LEMAITRE VASCULAR INC - Quarter Report: 2019 September (Form 10-Q)

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

	FORM 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

Or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                     .

 

Commission File Number 001-33092

 

LEMAITRE VASCULAR, INC.
(Exact name of registrant as specified in its charter)

 

Delaware	04-2825458
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

63 Second Avenue, Burlington, Massachusetts	01803
(Address of principal executive offices)	(Zip Code)

 

	(781) 221-2266
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth Company “in Rule12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common	LMAT	The Nasdaq Global Market

 

The registrant had 19,991,347 shares of common stock, $.01 par value per share, outstanding as of October 31, 2019.

 

 

 

LEMAITRE VASCULAR

FORM 10-Q

TABLE OF CONTENTS

 

			Page
Part I.	Financial Information:
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	3
		Unaudited Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019 and 2018	4
		Unaudited Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2019 and 2018	5
		Unaudited Consolidated Statements of Stockholders’ Equity for the three-month and nine-month periods ended September 30, 2019 and 2018	6
		Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2019 and 2018	8
		Notes to Unaudited Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	33
	Item 4.	Controls and Procedures	34
Part II.	Other Information:
	Item 1.	Legal Proceedings	35
	Item 1A.	Risk Factors	35
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
	Item 6.	Exhibits	39
	Signatures		40

 

 

 

		(unaudited)
		September 30,				December 31,
		2019				2018
		(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents		$	11,719			$	26,318
Short-term marketable securities			33,177				21,668
Accounts receivable, net of allowances of $482 at September 30, 2019 and $399 at December 31, 2018			14,878				15,721
Inventory and other deferred costs			36,695				27,388
Prepaid expenses and other current assets			3,226				2,922
Total current assets			99,695				94,017
Property and equipment, net			14,070				14,102
Right-of-use leased assets			6,008				-
Goodwill			32,102				29,868
Other intangibles, net			16,765				13,692
Deferred tax assets			1,164				1,215
Other assets			210				194
Total assets		$	170,014			$	153,088
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,670			$	1,732
Accrued expenses			13,390				15,847
Acquisition-related obligations			2,597				2,179
Lease liabilities - short-term			1,666				-
Total current liabilities			19,323				19,758
Lease liabilities - long-term			4,755				-
Deferred tax liabilities			823				484
Other long-term liabilities			2,797				2,611
Total liabilities			27,698				22,853
Stockholders’ equity:
Preferred stock, $0.01 par value; authorized 3,000,000 shares; none outstanding							-
Common stock, $0.01 par value; authorized 37,000,000 shares; issued 21,495,306 shares at September 30, 2019, and 21,110,224 shares at December 31, 2018			215				211
Additional paid-in capital			103,673				98,442
Retained earnings			54,117				45,831
Accumulated other comprehensive loss			(4,894	)			(3,900	)
Treasury stock, at cost; 1, 515,378 shares at September 30, 2019 and 1,501,511 shares at December 31, 2018			(10,795	)			(10,349	)
Total stockholders’ equity			142,316				130,235
Total liabilities and stockholders’ equity		$	170,014			$	153,088

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		Three months ended								Nine months ended
		September 30,								September 30,
		2019				2018				2019				2018
		(in thousands, except per share data)								(in thousands, except per share data)
Net sales		$	29,100			$	24,165			$	87,062			$	77,179
Cost of sales			8,934				6,910				27,117				22,458
Gross profit			20,166				17,255				59,945				54,721
Sales and marketing			7,429				6,622				22,887				20,504
General and administrative			4,551				3,983				14,026				13,227
Research and development			2,281				2,037				6,777				5,850
Gain on divestiture			-				-				-				(5,876	)
Total operating expenses			14,261				12,642				43,690				33,705
Income from operations			5,905				4,613				16,255				21,016
Other income (expense):
Interest income			193				192				574				452
Foreign currency gain (loss)			(208	)			(75	)			(338	)			(275	)
Income before income taxes			5,890				4,730				16,491				21,193
Provision for income taxes			706				416				3,170				4,275
Net income		$	5,184			$	4,314			$	13,321			$	16,918
Earnings per share of common stock:
Basic		$	0.26			$	0.22			$	0.68			$	0.87
Diluted		$	0.25			$	0.21			$	0.66			$	0.84
Weighted-average shares outstanding:
Basic			19,871				19,503				19,731				19,369
Diluted			20,378				20,293				20,277				20,258
Cash dividends declared per common share		$	0.085			$	0.070			$	0.255			$	0.210

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		Three months ended								Nine months ended
		September 30,								September 30,
		2019				2018				2019				2018
		(in thousands)								(in thousands)
Net income		$	5,184			$	4,314			$	13,321			$	16,918
Other comprehensive income (loss):
Foreign currency translation adjustment, net			(1,072	)			(308	)			(1,125	)			(1,204	)
Unrealized gain (loss) on short-term marketable securities			(4	)			33				131				11
Total other comprehensive income (loss)			(1,076	)			(275	)			(994	)			(1,193	)
Comprehensive income		$	4,108			$	4,039			$	12,327			$	15,725

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																		Accumulated
										Additional								Other												Total
		Common Stock								Paid-in				Retained				Comprehensive				Treasury Stock								Stockholders’
		Shares				Amount				Capital				Earnings				Income (Loss)				Shares				Amount				Equity
Balance at December 31, 2018			21,110,224			$	211			$	98,442			$	45,831			$	(3,900	)			1,501,511			$	(10,349	)		$	130,235
Net income															3,513																3,513
Other comprehensive income																			(192	)											(192	)
Issuance of common stock for stock options exercised			61,419				1				478																				479
Vested restricted stock units			2,026				-				-																				-
Stock-based compensation expense											746																				746
Repurchase of common stock at cost																							926				(21	)			(21	)
Common stock dividend accrued															(1,672	)															(1,672	)
Balance at March 31, 2019			21,173,669				212				99,666				47,672				(4,092	)			1,502,437				(10,370	)			133,088
Net income															4,624																4,624
Other comprehensive income																			274												274
Issuance of common stock for stock options exercised			77,032				1				530																				531
Vested restricted stock units			171				-				-																				-
Stock-based compensation expense											694																				694
Repurchase of common stock at cost																							1,008				(2	)			(2	)
Common stock dividend paid															(1,672	)															(1,672	)
Balance at June 30, 2019			21,250,872				213				100,890				50,624				(3,818	)			1,503,445				(10,372	)			137,537
Net income															5,184																5,184
Other comprehensive income																			(1,076	)											(1,076	)
Issuance of common stock for stock options exercised			208,821				2				2,128																				2,130
Vested restricted stock units			35,613								-																				-
Stock-based compensation expense											655																				655
Repurchase of common stock at cost																							11,933				(423	)			(423	)
Common stock dividend paid															(1,691	)															(1,691	)
Balance at September 30, 2019			21,495,306				215				103,673				54,117				(4,894	)			1,515,378				(10,795	)			142,316

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																		Accumulated
										Additional								Other												Total
		Common Stock								Paid-in				Retained				Comprehensive				Treasury Stock								Stockholders’
		Shares				Amount				Capital				Earnings				Income (Loss)				Shares				Amount				Equity
Balance at December 31, 2017			20,745,041			$	207			$	93,127			$	28,333			$	(2,289	)			1,480,101			$	(9,608	)			109,770
Net income															3,853																3,853
Other comprehensive income																			283												283
Issuance of common stock for stock options exercised			34,826				1				292																				293
Stock-based compensation expense											621																				621
Repurchase of common stock at cost																															-
Common stock dividend accrued															(1,350	)															(1,350	)
Balance at March 31, 2018			20,779,867			$	208			$	94,040			$	30,836			$	(2,006	)			1,480,101			$	(9,608	)		$	113,470
Net income															8,751																8,751
Other comprehensive income																			(1,201	)											(1,201	)
Issuance of common stock for stock options exercised			56,215				-				446																				446
Vested restricted stock units			765				-				-																				-
Stock-based compensation expense											636																				636
Repurchase of common stock at cost																							149				(5	)			(5	)
Common stock dividend accrued															(1,353	)															(1,353	)
Balance at June 30, 2018			20,836,847			$	208			$	95,122			$	38,234			$	(3,207	)			1,480,250			$	(9,613	)		$	120,744
Net income															4,314																4,314
Other comprehensive income																			(275	)											(275	)
Issuance of common stock for stock options exercised			192,487				3				2,068																				2,071
Vested restricted stock units			51,131				-				-																				-
Stock-based compensation expense											537																				537
Repurchase of common stock at cost																							18,353				(674	)			(674	)
Common stock dividend accrued															(1,370	)															(1,370	)
Balance at September 30, 2018			21,080,465			$	211			$	97,727			$	41,178			$	(3,482	)			1,498,603			$	(10,287	)		$	125,347

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		For the nine months ended
		September 30,
		2019				2018
		(in thousands)
Operating activities
Net income		$	13,321			$	16,918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,975				3,108
Stock-based compensation			2,095				1,794
Fair value adjustment to contingent consideration obligations			123				(24	)
Provision for doubtful accounts			289				209
Provision for inventory write-downs			508				298
Gain on divestitures			-				(5,876	)
Foreign currency transaction loss			62				126
Changes in operating assets and liabilities:
Accounts receivable			268				1,552
Inventory and other deferred costs			(9,576	)			(3,061	)
Prepaid expenses and other assets			(449	)			(1,764	)
Accounts payable and other liabilities			(2,031	)			(345	)
Net cash provided by operating activities			8,585				12,935
Investing activities
Purchases of property and equipment and other assets			(2,361	)			(1,764	)
Purchases of short-term marketable securities			(18,378	)			(15,948	)
Sales of short-term marketable securities			7,000				13,000
Payments related to acquisitions			(6,815	)			(11,000	)
Proceeds from divestuture			-				7,400
Net cash used in investing activities			(20,554	)			(8,312	)
Financing activities
Payments of deferred acquisition consideration			(59	)			(1,171	)
Proceeds from issuance of common stock			3,138				2,809
Purchase of treasury stock			(446	)			(678	)
Common stock cash dividend paid			(5,035	)			(4,073	)
Net cash provided by financing activities			(2,402	)			(3,113	)
Effect of exchange rate changes on cash and cash equivalents			(228	)			(502	)
Net increase in cash and cash equivalents			(14,599	)			1,008
Cash and cash equivalents at beginning of period			26,318				19,096
Cash and cash equivalents at end of period		$	11,719			$	20,104

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1. Organization and Basis for Presentation

 

Description of Business

 

Unless the context requires otherwise, references to LeMaitre Vascular, we, our, and us refer to LeMaitre Vascular, Inc. and our subsidiaries. We develop, manufacture, and market medical devices and implants used primarily in the field of vascular surgery. We also derive revenues from the processing and cryopreservation of human tissues for implantation in patients. We operate in a single segment in which our principal product lines include the following: anastomotic clips, angioscopes, biologic vascular grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy catheters, occlusion catheters, powered phlebectomy devices, radiopaque marking tape, remote endarterectomy devices, surgical glue, synthetic vascular grafts and valvulotomes. Our offices are located in Burlington, Massachusetts; Fox River Grove, Illinois; Chandler, Arizona; Vaughan, Canada; Sulzbach, Germany; Milan, Italy; Madrid, Spain; Saint-Etienne, France; Hereford, England; North Melbourne, Australia; Tokyo, Japan; Shanghai, China; and Singapore.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation of the results of these interim periods have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, sales returns and discounts, share-based compensation, and income taxes are updated as appropriate. The results for the nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the entire year. The information contained in these interim financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2018, including the notes thereto, included in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 11, 2019.

 

Consolidation

 

Our consolidated financial statements include the accounts of LeMaitre Vascular and the accounts of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

Our revenue is derived primarily from the sale of disposable or implantable devices used during vascular surgery. We sell primarily directly to hospitals and to a lesser extent to distributors, as described below, and, during the periods presented in our consolidated financial statements, entered into consigned inventory arrangements with either hospitals or distributors on a limited basis. With the acquisition of the RestoreFlow allograft business, we also derive revenues from the processing and cryopreservation of human tissues for implantation in patients. These revenues are recognized when services have been provided and the tissue has been shipped to the customer, provided all other revenue recognition criteria discussed in the succeeding paragraph have been met.

 

 

  We recognize revenue under the provisions of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard explains that to achieve the core principle, an entity should take the following actions:

 

Step 1: Identify the contract with a customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price

 

Step 5: Recognize revenue when or as the entity satisfies a performance obligation

 

Revenue is recognized when or as a company satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). In instances in which shipping and handling activities are performed after a customer takes control of the goods (such as when title passes upon shipment from our dock), we have made the policy election allowed under Topic 606 to account for these activities as fulfillment costs and not as performance obligations.

 

We generally reference customer purchase orders to determine the existence of a contract. Orders that are not accompanied by a purchase order are confirmed with the customer either in writing or verbally. The purchase orders or similar correspondence, once accepted, identify the performance obligations as well as the transaction price, and otherwise outline the rights and obligations of each party. We allocate the transaction price of each contract among the performance obligations in accordance with the pricing of each item specified on the purchase order, which is in turn based on standalone selling prices per our published price lists. In cases where we discount products or provide certain items free of charge, we allocate the discount proportionately to all performance obligations, unless it can be demonstrated that the discount should be allocated entirely to one or more, but not all, of the performance obligations.

 

We recognize revenue, net of allowances for returns and discounts, fees paid to group purchasing organizations, and any sales and value added taxes required to be invoiced, which we have elected to exclude from the measurement of the transaction price as allowed by the standard, at the time of shipment (taking into consideration contractual shipping terms), or in the case of consigned inventory, when it is consumed. Shipment is the point at which control of the product and title passes to our customers, and at which LeMaitre Vascular has a present right to receive payment for the goods.

 

Below is a disaggregation of our revenue by major geographic area, which is among the primary categorizations used by     management in evaluating financial performance, for the periods indicated (in thousands):  

 

 

Except as discussed in Note 7, we do not carry any contract assets or contract liabilities, as there are generally no unbilled amounts due from customers under contracts for which we have partially satisfied performance obligations, or amounts received from customers for which we have not satisfied performance obligations. We satisfy our performance obligations under revenue contracts within a very short time period from receipt of the orders, and payments from customers are typically received within 30 to 60 days of fulfillment of the orders, except in certain geographies such as Spain and Italy where the payment cycle is customarily longer. Accordingly, there is no significant financing component to our revenue contracts. Additionally, we have elected as a policy that incremental costs (such as commissions) incurred to obtain contracts are expensed as incurred, due to the short-term nature of the contracts.

 

 

Customers returning products may be entitled to full or partial credit based on the condition and timing of the return. To be accepted, a returned product must be unopened (if sterile), unadulterated, and undamaged, must have at least 18 months remaining prior to its expiration date, or twelve months for our hospital customers in Europe, and generally be returned within 30 days of shipment. These return policies apply to sales to both hospitals and distributors. The amount of products returned to us, either for exchange or credit, has not been material. Nevertheless, we provide for an allowance for future sales returns based on historical returns experience, which requires judgment. Our cost of replacing defective products has not been material and is accounted for at the time of replacement.

 

 

 Recent Accounting Pronouncements

 

On January 1, 2019 we adopted the provisions of ASU No. 2016-02, Leases (Topic 842), subsequently amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under the new guidance, we are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. As allowed by the standard, we elected to use the transition option not to apply the new lease standard to comparative periods but instead to recognize a cumulative-effect adjustment to retained earnings as of the date of adoption, January 1, 2019. Upon adoption of this standard, we recognized lease liabilities of $7.0 million and right-of-use assets in the amount of $6.5 million (net of the reversal of a previously recorded deferred rent liability of $0.5 million). There was no cumulative-effect adjustment to retained earnings required. Additional disclosures required under the new standard are included in Note 6 to these financial statements.

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The new standard is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820), which modifies the disclosure requirements for fair value measurements. The new standard is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

  

In January 2017, the FASB issued ASU 2017-04, which, among other provisions, eliminates “step 2” from the goodwill impairment test. The annual, or interim, goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments, including accounts receivable. The new standard is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

 

2. Income Tax Expense

 

As part of the process of preparing our consolidated financial statements we are required to determine our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from recognition of items for income tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from taxable income during the carryback period or in the future; and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within the tax provision in the statement of operations. We do not provide for income taxes on undistributed earnings of foreign subsidiaries, as our intention is to permanently reinvest these earnings.

 

 

We recognize, measure, present and disclose in our financial statements any uncertain tax positions that we have taken, or expect to take on a tax return. We operate in multiple taxing jurisdictions, both within and without the United States, and may be subject to audits from various tax authorities. Management’s judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, liabilities for uncertain tax positions, and any valuation allowance recorded against our net deferred tax assets. We will monitor the realizability of our deferred tax assets and adjust the valuation allowance accordingly.

 

 

Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense. Our 2019 income tax expense varies from the statutory rate mainly due to the generation of federal and state tax credits, permanent items, different statutory rates from our foreign subsidiaries, and discrete stock option exercises. Our 2018 income tax expense varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and discrete stock option exercises.

 

We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2019, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $766,000. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction. The statute of limitations will be open with respect to these tax positions until 2026. A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:

 

 

As of September 30, 2019, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:

 

United States	2016 and forward
Foreign	2012 and forward

 

 

 

 

3. Inventories and Other Deferred Costs

 

Inventories and other deferred costs consist of the following:  

 

 

We had inventory on consignment of $1.8 million and $1.7 million at September 30, 2019 and December 31, 2018, respectively.

 

Other deferred costs relate to our RestoreFlow allograft offering and include costs incurred for the preservation of human vascular tissues available for shipment, tissues currently in active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot be bought or sold. Therefore, the vascular tissues we preserve are not held as inventory, and the costs we incur to procure and process them are instead accumulated and deferred. These costs include fixed and variable overhead costs associated with the cryopreservation process, including primarily direct labor costs, tissue recovery fees, inbound freight charges, indirect materials and facilities costs. General and administrative expenses and selling expenses associated with the provision of these services are expensed as incurred.

 

 

 

4. Acquisitions and Divestitures

 

Our acquisitions are accounted for using the acquisition method, and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In each case for the acquisitions disclosed below, pro forma information assuming the acquisition had occurred at the beginning of the earliest period presented is not included, as the impact is immaterial.

 

With the exception of Cardial discussed below, our acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of synergies that will be realized by combining businesses. These synergies include the use of our existing sales channel to expand sales of the acquired businesses’ products and services, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure. The fair market valuations associated with these transactions fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long range strategic plans and other estimates. Our assumptions associated with these Level 3 valuations are discussed below and in Note 13 to these financial statements.

 

Tru-Incise Valve Cutter

 

On July 12, 2019, we entered into an agreement with UreSil, LLC, an Illinois limited liability company, to purchase the remaining assets of their Tru-Incise valve cutter business, including distribution rights in the United States. We also entered into a transition services agreement under which UreSil, LLC will continue to manufacture the acquired products for us for a specified time, until we transition the full manufacturing process to our Burlington, Massachusetts facilities.

 

The purchase price for the acquired assets, which included inventory, machinery and equipment, intellectual property, and customer and supplier information, was $8.0 million. Of this amount, $6.8 million was paid at closing, with three follow-on payments $0.4 million each due on the first, second and third anniversaries of the closing date.  The deferred amounts totaling $1.2 million were recorded at an acquisition-date fair value of $1.1 million using a discount rate of 4.19% to reflect the time value of money between the acquisition date and the payment due dates. There are no contingencies associated with these holdback payments, although they may be reduced for certain post-closing claims.

 

The following table summarizes the preliminary purchase price allocation: 

 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

 

The following table reflects the allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

 

The weighted-average amortization period of the acquired intangible assets was 14.2 years.

 

Cardial

 

On October 22, 2018, through a newly created subsidiary LeMaitre Cardial SAS, we entered into an agreement to acquire the business assets of Cardial, a company located in Saint-Etienne, France. The Cardial business consists of the manufacturing of polyester vascular grafts, valvulotomes, surgical glue and original equipment manufacturing (OEM) services. On the same date, the parties entered into a separate agreement under which LeMaitre Cardial SAS purchased the building and land previously owned by Cardial.

 

The purchase price for the acquired assets, including the land and building, inventory, machinery and equipment, intellectual property, permits and approvals, data and records, and customer and supplier information, was €2.0 million ($2.3 million). At closing, €1.1 million ($1.3 million) was paid in cash, and €0.5 million ($0.5 million) of liabilities were assumed by LeMaitre Cardial SAS. Another €0.4 million ($0.4 million) is due in two installments, half to be paid twelve months after the closing date, and half eighteen months after the closing date. There are no contingencies associated with these holdback payments, although they may be reduced depending upon the results of a reconciliation of the value of inventory transferred, as outlined in the agreement, or for certain post-closing claims. 

 

 The following table summarizes the preliminary purchase price allocation:     

 

 

The bargain purchase gain was recorded to reflect the excess of the net assets acquired over the purchase price. We recorded deferred taxes on this gain of €0.5 million ($0.6 million), resulting in a net gain of €1.4 million ($1.6 million).

 

The following table reflects the allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

 

The weighted-average amortization period of the acquired intangible assets was 9.4 years.

  

 

Applied Medical Clot Management Business

 

On September 20, 2018, we entered into an agreement to acquire the assets of the embolectomy catheter business of Applied Medical Resources Corporation (Applied). The acquired business consists of several embolectomy, thrombectomy and irrigation catheter product lines which are sold worldwide (approximately 60% in the U.S. and 40% outside the U.S.). On the same date, we entered into a transition services agreement under which Applied will manufacture and supply us with inventory for a period of twelve months, unless extended by both parties.

 

The purchase price for the acquired assets, which included inventory, machinery and equipment, intellectual property, permits and approvals, data and records, and customer and supplier information, was $14.2 million. Of this amount, $11 million was paid at closing, with another $2 million due 12 months following the closing date, and the final $1.2 million due 24 months following the closing date.   The deferred amounts totaling $3.2 million were recorded at an acquisition-date fair value of $3.0 million using a discount rate of 3.75% to reflect the time value of money between the acquisition date and the payment due dates. There are no contingencies associated with these holdback payments, although they may be reduced for certain post-closing claims.

 

The following table summarizes the purchase price allocation:    

 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

The following table reflects the allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

 

The weighted-average amortization period of the acquired intangible assets was 13.0 years.

 

 

Reddick Divestiture 

 

On April 5, 2018, we entered into an agreement to sell the inventory, intellectual property and other assets associated exclusively with our Reddick cholangiogram catheter and Reddick-Saye screw product lines for $7.4 million to Specialty Surgical Instrumentation. Concurrent with this divestiture we entered into a transition services agreement under which we will continue to manufacture and supply these products to the buyer for a period of up to two years unless extended by both parties, as well as a balloon supply agreement under which we will supply balloons, a component of the cholangiogram catheters, to the buyer for a period of up to six years unless extended by both parties. We recorded a gain during the quarter ended June 30, 2018 in connection with these agreements of $5.9 million. The following table summarizes the allocation of consideration received:

 

 

Under the terms of the transition services agreement, we agreed to manufacture the Reddick products for the buyer at prices at or in some cases below our cost. We allocated a portion of the consideration received to this agreement to reflect it at fair value and recorded it as deferred revenue. As the products were sold to the buyer, we amortized a portion of the deferred revenue to adjust the gross margin on the sale to fair value on a specific identification basis. This arrangement ended by mutual agreement during the quarter ended September 30, 2019, and all remaining deferred revenue was recognized.

 

Subsequent Event 

 

On October 11, 2019 we acquired the biologic cardiac and vascular patch business of Admedus Ltd for $15.5 million, of which $14.2 million was paid at closing and $1.3 million is due in two post-closing installments, as well as potential earnout payments of $7.8 million payable based upon performance of the acquired business as well as other milestones.  We also entered into a license agreement for the tissue processing technology limited to the acquired CardioCel and VascuCel product lines, and a transition services agreement under which Admedus will continue to manufacture the products for up to three years while we transition manufacturing to Burlington. 

 

 

 

5. Goodwill and Other Intangibles

 

Goodwill consists of the following as of September 30, 2019:

 

 

    Other intangible assets consist of the following:

 

 

 

These intangible assets are being amortized over their useful lives ranging from 2 to 16 years. The weighted-average amortization period for these intangibles as of September 30, 2019 is 11.0 years. Amortization expense is included in general and administrative expense and was as follows for the periods indicated.

 

 

We estimate that amortization expense for the remainder of 2019 and for each of the five succeeding fiscal years will be as follows: 

 

 

 

 

6. Leases

 

We conduct the majority of our operations in leased facilities, all of which are accounted for as operating leases, as they do not meet the criteria for finance leases. Our principal worldwide executive, distribution, and manufacturing operations are located at three adjacent 27,098 square foot, 27,289 square foot and 15,642 square foot leased facilities, as well as a fourth nearby 12,878 square foot leased facility, in Burlington, Massachusetts. Each of our Burlington leases expires in December 2023. In addition, our international operations are headquartered at a 16,470 square foot leased facility located in Sulzbach, Germany, including approximately 3,630 square feet added in 2019, under a lease which expires in August 2023. This lease contains two five-year renewal options. In addition, we have smaller long-term leased sales, marketing and other facilities located in Arizona, Japan, Canada, Australia, Singapore and China, and short-term leases in Italy, Spain and Illinois. Our lease in Canada contains a five-year renewal option exercisable in February 2023. Our leases in Germany and Australia are subject to periodic rent increases based on increases in the consumer price index as measured each September and May, respectively, with such increases applicable to the subsequent twelve months of lease payments. None of our noncancelable lease payments include non-lease components such as maintenance contracts; we generally reimburse the landlord for direct operating costs associated with the leased space. We have no subleases, and there are no residual value guarantees associated with, or restrictive covenants imposed by, any of our leases. There were no assets held under capital leases at September 30, 2019.

 

On October 29, 2019, our four Burlington, Massachusetts leases were extended through December 2030, under terms substantially similar to the existing leases.

 

We also lease automobiles under operating leases in the U.S. as well as certain of our international subsidiaries. The terms of these leases are generally three years, with older vehicles replaced by newer vehicles from time to time.

 

As discussed above under Recent Accounting Pronouncements, on January 1, 2019 we adopted the provisions of ASU No. 2016-02, Leases (Topic 842), subsequently amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under the new guidance, we are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Our most significant judgment involved in determining the amounts to initially record as lease liabilities and right-of-use assets was the estimation of a discount rate; because we have no debt we have no incremental borrowing rate to reference. We therefore estimated an incremental borrowing rate using quotes from potential lenders as the primary inputs, augmented by other available information. The resulting rate selected was 5.25%. We determined that it was appropriate to apply this single rate to our portfolio of leases worldwide, as the lease terms and conditions are substantially similar, and because we believe our subsidiaries would be unable to obtain borrowings on their own without a commitment of parent company support.

 

 

Additional information with respect to our leases is as follows: 

 

 

At September 30, 2019, the minimum noncancelable operating lease rental commitments with initial or remaining terms of more than one year are as follows:

 

  

 

 

 7. Accrued Expenses and Other Long-term Liabilities

 

Accrued expenses consist of the following: 

 

 

As discussed in Note 4 above, deferred revenue related to our divestiture of the Reddick product line and an associated transition services agreement that we entered into at the time of the divestiture, under which we agreed to manufacture and sell product to the buyer at prices at or below our cost. We allocated a portion of the consideration received from the divestiture to this transition services agreement to reflect it at fair value and recorded it as deferred revenue. As the products were sold to the buyer, we amortized a portion of the deferred revenue to adjust the gross margin on the sale to fair value on a specific identification basis. This arrangement was completed during the quarter ended September 30, 2019:

 

 

Other long-term liabilities consist of the following: 

 

  

 

8. Segment and Enterprise-Wide Disclosures

 

Under Accounting Standards Codification Topic 280, Segment Reporting, operating segments are defined as components of an enterprise for which separate, discrete financial information is available and evaluated by the chief operating decision-maker in making decisions on how to allocate resources and assess performance. We view our operations and manage our business as one operating segment. No discrete operating information is prepared by us except for sales by product line and by legal entity for local reporting purposes.

 

 

Most of our revenues are generated in the United States, Germany, and other European countries as well as in Canada, Japan and China. Substantially all of our assets are located in the United States. Net sales to unaffiliated customers by country were as follows:

 

 

 

9. Share-based Compensation

 

Our Third Amended and Restated 2006 Stock Option and Incentive Plan allows for granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, unrestricted stock awards and deferred stock awards to our officers, employees, directors and consultants. The components of share-based compensation expense were as follows:

 

 

Stock-based compensation is included in our statements of operations as follows: 

 

 

We did not grant any options during the nine-month periods ended September 30, 2019 or 2018. Awards of restricted stock units during both periods were immaterial.

 

We issued approximately 385,000 and 329,000 shares of common stock following the exercise or vesting of underlying stock options or restricted stock units during the nine months ended September 30, 2019 and 2018, respectively.

 

 

 

10. Net Income per Share

 

The computation of basic and diluted net income per share was as follows: