardiovascular
Cardiovascular net sales for the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020 increased 17.1% and
4.5%, respectively. Cardiopulmonary sales for the three and six months ended
June 30, 2021 compared to the three and six months ended June 30, 2020 increased
16.6% and 4.2% to $117.9 million and $226.6 million, respectively, primarily
related to growth in oxygenators, largely in the Europe and U.S. regions,
partially offset by a reduction in capital equipment purchases in the Rest of
World region. Advanced Circulatory Support sales for the three and six months
ended June 30, 2021 compared to the three and six months ended June 30, 2020
increased 120.8% and 59.2% to $13.3 million and $26.3 million, respectively,
resulting from the continued adoption of LifeSPARC in the U.S. and an increase
in procedure volumes. These increases in sales were partially offset by a
decline in Heart Valves sales for the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020 of 15.7% and 15.2% to
$14.7 million and $36.2 million, respectively, primarily resulting from the sale
of the Heart Valves business on June 1, 2021.
Cardiovascular operating loss for the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020 increased primarily due
to an increase in the litigation provision related to our 3T Heater-Cooler
device of $28.4 million and $31.5 million for the three and six months ended
June 30, 2021 compared to the three and six months ended June 30, 2020,
respectively. Additionally, operating loss increased due to the net impact of
changes in the fair value of the milestone-based contingent consideration
arrangements associated with the acquisitions of TandemLife and Miami
Instruments totaling $3.7 million and $6.9 million for the three and six months
ended June 30, 2021 compared to the three and six months ended June 30, 2020,
respectively. These increases to operating loss were partially offset by an
increase in net sales, as discussed above, as well as a decrease in 3T
Heater-Cooler product remediation expense of $3.9 million and $5.3 million for
the three and six months ended June 30, 2021 compared to the three and six
months ended June 30, 2020, respectively.
Neuromodulation
Neuromodulation net sales for the three and six months ended June 30, 2021
compared to the three and six months ended June 30, 2020 increased 105.6% and
50.7% to $117.6 million and $221.3 million, respectively, primarily due to
improving market dynamics across all regions and particularly in the U.S.
Neuromodulation operating income for the three and six months ended June 30,
2021 compared to the three and six months ended June 30, 2020 increased
primarily due to an increase in net sales, as discussed above, partially offset
by the net impact of changes in fair value of the sales-based and
milestone-based contingent consideration arrangement associated with the
acquisition of ImThera of $35.2 million and $49.9 million for the three and six
months ended June 30, 2021 compared to the three and six months ended June 30,
2020, respectively.
Cost of Sales and Expenses
The table below presents our comparative cost of sales and significant expenses
as a percentage of sales:
                                                      Three Months Ended June 30,                                   Six Months Ended June 30,
                                             2021                2020                Change               2021                2020               Change
Cost of sales                                  34.3  %             36.1  %              (1.8) %             33.9  %             33.4  %              0.5  %
Selling, general and
administrative                                 46.4  %             56.4  %             (10.0) %             46.6  %             53.6  %             (7.0) %
Research and development                       19.9  %             13.8  %               6.1  %             19.0  %             14.4  %              4.6  %

Other operating expenses                       12.6  %              2.1  %              10.5  %              8.2  %              2.1  %              6.1  %


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Cost of Sales
Cost of sales consisted primarily of direct labor, allocated manufacturing
overhead, the acquisition cost of raw materials and components and product
remediation expenses. Cost of sales as a percentage of net sales for the three
and six months ended June 30, 2021 compared to the three and six months ended
June 30, 2020 decreased primarily due to favorable product mix as well as a
decline in product remediation expenses associated with our 3T Heater-Cooler
device. These decreases were partially offset by the net impact of the changes
in fair value of sales-based contingent consideration arrangements of
$20.6 million and $29.3 million, respectively.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses consisted of sales, marketing, general and administrative
activities. SG&A expenses as a percentage of net sales for the three and six
months ended June 30, 2021 compared to the three and six months ended June 30,
2020 decreased primarily due to an increase in sales, partially offset by an
increase in sales and marketing expenses due to lower commercial related
variable and discretionary spending during the three and six months ended June
30, 2020 as a result of COVID-19.
Research and Development ("R&D") Expenses
R&D expenses consisted of product design and development efforts, clinical study
programs and regulatory activities, which are essential to our strategic
portfolio initiatives, including DTD, obstructive sleep apnea and heart failure.
R&D expenses as a percentage of net sales for the three and six months ended
June 30, 2021 compared to the three and six months ended June 30, 2020 increased
primarily due to an increase in R&D expense resulting from the net impact of
changes in fair value of milestone-based contingent consideration arrangements
of $18.4 million and $27.5 million, respectively.
Other Operating Expenses
Other operating expenses consisted of merger and integration expense,
restructuring expense, the provision for litigation involving our 3T
Heater-Cooler device and gain (loss) on the on sale of Heart Valves. Other
operating expenses as a percentage of net sales for the three and six months
ended June 30, 2021 compared to the three and six months ended June 30, 2020
increased primarily due to an increase in the litigation provision related to
our 3T Heater-Cooler device of $28.4 million and $31.5 million, respectively.
For additional information refer to "Note 8. Commitments and Contingencies."
Interest Expense
We incurred interest expense of $16.5 million and $32.5 million for the three
and six months ended June 30, 2021, respectively, as compared to $5.7 million
and $10.6 million for the three and six months ended June 30, 2020,
respectively. The increase for the three and six months ended June 30, 2021 as
compared to the three and six months ended June 30, 2020 was primarily due to an
increase in debt borrowings in June 2020 at increased borrowing rates.
Foreign Exchange and Other Gains (Losses)
Foreign exchange and other gains (losses) consisted primarily of changes in the
fair value of the embedded exchange feature and capped call derivatives, gains
and losses arising from transactions denominated in a currency different from an
entity's functional currency and foreign currency exchange rate derivative gains
and losses.
We incurred foreign exchange and other gains (losses) of $0.1 million and $(6.3)
million for the three and six months ended June 30, 2021, respectively, as
compared to $(1.0) million and $(2.9) million for the three and six months ended
June 30, 2020, respectively. For further details on foreign exchange and other
gains (losses) refer to "Note 14. Supplemental Financial Information" in the
condensed consolidated financial statements in this Quarterly Report on Form
10-Q.
Income Taxes
LivaNova PLC is resident in the UK for tax purposes. Our subsidiaries conduct
operations and earn income in numerous countries and are subject to the laws of
taxing jurisdictions within those countries, and the income tax rates imposed in
the tax jurisdictions in which our subsidiaries conduct operations vary. As a
result of the changes in the overall level of our income, the earnings mix in
various jurisdictions and the changes in tax laws, our consolidated effective
income tax rate may vary from one reporting period to another.
Our effective income tax rate from continuing operations for the three and six
months ended June 30, 2021 was (8.1)% and (9.0)%, respectively, compared with
(306.0)% and (78.0)%, respectively, for the for the three and six months ended
June 30, 2020. Our effective income tax rate fluctuates based on, among other
factors, changes in pretax income in countries with varying statutory tax rates,
changes in valuation allowances, changes in tax credits and incentives, and
changes in unrecognized tax benefits associated with uncertain tax positions.
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Compared with the three months ended June 30, 2020, the change in the effective
tax rate for the three months ended June 30, 2021 was primarily attributable to
the discrete tax impact of the sale of the Heart Valve business as compared to
the establishment of a $70.0 million valuation allowance for the U.K. during the
three months ended June 30, 2020.
Compared with the six months ended June 30, 2020, the change in the effective
tax rate for the six months ended June 30, 2021 was primarily attributable to
changes in valuation allowances and the discrete tax impact of the sale of the
Heart Valve business as compared to the $42.9 million realized discrete tax
benefit related to the Coronavirus Aid, Relief and Economic Security Act ("CARES
Act") offset by the establishment of a $70.0 million valuation allowance for the
U.K. during the six months ended June 30, 2020.
European Union State Aid Challenge
On April 2, 2019, the EC concluded that "when financing income from a foreign
group company, channeled through an offshore subsidiary, derives from UK
activities, the group finance exemption is not justified and constitutes State
aid under EU rules." Based upon our assessment of the technical arguments as to
whether the UK group exemption is State aid, together with no material UK
activities involved in our financing, no reserve relating to our tax position
has been recognized related to this matter. Furthermore, in December 2019, we
amended our 2017 tax return filing to avail ourselves of different rules to
determine UK taxation, which are not subject to the EU decision. We filed our
2018 tax return in a similar fashion, and therefore, we do not believe that the
EU state aid decision will result in a material liability.
Liquidity and Capital Resources
Based on our current business plan, we believe that our existing cash and cash
equivalents, future cash generated from operations and borrowing under our
current debt facilities will be sufficient to fund our expected operating needs,
working capital requirements, R&D opportunities, capital expenditures, and debt
service requirements over the twelve-month period beginning from the issuance
date of these condensed consolidated financial statements. From time to time, we
may decide to access debt and/or equity markets to optimize our capital
structure, raise additional capital or increase liquidity as necessary,
including to satisfy liabilities in the event of an adverse ruling in connection
with the SNIA litigation. Our liquidity could be adversely impacted by the
factors affecting future operating results, including those referred to in "Part
II, Item 1A. Risk Factors" in the 2020 Form 10-K as supplemented by the factors
referred to in "Part II, Item 1A, Risk Factors" in this Quarterly Reports on
Form 10-Q as well as "Note 8. Commitments and Contingencies" in the condensed
consolidated financial statements in this Quarterly Report on Form 10-Q.
On June 17, 2020, our wholly-owned subsidiary, LivaNova USA, Inc., issued
$287.5 million principal amount of 3.00% Cash Exchangeable Senior Notes due 2025
(the "Notes"). Holders of the Notes are entitled to exchange the Notes at any
time during specified periods, at their option. This includes the right to
exchange the Notes during any calendar quarter, if the last reported sale price
of LivaNova's ordinary shares, with a nominal value of £1.00 per share, is
greater than or equal to 130% of the exchange price, or $79.27 per share for at
least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on, and including, the last trading day of the
immediately preceding calendar quarter. The exchange condition was satisfied on
June 18, 2021, which allows the holders of the Notes to request to exchange the
Notes beginning July 1, 2021 through September 30, 2021. As a result, we have
reclassified our obligations from the Notes and the associated embedded exchange
feature derivative as a current liability on the condensed consolidated balance
sheet as of June 30, 2021. However, as of the date of filing of this Form 10-Q,
no holders have elected to exchange the Notes. The Notes are exchangeable solely
into cash and are not exchangeable into ordinary shares of LivaNova or any other
security under any circumstances. The initial exchange rate for the Notes is
16.3980 ordinary shares per $1,000 principal amount of Notes (equivalent to an
initial exchange price of approximately $60.98 per share). The exchange rate is
subject to adjustment in certain circumstances, as set forth in the indenture
governing the Notes. If holders elect to exchange their Notes during the current
period or any future periods in the event an exchange condition is met, we would
be required to settle our exchange obligation through the payment of cash, which
could adversely affect our liquidity. Currently, the Company believes it is
unlikely the holders of the Notes will exchange significant amounts of the
Notes.
The Company has also entered into privately negotiated capped call transactions
with terms substantially similar to those applicable to the Notes. The capped
call transactions are expected generally to offset any cash payments the Company
is required to make upon exchange of the Notes in excess of the principal amount
thereof in the event that the market value per ordinary share, as measured under
the capped call transactions, is greater than the strike price of the capped
call transactions, with such offset being subject to an initial cap price of
$100.00 per share. The capped call transactions expire on December 15, 2025 and
must be settled in cash. If the capped call transactions are converted or
redeemed early, settlement occurs at their termination value, which is equal to
their fair value at the time of the redemption. The capped call transactions are
included at their estimated fair value as of June 30, 2021 within current
derivative assets on the condensed consolidated balance sheet.
                                       40
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Refer to "Note 6. Financing Arrangements" in the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt and debt transactions.


 Cash Flows
Net cash and cash equivalents provided by (used in) operating, investing and
financing activities and the net increase in the balance of cash and cash
equivalents were as follows (in thousands):

Six Months Ended June 30, 2021


                                                                            2021                   2020
Operating activities                                                  $       45,111          $  (125,064)
Investing activities                                                          46,715              (22,666)
Financing activities                                                         (14,087)             319,697
Effect of exchange rate changes on cash and cash equivalents                  (1,185)                (555)
Net increase in cash and cash equivalents                             $

76,554 $ 171,412




Operating Activities
Cash provided by operating activities during the six months ended June 30, 2021
increased by $170.2 million as compared to the same prior-year period. The
increase is primarily due to a decrease in 3T litigation settlement payments of
$113.5 million, the receipt of a CARES Act tax refund of $24.6 million during
the six months ended June 30, 2021 and an increase in cash associated with net
loss adjusted for non-cash items.
Investing Activities
Cash provided by investing activities during the six months ended June 30, 2021
increased $69.4 million as compared to the same prior-year period. The increase
is primarily due proceeds from the sale of Heart Valves of $41.8 million as well
as proceeds from the sale of LivaNova's investment in and loan to Respicardia
totaling $23.1 million.
Financing Activities
Cash used in financing activities during the six months ended June 30, 2021 was
$14.1 million as compared to cash provided by financing activities during the
six months ended June 30, 2020 of $319.7 million. The decrease is primarily due
to a decrease in net borrowings of $387.6 million, partially offset by the
purchase of a capped call associated with our Notes of $43.1 million and a
closing adjustment payment for the sale of our former CRM business of $14.9
million made during the six months ended June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements.
Contractual Obligations
We had no material changes in our contractual commitments and obligations from
amounts listed under "Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in our 2020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business
operations, including risks from foreign currency exchange rates, equity price
risk, interest rate risks and concentration of procurement suppliers that could
adversely affect our consolidated financial position, results of operations or
cash flows. We manage these risks through regular operating and financing
activities and, at certain times, derivative financial instruments. Quantitative
and qualitative disclosures about these risks are included in this Quarterly
Report on Form 10-Q in "Part I, Note 7. Derivatives and Risk Management," "Part
I, Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and "Part II, Item 1A. Risk Factors" and in our 2020 Form
10-K in "Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Part I, Item 1A. Risk Factors."
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