LivaNova PLC - Quarter Report: 2020 September (Form 10-Q)

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, 2020

☐ 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: 001-37599

LivaNova PLC

(Exact name of registrant as specified in its charter)

England and Wales ................... 98-1268150

(State or other jurisdiction of .......... (I.R.S. Employer

incorporation or organization) ........ Identification No.)

20 Eastbourne Terrace, London, United Kingdom, W2 6LG

(Address of principal executive offices) ....................... (Zip Code)

Registrant’s telephone number, including area code: (44) (0) 203 325-0660

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Ordinary Shares - £1.00 par value per share

LIVN

NASDAQ Global Market

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 Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑


Class			Outstanding at October 27, 2020
Ordinary Shares - £1.00 par value per share			48,596,417

LIVANOVA PLC

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PAGE NO.

Note About Forward Looking Statements

Item 1

Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (Loss)

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Cash Flows

Notes to the Condensed Consolidated Financial Statements

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

PART II. OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Mine Safety Disclosures

In this Quarterly Report on Form 10-Q, “LivaNova,” “the Company,” “we,” “us” and “our” refer to LivaNova PLC and its consolidated subsidiaries.

This report may contain references to our proprietary intellectual property, including among others:

•Trademarks for our VNS therapy systems, the VNS Therapy® System, the VITARIA® System and our proprietary pulse generator products: Model 102 (Pulse®), Model 102R (Pulse Duo®), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®), Model 106 (AspireSR®), Model 1000 (SenTiva®) and Model 8103 (Symmetry®).

•Trademarks for our Cardiopulmonary product systems: S5® heart-lung machine, S3® heart-lung machine, Inspire®, Heartlink®, XTRA® Autotransfusion System, 3T Heater-Cooler®, Connect™ and Revolution®.

•Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: Mitroflow®, Crown PRT®, Solo Smart™, Perceval®, Miami Instruments™, Top Hat®, Reduced Series Aortic Valves™, Carbomedics Carbo-Seal®, Carbo-Seal Valsalva®, Carbomedics Standard®, Orbis™ and Optiform®, MEMO 4D®, AnnuloFlo®, AnnuloFlex®, Bicarbon Slimline™, Bicarbon Fitline™ and Bicarbon Overline®.

•Trademarks for our advanced circulatory support systems: TandemLife®, TandemHeart®, TandemLung®, ProtekDuo®, and LifeSPARC™.

•Trademarks for our obstructive sleep apnea system: ImThera® and Aura6000®.

These trademarks and trade names are the property of LivaNova or the property of our consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, our trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.

________________________________________

NOTE ABOUT FORWARD LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, LivaNova’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “should,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” “foresee” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by LivaNova and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, and include but are not limited to the risks and uncertainties summarized below:

•changes in our common stock price;

•activist investors causing disruptions to the business;

•changes in our profitability;

•regulatory activities and announcements, including the failure to obtain regulatory approvals for our new products;

•effectiveness of our internal controls over financial reporting;

•fluctuations in future quarterly operating results;

•failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, U.S. Food and Drug Administration (“FDA”) laws and regulations;

•failure to establish, expand or maintain market acceptance of our products for the treatment of our approved indications;

•any legislative or administrative reform to the healthcare system, including the U.S. Medicare or Medicaid systems or international reimbursement systems, that significantly reduces reimbursement for our products or procedures or denies coverage for such products or procedures or enhances coverage for competitive products or procedures, as well as adverse decisions by administrators of such systems on coverage or reimbursement issues relating to our products;

•failure to maintain the current regulatory approvals for our products’ approved indications;

•failure to obtain or maintain coverage and reimbursement for our products’ approved indications;

•unfavorable results from clinical studies;

•variations in sales and operating expenses relative to estimates;

•our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;

•product liability, intellectual property, shareholder-related, environmental-related, income tax and other litigation, disputes, losses and costs;

•protection, expiration and validity of our intellectual property;

•changes in technology, including the development of superior or alternative technology or devices by competitors;

•competition from providers of alternative medical therapies, such as pharmaceutical companies and providers of cannabis;

•cyber-attacks or other disruptions to our information technology systems;

•failure to comply with applicable U.S. laws and regulations, including federal and state privacy and security laws and regulations;

•failure to comply with applicable non-U.S. laws and regulations;

•non-U.S. operational and economic risks and concerns;

•failure to attract or retain key personnel;

•failure of new acquisitions to further our strategic objectives or strengthen our existing businesses;

•losses or costs from pending or future lawsuits and governmental investigations;

•changes in accounting rules that adversely affect the characterization of our consolidated financial position, results of operations or cash flows;

•changes in customer spending patterns;

•continued volatility in the global market and worldwide economic conditions, including volatility caused by Brexit and/or changes to existing trade agreements and relationships between the U.S. and other countries;

•risks relating to the outbreak and spread of COVID-19 around the world;

•changes in tax laws, including changes related to Brexit, or exposure to additional income tax liabilities;

•harsh weather or natural disasters that interrupt our business operations or the business operations of our hospital-customers; and

•failure of the market to adopt new therapies or to adopt new therapies quickly.

Other factors that could cause our actual results to differ from our projected results are described in (1) “Part II, Item 1A. Risk Factors” and elsewhere in this and our other Quarterly Reports on Form 10-Q, (2) our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our 2019 Form 10-K and in our Quarterly Reports on Form 10-Q.

Financial Information and Currency of Financial Statements

All of the financial information included in this quarterly report has been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.” and such principles, “U.S. GAAP”). The reporting currency of our condensed consolidated financial statements is U.S. dollars.

________________________________________

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net sales	$	240,083	$	268,610	$	664,686	$	796,580
Costs and expenses:
Cost of sales - exclusive of amortization	86,467		86,128		212,152		245,324
Product remediation	1,133		3,076		6,868		11,136
Selling, general and administrative	99,199		123,015		317,424		375,932
Research and development	47,368		45,904		108,422		124,023
Merger and integration expenses	1,094		6,716		6,616		14,345
Restructuring expenses	(349)		698		2,025		4,563
Impairment of intangible assets	—		—		—		50,295
Amortization of intangibles	9,685		11,146		29,346		29,690
Litigation provision, net	2,994		(33,834)		3,970		(33,834)
Operating (loss) income from continuing operations	(7,508)		25,761		(22,137)		(24,894)
Interest income	47		151		482		624
Interest expense	(14,673)		(4,774)		(25,237)		(10,490)
Foreign exchange and other gains (losses)	3,420		327		507		(795)
(Loss) income from continuing operations before tax	(18,714)		21,465		(46,385)		(35,555)
Income tax (benefit) expense	(3,990)		(10,653)		17,581		(23,431)
Losses from equity method investments	(48)		—		(221)		—
Net (loss) income from continuing operations	(14,772)		32,118		(64,187)		(12,124)
Net (loss) income from discontinued operations, net of tax	—		—		(995)		178
Net (loss) income	$	(14,772)	$	32,118	$	(65,182)	$	(11,946)

Basic (loss) income per share:
Continuing operations	$	(0.30)	$	0.66	$	(1.32)	$	(0.25)
Discontinued operations	—		—		(0.02)		—
	$	(0.30)	$	0.66	$	(1.34)	$	(0.25)

Diluted (loss) income per share:
Continuing operations	$	(0.30)	$	0.66	$	(1.32)	$	(0.25)
Discontinued operations	—		—		(0.02)		—
	$	(0.30)	$	0.66	$	(1.34)	$	(0.25)

Shares used in computing basic (loss) income per share	48,652		48,395		48,582		48,329
Shares used in computing diluted (loss) income per share	48,652		48,820		48,582		48,329

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net (loss) income	$	(14,772)	$	32,118	$	(65,182)	$	(11,946)
Other comprehensive income (loss):
Net change in unrealized gain (loss) on derivatives	1,640		(870)		1,313		(665)
Tax effect	(393)		209		(314)		159
Net of tax	1,247		(661)		999		(506)
Foreign currency translation adjustment	23,457		(27,775)		8,008		(16,628)
Total other comprehensive income (loss)	24,704		(28,436)		9,007		(17,134)
Total comprehensive income (loss)	$	9,932	$	3,682	$	(56,175)	$	(29,080)

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share amounts)


	September 30, 2020		December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	227,811	$	61,137
Accounts receivable, net of allowance of $16,241 at September 30, 2020 and $13,105 at December 31, 2019	191,892		257,769
Inventories	178,091		164,154
Prepaid and refundable taxes	43,316		37,779
Prepaid expenses and other current assets	32,026		28,604
Total Current Assets	673,136		549,443
Property, plant and equipment, net	190,509		181,354
Goodwill	918,478		915,794
Intangible assets, net	583,818		607,546
Operating lease assets	52,834		54,372
Investments	30,358		27,256
Deferred tax assets	22,673		68,676
Other assets	49,942		7,356
Total Assets	$	2,521,748	$	2,411,797
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations	$	13,953	$	77,396
Accounts payable	71,596		85,892
Accrued liabilities and other	98,308		120,100
Current litigation provision liability	34,790		146,026
Taxes payable	10,118		12,719
Accrued employee compensation and related benefits	52,994		70,420
Total Current Liabilities	281,759		512,553
Long-term debt obligations	637,109		260,330
Contingent consideration	79,603		114,396
Litigation provision liability	11,510		24,378
Deferred tax liabilities	28,362		32,219
Long-term operating lease liabilities	43,124		46,027
Long-term employee compensation and related benefits	23,109		22,797
Long-term derivative liabilities	59,588		61
Other long-term liabilities	6,792		15,319
Total Liabilities	1,170,956		1,028,080
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 49,402,628 shares issued and 48,596,417 shares outstanding at September 30, 2020; 49,411,016 shares issued and 48,443,830 shares outstanding at December 31, 2019	76,338		76,257
Additional paid-in capital	1,758,468		1,734,870
Accumulated other comprehensive loss	(10,385)		(19,392)
Accumulated deficit	(472,576)		(406,755)
Treasury stock at cost, 806,211 ordinary shares at September 30, 2020; 967,186 ordinary shares at December 31, 2019	(1,053)		(1,263)
Total Stockholders’ Equity	1,350,792		1,383,717
Total Liabilities and Stockholders’ Equity	$	2,521,748	$	2,411,797

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Nine Months Ended September 30,
	2020		2019
Operating Activities:
Net loss	$	(65,182)	$	(11,946)
Non-cash items included in net loss:
Deferred tax expense (benefit)	41,133		(26,422)
Remeasurement of contingent consideration to fair value	(31,176)		(2,425)
Amortization	29,346		29,690
Stock-based compensation	26,845		24,127
Depreciation	22,206		23,115
Remeasurement of derivative instruments	(17,654)		(2,948)
Amortization of operating lease assets	9,813		8,961

Impairment of intangible assets	—		50,295

Other	5,876		7,638
Changes in operating assets and liabilities:
Accounts receivable, net	65,401		5,433
Inventories	(12,141)		(18,181)
Other current and non-current assets	(15,360)		9,575
Accounts payable and accrued current and non-current liabilities	(49,547)		(28,964)
Taxes payable	(615)		(14,367)
Litigation provision liability	(124,158)		(140,823)
Restructuring reserve	(1,194)		(6,766)
Net cash used in operating activities	(116,407)		(94,008)
Investing Activities:
Purchases of property, plant and equipment	(28,445)		(16,801)
Purchase of investments	(3,175)		(287)
Loans to investees	(2,250)		—
Acquisitions, net of cash acquired	—		(10,750)
Purchases of intangible assets	—		(3,186)

Other	533		505
Net cash used in investing activities	(33,337)		(30,519)
Financing Activities:
Proceeds from long-term debt obligations	886,899		193,490
Repayment of long-term debt obligations	(481,360)		(12,330)
Proceeds from short term borrowings (maturities greater than 90 days)	46,717		—
Repayments of short term borrowings (maturities greater than 90 days)	(44,838)		—
Purchase of capped call	(43,096)		—
Debt issuance costs	(20,412)		(3,795)
Closing adjustment payment for sale of CRM business	(14,891)		—
Payment of contingent consideration	(8,860)		(17,989)
Shares repurchased from employees for minimum tax withholding	(5,277)		(6,183)
Proceeds from share issuances under ESPP	2,063		2,574
Change in short-term borrowing, net	(1,043)		(2,173)

Other	25		147
Net cash provided by financing activities	315,927		153,741
Effect of exchange rate changes on cash and cash equivalents	491		(1,105)
Net increase in cash and cash equivalents	166,674		28,109
Cash and cash equivalents at beginning of period	61,137		47,204
Cash and cash equivalents at end of period	$	227,811	$	75,313

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Unaudited Condensed Consolidated Financial Statements

Basis of Presentation

The accompanying condensed consolidated financial statements of LivaNova as of, and for the three and nine months ended September 30, 2020 and 2019, have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated balance sheet of LivaNova at December 31, 2019 has been derived from audited financial statements contained in our 2019 Form 10-K, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of the operating results of LivaNova and its subsidiaries, for the three and nine months ended September 30, 2020, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our 2019 Form 10-K.

Recent Developments Regarding COVID-19

Due to the COVID-19 pandemic (“COVID-19”), we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers have diverted medical resources and priorities towards the treatment of COVID-19. In addition, public health bodies have delayed elective procedures during the COVID-19 pandemic, which has negatively impacted the usage of our products, including the number of Neuromodulation procedures. Further, some people are avoiding seeking treatment for non-COVID-19 emergency procedures, which has also negatively impacted the demand for our products.

We are seeing signs of stabilization in certain geographies as elective surgeries resume and expect this trend to continue on a global basis during the fourth quarter of 2020. We expect elective procedure recovery rates to vary by country, and to be impacted by COVID-19 case volumes, hospital occupancy and staffing levels, patient’s willingness to re-book previously deferred procedures, travel restrictions, transportation limitations, quarantine restrictions, economic uncertainty and potential COVID-19 resurgence.

Reclassifications

We have reclassified certain prior period amounts for comparative purposes. These reclassifications did not have a material effect on our financial condition, results of operations or cash flows.

Significant Accounting Policies

Our significant accounting policies are detailed in “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” and “Note 3. Revenue Recognition” of our 2019 Form 10-K.

Note 2. Business Combinations

Miami Instruments

On June 12, 2019, we acquired the minimally invasive cardiac surgery instruments business from Miami Instruments, LLC (“Miami Instruments”) for cash consideration of up to $17.0 million. The related operations have been integrated into our Cardiovascular segment as a part of our Heart Valves business. Cash of $10.8 million was paid at closing with up to $6.0 million in contingent consideration based on achieving certain milestones. The purchase price allocation for the Miami Instruments acquisition was finalized during the second quarter of 2020 and resulted in no measurement period adjustments. In connection with this acquisition, we recognized $14.7 million in developed technology and in-process research and development (“IPR&D”) intangible assets and $1.5 million in goodwill.

Note 3. Discontinued Operations

On April 30, 2018, we completed the sale of our Cardiac Rhythm Management (“CRM”) business to MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation (“MicroPort”) for total cash proceeds of $195.9 million, less cash transferred of $9.2 million, subject to a closing working capital adjustment. In March 2020, we finalized the working capital adjustment and as a result, made a $16.4 million payment to MicroPort during the first quarter of 2020 and incurred an additional $1.0 million loss on sale, net of a $0.1 million tax benefit.

Note 4. Restructuring

We initiate restructuring plans to leverage economies of scale, streamline distribution and logistics, and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these plans were reported as restructuring expenses in the operating results of our condensed consolidated statements of income (loss).

The following table provides a reconciliation of the beginning and ending balance of the accruals and other reserves recorded in connection with our restructuring plans included within accrued liabilities and other and other long-term liabilities on the condensed consolidated balance sheet (in thousands):


	Employee Severance and Other Termination Costs		Other		Total
Balance at December 31, 2019	$	4,097	$	1,400	$	5,497
Charges	2,025		—		2,025
Cash payments and other	(4,880)		(792)		(5,672)
Balance at September 30, 2020	$	1,242	$	608	$	1,850

The following table presents restructuring expense by reportable segment (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cardiovascular	$	9	$	783	$	1,265	$	1,521
Neuromodulation	43		(171)		851		314
Other	(401)		86		(91)		2,728
Total	$	(349)	$	698	$	2,025	$	4,563

Note 5. Product Remediation Liability

On December 29, 2015, we received an FDA Warning Letter (the “Warning Letter”) alleging certain violations of FDA regulations applicable to medical device manufacturing at our Munich, Germany and Arvada, Colorado facilities. On October 13, 2016, the CDC and FDA separately released safety notifications regarding 3T Heater-Cooler devices in response to which we issued a Field Safety Notice Update for U.S. users of our 3T Heater-Cooler devices to proactively and voluntarily contact facilities to facilitate implementation of the CDC and FDA recommendations.

At December 31, 2016, we recognized a liability for a product remediation plan related to our 3T Heater-Cooler device (“3T device”). The remediation plan consists primarily of a modification of the 3T device design to include internal sealing and the addition of a vacuum system to new and existing devices. These changes are intended to address regulatory actions and to reduce further the risk of possible dispersion of aerosols from 3T devices in the operating room. We concluded that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated with the plan was reasonably estimable. The deployment of this solution for commercially distributed devices has been dependent upon final validation and verification of the design changes and approval or clearance by regulatory authorities worldwide. It is reasonably possible that our estimate of the remediation liability could materially change in future periods due to the various significant assumptions involved such as customer behavior, market reaction and the timing of approvals or clearance by regulatory authorities worldwide.

In April 2017, we obtained CE Mark in Europe for the design change, and in May 2017 we completed our first vacuum canister and internal sealing upgrade on a customer-owned device. In October 2018, the FDA concluded that we could commence the vacuum canister and internal sealing upgrade program in the U.S., and 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 previously issued by the FDA and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared under K191402. We continue to implement the vacuum canister and internal sealing upgrade program in as many countries as possible until all devices are upgraded.

As a second part of the remediation plan, we continue to offer a no-charge deep disinfection service (deep cleaning service) for 3T device users as we receive the required regulatory approvals. The deep disinfection service was rolled out in Europe in the second half of 2015, and in April 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S., thereby adding to the growing list of countries around the world in which we offer this service. Finally, we continue to offer the loaner program for 3T devices, initiated in the fourth quarter of 2016, to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of the vacuum system addition and deep disinfection service worldwide.

The following table provides a reconciliation of the beginning and ending balance of the product remediation liability included within accrued liabilities and other on the condensed consolidated balance sheet (in thousands):


Balance at December 31, 2019	$	3,251
Adjustments	2,301
Remediation activity	(3,982)
Effect of changes in foreign currency exchange rates	145
Balance at September 30, 2020	$	1,715

We recognized product remediation expenses of $1.1 million and $3.1 million during the three months ended September 30, 2020 and 2019, respectively, and $6.9 million and $11.1 million during the nine months ended September 30, 2020 and 2019, respectively. Product remediation expenses include internal labor costs, costs to remediate certain inspectional observations made by the FDA at our Munich facility and costs associated with the incorporation of the modification of the 3T device design into the next generation 3T device. These costs and related legal costs are expensed as incurred and are not included within the product remediation liability presented above. At September 30, 2020, our balance sheet includes a $46.3 million provision related to litigation involving our 3T device. For further information, please refer to “Note 10. Commitments and Contingencies.”

Note 6. Investments

The following table details the carrying value of our investments in equity securities of non-consolidated affiliates without readily determinable fair values for which we do not exert significant influence over the investee. These equity investments are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The below equity investments are included in investments on the condensed consolidated balance sheets (in thousands):


Equity Investments Without Readily Determinable Fair Values	September 30, 2020		December 31, 2019
Respicardia Inc. (1)	$	17,706	$	17,706
ALung Technologies, Inc. (2)	3,000		—
Ceribell, Inc.	3,000		3,000
ShiraTronics, Inc.	2,045		2,045
MD Start II	1,169		1,121
Rainbow Medical Ltd.	1,145		1,099
Highlife S.A.S.	1,109		1,064
Other	770		770
	29,944		26,805
Equity method investment	414		451
	$	30,358	$	27,256

(1)Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia, with a carrying amount of $0.8 million and $0.6 million as of September 30, 2020 and December 31, 2019, respectively, which is included in prepaid expenses and other current assets on the condensed consolidated balance sheet.

(2)During the first quarter of 2020, we invested in ALung Technologies, Inc. (“ALung”). ALung is a privately held medical device company focused on creating advanced medical devices for treating respiratory failure. ALung’s Hemolung Respiratory Assist System is a dialysis-like alternative or supplement to mechanical ventilation which removes carbon dioxide directly from the blood in patients with acute respiratory failure. During the second quarter of 2020, we provided a convertible loan to ALung for $2.0 million, due July 10, 2021. As of September 30, 2020, the carrying amount of the loan was $2.0 million, which is included in prepaid expenses and other current assets on the condensed consolidated balance sheet.

Note 7. Fair Value Measurements

We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2020 and 2019.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	Fair Value as of September 30, 2020		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (foreign currency exchange rate “FX”)	$	1,787	$	—	$	1,787	$	—
Derivative assets - freestanding instruments (FX)	4,052		—		4,052		—
Derivative assets - capped call derivatives	38,999		—		—		38,999
Convertible notes receivable	2,301		—		—		2,301
	$	47,139	$	—	$	5,839	$	41,300

Liabilities:

Derivative liabilities - freestanding instruments (interest rate swaps)	$	139	$	—	$	139	$	—
Derivative liabilities - freestanding instruments (FX)	85		—		85		—
Derivative liabilities - embedded exchange feature	59,398		—		—		59,398
Derivative liabilities - other	1,350		—		—		1,350
Contingent consideration arrangements	96,174		—		—		96,174
	$	157,146	$	—	$	224	$	156,922


	Fair Value as of December 31, 2019		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (FX)	$	535	$	—	$	535	$	—
Derivative assets - freestanding instruments (FX)	26		—		26		—
	$	561	$	—	$	561	$	—

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	169	$	—	$	169	$	—
Derivative liabilities - designated as cash flow hedges (interest rate swaps)	374		—		374		—
Derivative liabilities - freestanding instruments (FX)	3,137		—		3,137		—
Contingent consideration arrangements	137,349		—		—		137,349
	$	141,029	$	—	$	3,680	$	137,349

The following table provides a reconciliation of the beginning and ending balances of our recurring fair value measurements, using significant unobservable inputs (Level 3) (in thousands):


	Capped Call Derivative Asset		Embedded Exchange Feature Derivative Liability		Other Derivative Liabilities		Contingent Consideration Liability Arrangements		Convertible Notes Receivable
As of December 31, 2019	$	—	$	—	$	—	$	137,349	$	—
Additions	43,096		74,951		—		—		2,267
Payments (1)	—		—		—		(9,868)		—
Changes in fair value (2) (3) (4)	(4,097)		(15,553)		1,350		(31,176)		34
Effect of changes in foreign currency exchange rates	—		—		—		(131)		—
Total at September 30, 2020	38,999		59,398		1,350		96,174		2,301
Less current portion at September 30, 2020	—		—		1,160		16,571		2,044
Long-term portion at September 30, 2020	$	38,999	$	59,398	$	190	$	79,603	$	257

(1)During the nine months ended September 30, 2020, we paid $8.8 million under the contingent consideration arrangement for the acquisition of CardiacAssist, Inc., doing business as TandemLife (“TandemLife”). Additionally, we made final payments under contingent consideration arrangements resulting from the acquisitions of two distributors.

(2)The contingent consideration change in fair value during the nine months ended September 30, 2020 is primarily due to a one-year delay in the projected achievement of a certain regulatory milestone and timing of sales-based earnout payments for ImThera Medical Inc. (“ImThera”), and the impact of an increase in discount rates utilized in the valuation of contingent consideration. Refer to the tables below for further information regarding the fair value measurements of contingent consideration.

(3)During the nine months ended September 30, 2020, the contingent consideration change in fair value resulted in a decrease of $19.2 million and $12.0 million recorded to cost of sales - exclusive of amortization and research and development, respectively.

(4)Changes in the fair value of the embedded exchange feature derivative and capped call derivatives are recognized in foreign exchange and other gains (losses) in the condensed consolidated statements of income (loss).

Embedded Exchange Feature and Capped Call Derivatives

In June 2020, the Company issued $287.5 million in cash exchangeable senior notes and entered into related capped call transactions. The cash exchangeable senior notes include an embedded exchange feature that is bifurcated from the cash exchangeable senior notes. Please refer to “Note 8. Financing Arrangements” for further details. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value using the Black-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable.

The embedded exchange feature and capped call derivatives are classified as Level 3 as the Company uses historical volatility and implied volatility from options traded to determine expected stock price volatility which is an unobservable input that is significant to the valuation. In general, an increase in our stock price or stock price volatility would increase the fair value of the embedded exchange feature and capped call derivatives which would result in an increase in expense. As time to the expiration of the derivatives decreases with passage of time, the fair value of the derivatives would decrease. The future impact on net income depends on how significant inputs such as stock price, stock price volatility and time to the expiration of the derivatives change in relation to other inputs.

The stock price volatility as of September 30, 2020 was 37%. As of September 30, 2020, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the embedded exchange feature derivative of $42.4 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $76.4 million. As of September 30, 2020, a 10% lower volatility, holding other inputs constant would result in approximate fair value for the capped call derivatives of $29.3 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $42.3 million.

Contingent Consideration Arrangements

The following table provides the fair value of our Level 3 contingent consideration arrangements by acquisition (in thousands):


	September 30, 2020		December 31, 2019
ImThera	$	79,603	$	113,503
TandemLife	11,672		17,311
Miami Instruments	4,899		5,338
Drilltex	—		294
Other	—		903
	$	96,174	$	137,349

The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products. The sales-based earnout is valued using projected sales from our internal strategic plan. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of September 30, 2020:


ImThera Acquisition	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payment	Discounted cash flow	Discount rate	8.3%
		Probability of payment	85%
		Projected payment year	2024

Sales-based earnout	Monte Carlo simulation	Risk-adjusted discount rate	12.2	%	-	12.5%
		Credit risk discount rate	8.5	%	-	9.2%
		Revenue volatility	32.5%
		Probability of payment	85%
		Projected years of earnout	2025		-	2028

The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:


TandemLife Acquisition	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payment	Discounted cash flow	Discount rate	7.6	%	-	7.7%
		Probability of payments	70	%	-	100%
		Projected payment years	2020		-	2021

The Miami Instruments business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:


Miami Instruments	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payments	Discounted cash flow	Discount rate	7.6	%	-	7.7%
		Probability of payments	80	%	-	95%
		Projected payment years	2020		-	2021

Note 8. Financing Arrangements

The carrying amount of our long-term debt as of September 30, 2020 and December 31, 2019 was as follows (in thousands, except interest rates):


	September 30, 2020		December 31, 2019		Maturity	Interest Rate
2020 Senior Secured Term Loan	$	422,960	$	—	June 2025	LIBOR (1% Floor)		+	6.50%
2020 Cash Exchangeable Senior Notes	208,954		—		December 2025	3.00%
Bank of America Merrill Lynch Banco Múltiplo S.A.	6,000		8,422		July 2021	5.61%
Mediocredito Italiano	5,835		6,222		December 2023	0.50	%	-	2.77%
Bank of America, U.S.	2,011		2,004		January 2021	2.08%
2019 Debt Facility	—		184,275
2017 European Investment Bank	—		103,570
2014 European Investment Bank	—		28,053
Other	1,041		965
Total long-term facilities	646,801		333,511
Less current portion of long-term debt	9,692		73,181
Total long-term debt	$	637,109	$	260,330

Revolving Credit

The outstanding principal amount of our short-term unsecured revolving credit agreements and other agreements with various banks was $4.3 million and $4.2 million, at September 30, 2020 and December 31, 2019, respectively, with interest rates ranging from 3.21% to 7.20% and loan terms ranging from overnight to 10 months, as of September 30, 2020.

2020 Senior Secured Term Loan

On June 10, 2020, we entered into a $450.0 million five-year senior secured term loan (the “Term Loan”) through our wholly owned subsidiary LivaNova USA Inc., with funds managed by affiliates of Ares Management Corporation, as administrative agent and collateral agent, resulting in cash proceeds of approximately $421.7 million, net of discounts and issuance costs. The obligations under the Term Loan are guaranteed on a senior secured basis by each of LivaNova’s existing and future wholly owned material subsidiaries, and are secured by a perfected first priority security interest in substantially all tangible and intangible assets of LivaNova and certain U.S. and UK subsidiaries of LivaNova, subject in each case to certain exceptions contained in the Term Loan. Borrowings under the Term Loan bear interest at a variable annual rate equal to the three-month LIBOR rate (subject to a 1% floor), plus an applicable margin of 6.5% per annum. The effective interest rate of the Term Loan at September 30, 2020 was 9.0%. The Term Loan will mature on June 30, 2025 and includes certain affirmative, negative and financial covenants. The financial covenants under the Term Loan state (i) the net revenue of LivaNova PLC, LivaNova USA, Inc. and any restricted subsidiaries on a consolidated basis shall not be lower than $700 million for each trailing 12 month period, such threshold to decrease pro rata (not below $550 million) upon prepayments of the Term Loan made by LivaNova USA, Inc. out of the proceeds of certain asset sales, and (ii) the total secured leverage ratio (as defined in the debt agreement) for LivaNova PLC, LivaNova USA, Inc. and any restricted subsidiaries on a consolidated basis shall not be greater than the applicable ratio set forth below:


Test Period	Total Secured Leverage Ratio
4 Quarters ending June 30, 2020 through each fiscal quarter thereafter until (and including) the fiscal quarter ending June 30, 2021	5.625	:	1.00
4 Quarters ending September 30, 2021 and ending each fiscal quarter thereafter	4.5	:	1.00

Debt discounts and issuance costs related to the Term Loan were approximately $28.3 million and included various legal, bank and accounting fees. Amortization of debt discount and issuance costs was $1.1 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, and was included in interest expense on the condensed consolidated statement of income (loss).

2020 Cash Exchangeable Senior Notes

On June 17, 2020, our wholly-owned subsidiary, LivaNova USA, Inc., issued $287.5 million aggregate principal amount of 3.00% cash exchangeable senior notes (the “Notes”) by private placement to qualified institutional buyers pursuant to Rule

144A under the Securities Act of 1933, as amended. The sale of the Notes resulted in approximately $278.0 million in net proceeds to the Company after deducting issuance costs. Interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The effective interest rate of the Notes at September 30, 2020 was 9.9%. The Notes mature on December 15, 2025 unless earlier exchanged, repurchased, or redeemed.

Debt discounts and issuance costs related to the Notes were approximately $82.0 million and included $75.0 million of discount attributable to the embedded exchange feature, discussed below, and $7.0 million of allocated issuance costs to the Notes related to legal, bank and accounting fees. Amortization of debt discount and issuance costs was $3.0 million and $3.4 million for the three and nine months ended September 30, 2020 and is included in interest expense on the condensed consolidated statement of income (loss).

The Notes are exchangeable at the option of the holders only under certain circumstances and solely into cash in an amount based on the trading prices of LivaNova’s ordinary shares during a related observation period. The Notes 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.

The Company may redeem the Notes at its option, on or after June 20, 2023, in whole or in part, if the last reported sale price per ordinary share has been at least 130% of the exchange price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Additionally, the Company may redeem the Notes at its option, prior to December 15, 2025, in whole but not in part, in connection with certain tax-related events.

Embedded Exchange Feature

The embedded exchange feature of the Notes requires bifurcation from the Notes and is accounted for as a derivative liability. The fair value of the Notes’ embedded exchange feature derivative at the time of issuance was $75.0 million and was recorded as debt discount on the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. The Notes’ embedded exchange feature derivative is carried on the condensed consolidated balance sheets at its estimated fair value and is adjusted at the end of each reporting period, with unrealized gain or loss reflected in the consolidated statements of income (loss). The fair value of the embedded exchange feature derivative liability was $59.4 million as of September 30, 2020.

Capped Call Transactions

In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers of the Notes or their respective affiliates. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of LivaNova’s ordinary shares underlying the Notes and 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 aggregate cost of the capped calls derivative assets was $43.1 million. The capped call transactions expire on December 15, 2025 and must be settled in cash. The capped calls are carried on the condensed consolidated balance sheets as a derivative asset at their estimated fair value and are adjusted at the end of each reporting period, with unrealized gain or loss reflected in the condensed consolidated statement of income (loss). The fair value of capped call derivative assets was $39.0 million as of September 30, 2020.

The current and non-current classification is evaluated at each balance sheet date and may change depending on whether any exchange conditions are met. As of September 30, 2020, no exchange conditions have been met and the Notes, embedded exchange feature derivative liability, and the capped call derivative assets are classified as non-current. Please refer to “Note 7. Fair Value Measurements” for details on the valuation of the embedded exchange feature derivative liability and capped call derivative assets.

Extinguishment of Debt

The Company used the net proceeds from the Term Loan, together with a portion of the net proceeds of the Notes, after fees, discounts, commissions and other expenses, to repay outstanding indebtedness under the Company’s 2017 European Investment Bank loan, 2014 European Investment Bank loan, Banca Nazionale del Lavoro S.p.A loan, and 2019 Debt Facility and related

expenses. The Company repaid approximately $528.0 million in aggregate outstanding principal, accrued interest and associated fees, including breakage fees and legal fees. The Company recognized a loss on debt extinguishment of $1.4 million during the nine months ended September 30, 2020. The loss on debt extinguishment was recognized in foreign exchange and other losses in the condensed consolidated statements of income (loss).

The remainder of the proceeds from the concurrent financing transactions were used to pay the cost of capped call transactions and for general corporate purposes.

Note 9. Derivatives and Risk Management

Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. We enter into FX derivative contracts to reduce the impact of foreign currency exchange rate fluctuations on earnings and cash flow. We are also exposed to equity price risk in connection with our Notes, including exchange and settlement provisions based on the price of our ordinary shares at exchange or maturity of the Notes. In addition, the capped call transactions associated with the Notes also include settlement provisions that are based on the price of our ordinary shares, subject to a capped price per share.

We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities on the condensed consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings.

If the derivative qualifies for hedge accounting, changes in the fair value of the derivative will be recorded in accumulated other comprehensive income (“AOCI”) until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to our condensed consolidated statements of income (loss) as shown in the tables below. We evaluate hedge effectiveness at inception. Cash flows from derivative contracts are reported as operating activities on our condensed consolidated statements of cash flows.

Freestanding FX Derivative Contracts

The gross notional amount of FX derivative contracts not designated as hedging instruments outstanding at September 30, 2020 and December 31, 2019 was $332.2 million and $338.0 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans and trade receivables. We recorded net (losses) gains for these freestanding derivatives of $(11.7) million and $3.1 million for the three months ended September 30, 2020 and 2019, respectively, and $(4.8) million and $6.8 million for the nine months ended September 30, 2020 and 2019, respectively. These (losses) and gains are included in foreign exchange and other gains (losses) on our condensed consolidated statement of income (loss).

Counterparty Credit Risk

We are exposed to credit risk in the event of non-performance by the counterparties to our derivatives at maturity.

The two counterparties to the capped call transactions are financial institutions. To limit our credit risk, we selected financial institutions with a minimum long-term investment grade credit rating. Our exposure to the credit risk of the counterparties is not secured by any collateral. If a counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under the capped call transactions with that counterparty.

To manage credit risk with respect to our other derivatives, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market positions. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any transactions with the counterparty could be subject to early termination, which could result in substantial losses for the Company.

Cash Flow Hedges

The gross notional amounts of open derivative contracts designated as cash flow hedges at September 30, 2020 and December 31, 2019 were as follows (in thousands):


Description of Derivative Contract	September 30, 2020		December 31, 2019
FX derivative contracts to be exchanged for British Pounds	$	7,610	$	10,128
FX derivative contracts to be exchanged for Japanese Yen	16,023		25,342
FX derivative contracts to be exchanged for Euros	36,553		48,838
Interest rate swap contracts (1)	—		22,442
	$	60,186	$	106,750

(1)Interest rate swap contracts were de-designated upon the repayment of the 2014 European Investment Bank loan. Refer to “Note 8. Financing Arrangements.”

After-tax net loss associated with derivatives designated as cash flow hedges recorded in the ending balance of AOCI and the amount expected to be reclassified to earnings in the next twelve months are as follows (in thousands):


Description of Derivative Contract	After-Tax Net Gain in AOCI as of September 30, 2020		After-Tax Net Gain in AOCI as of Amount Expected to be Reclassified to Earnings in Next 12 Months
FX derivative contracts	$	1,512	$	1,512

Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in other comprehensive income (loss) (“OCI”) and the amount reclassified to earnings from AOCI were as follows (in thousands):


		Three Months Ended September 30,
		2020				2019
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Gains Recognized in OCI		(Losses) Gains Reclassified from AOCI to Earnings		Losses Recognized in OCI		Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	1,482	$	(692)	$	(689)	$	963
FX derivative contracts	SG&A	—		534		—		(742)
Interest rate swap contracts	Interest expense	—		—		—		(40)
		$	1,482	$	(158)	$	(689)	$	181


		Nine Months Ended September 30,
		2020				2019
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Gains Recognized in OCI		(Losses) Gains Reclassified from AOCI to Earnings		Gains Recognized in OCI		Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	632	$	(777)	$	933	$	3,094
FX derivative contracts	SG&A	—		209		—		(1,470)
Interest rate swap contracts	Interest expense	—		(113)		—		(26)
		$	632	$	(681)	$	933	$	1,598

We offset fair value amounts associated with our derivative instruments on our condensed consolidated balance sheets that are executed with the same counterparty under master netting arrangements. Our netting arrangements include a right to set off or net together purchases and sales of similar products in the settlement process.

The following tables present the fair value and the location of derivative contracts reported on the condensed consolidated balance sheets (in thousands):

September 30, 2020

Asset Derivatives

Liability Derivatives

Derivatives Designated as Hedging Instruments

Balance Sheet Location

Fair Value (1)

Balance Sheet Location

Fair Value (1)

FX derivative contracts

Prepaid expenses and other current assets

1,775

FX derivative contracts

Accrued liabilities

Total derivatives designated as hedging instruments

1,787

Derivatives Not Designated as Hedging Instruments

Interest rate swap contracts

Accrued liabilities

139

FX derivative contracts

Prepaid expenses and other current assets

4,052

Accrued liabilities

FX derivative contracts

Prepaid expense and other current assets

Capped call derivatives

Other assets

38,999

Embedded exchange feature

Long-term derivative liability

59,398

Other derivatives

Accrued liabilities

1,160

Other derivatives

Long-term derivative liability

190

Total derivatives not designated as hedging instruments

43,051

60,972

Total derivatives

44,838

60,972


December 31, 2019	Asset Derivatives			Liability Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value (1)		Balance Sheet Location	Fair Value (1)
Interest rate swap contracts				Accrued liabilities	$	313
Interest rate swap contracts				Long-term derivative liability	61
FX derivative contracts	Prepaid expenses and other current assets	$	148	Accrued liabilities	169
FX derivative contracts	Accrued liabilities	387
Total derivatives designated as hedging instruments		535			543
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Accrued liabilities	26		Accrued liabilities	3,104
FX derivative contracts				Prepaid expenses and other current assets	33
Total derivatives not designated as hedging instruments		26			3,137
Total derivatives		$	561		$	3,680

(1)For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 7. Fair Value Measurements.”

Note 10. Commitments and Contingencies

FDA Warning Letter

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.

The FDA inspected the Munich facility from August 24, 2015 to August 27, 2015 and the Arvada facility from August 24, 2015 to September 1, 2015. On August 27, 2015, the FDA issued a Form 483 identifying two observed non-conformities with certain regulatory requirements at the Munich facility. We did not receive a Form 483 in connection with the FDA’s inspection of the Arvada facility. Following the receipt of the Form 483, we provided written responses to the FDA describing corrective and preventive actions that were underway or to be taken to address the FDA’s observations at the Munich facility. The Warning Letter responded in part to our responses and identified other alleged violations related to the manufacture of our 3T Heater-Cooler device that were not previously included in the Form 483.

The Warning Letter further stated that our 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 had 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 existing users cease using the 3T device, and manufacturing and shipment of all of 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.

We continue to work diligently to remediate the FDA’s inspectional observations for the Munich facility, as well as the additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the FDA’s requests.

CDC and FDA Safety Communications and Company Field Safety Notice

On October 13, 2016, the CDC and the FDA separately released safety notifications regarding the 3T devices. The CDC’s Morbidity and Mortality Weekly Report (“MMWR”) and Health Advisory Notice (“HAN”) reported that tests conducted by the CDC and its affiliates indicate that there appears to be genetic similarity between both patient and 3T device strains of the non-tuberculous mycobacterium (“NTM”) bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the geographic separation between the two hospitals referenced in the investigation, the report asserts that 3T devices manufactured prior to August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with 3T devices and provide guidance for providers and patients. The CDC notification states that the decision to use the 3T device during a surgical operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s communications confirm that 3T devices are critical medical devices and enable doctors to perform life-saving cardiac surgery procedures.

Also on October 13, 2016, concurrent with the CDC’s HAN and FDA’s Safety Communication, we issued a Field Safety Notice Update for U.S. users of 3T devices to proactively and voluntarily contact facilities to aid in implementation of the CDC and FDA recommendations. In the fourth quarter of 2016, we initiated a program to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies worldwide, including a vacuum canister and internal sealing upgrade program and a deep disinfection service. This loaner program is available on a global basis. We anticipate that this program will continue until we are able to address customer needs through a broader solution that includes implementation of the risk mitigation strategies described above. We are currently implementing the vacuum and sealing upgrade program in as many countries as possible until all devices are upgraded. On October 11, 2018, after review of information provided by us, the FDA concluded that we could commence the vacuum and

sealing upgrade program in the U.S., and 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. Furthermore, we continue to offer a no-charge deep disinfection service (deep cleaning service) for 3T device users as we receive the required regulatory approvals. The deep disinfection service was rolled out in Europe in the second half of 2015, and on April 12, 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S. thereby adding to the growing list of countries around the world in which we offer this service.

On December 31, 2016, we recognized a liability for our product remediation plan related to our 3T device. We concluded that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated with the plan was reasonably estimable. At September 30, 2020, the product remediation liability was $1.7 million. Refer to “Note 5. Product Remediation Liability” for additional information.

Litigation

Product Liability

The Company is currently involved in litigation involving our 3T device. The litigation includes a class action complaint in the U.S. District Court for the Middle District of Pennsylvania, 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. The class action, filed in February 2016, consists 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. Members of the class seek declaratory relief that the 3T devices are defective and unsafe for intended uses, medical monitoring, damages, and attorneys’ fees.

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 pending 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 October 29, 2020, 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 includes 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.

At September 30, 2020, the provision for these matters was $46.3 million. While the amount accrued represents our best estimate, the actual liability for resolution of these matters may vary from our estimate.

The changes in the litigation provision liability during the nine months ended September 30, 2020 are as follows (in thousands):


	Litigation Provision Liability
Total litigation provision liability at December 31, 2019	$	170,404
Payments	(128,128)
Adjustments	3,970
FX and other	54
Total litigation provision liability at September 30, 2020	46,300
Less current portion of litigation liability at September 30, 2020	34,790
Long-term portion of litigation provision liability at September 30, 2020	$	11,510

Environmental Liability

Our subsidiary, Sorin S.p.A. (“Sorin”) was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”) in January 2004. SNIA subsequently became insolvent and the Italian Ministry of the Environment and the Protection of Land and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA for remediation costs relating to the environmental damage at chemical sites previously operated by SNIA’s other subsidiaries.

In September 2011 and July 2014, the Bankruptcy Court of Udine and the Bankruptcy Court of Milan, respectively, held (in proceedings to which we are not parties) that the Italian Ministry of the Environment and other Italian government agencies (the “Public Administrations”) were not creditors of either SNIA or its subsidiaries in connection with their claims in the Italian insolvency proceedings. The Public Administrations appealed and in January 2016, the Court of Udine rejected the appeal. The Public Administrations has appealed that decision to the Supreme Court. Meanwhile, the Bankruptcy Court of Milan’s decision has been appealed.

In January 2012, SNIA filed a civil action against Sorin in the Civil Court of Milan asserting joint liability of a parent and a spun-off company. The Public Administrations intervened in the proceeding, with a claim for environmental damages of approximately $4 billion. On April 1, 2016, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations further requiring the Public Administrations to pay Sorin approximately €292,000 (approximately $342,000 as of September 30, 2020) for legal fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal of Milan, and on March 5, 2019, the Court of Appeal issued a partial decision on the merits declaring Sorin/LivaNova jointly liable with SNIA for SNIA’s environmental liabilities in an amount up to the fair value of the net worth received by Sorin because of the Sorin spin-off, an estimated €572.1 million (approximately $669.1 million as of September 30, 2020). Additionally the Court issued a separate order, staying the proceeding until a panel of three experts can assess the environmental damages, the costs of clean-up, and the costs that the Public Administrations has already borne for the clean-up of the sites to allow the Court to decide on the second claim of the Public Administration against LivaNova, (i.e., to refund the Public Administrations for the SNIA environmental liabilities). Both LivaNova and the Public Administrations have appealed the decision to the Italian Supreme Court (Corte di Cassazione).

We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

Patent Litigation

On May 11, 2018, Neuro and Cardiac Technologies LLC (“NCT”), a non-practicing entity, filed a complaint in the United States District Court for the Southern District of Texas asserting that the VNS Therapy System, when used with the SenTiva Model 1000 generator, infringes the claims of U.S. Patent No. 7,076,307 owned by NCT. The complaint requests damages that include a royalty, costs, interest, and attorneys’ fees. On September 13, 2018, we petitioned the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (the “Patent Office”) for an inter partes review (“IPR”) of the validity of the ‘307 patent, and on May 18, 2020, the Patent Office issued a Final Written Decision determining that all challenged claims are unpatentable. NCT is appealing the Final Written Decision. On March 24, 2020, we were granted our request for an ex parte reexamination of the ‘307 patent, and in August, the Patent Office issued a Non-Final Rejection of all of the ‘307 claims. The Court has stayed the litigation pending the outcome of the IPR appeal proceeding. We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

Contract Litigation

On November 25, 2019, LivaNova received notice of a lawsuit initiated by former members of Caisson Interventional, LLC (“Caisson”), a subsidiary of the Company acquired in 2017. The lawsuit, Todd J. Mortier, as Member Representative of the former Members of Caisson Interventional, LLC v. LivaNova USA, Inc., is currently pending in the United States District Court for the District of Minnesota. The complaint alleges (i) breach of contract, (ii) breach of the covenant of good faith and fair dealing and (iii) unjust enrichment in connection with the Company’s operation of Caisson’s Transcatheter Mitral Valve Replacement (“TMVR”) program and the Company’s November 20, 2019 announcement that it was ending the TMVR program at the end of 2019. The lawsuit seeks damages arising out of the 2017 acquisition agreement, including various regulatory milestone payments. We intend to vigorously defend this claim. The Company has not recognized an expense related to this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

Tax Litigation

In a tax audit report received on October 30, 2009, the Regional Internal Revenue Office of Lombardy (the “Internal Revenue Office”) informed Sorin Group Italia S.r.l. that, among several issues, it was disallowing in part a tax-deductible write down of the investment in the U.S. company, Cobe Cardiovascular Inc., which Sorin Group Italia S.r.l. recognized in 2002 and deducted in five equal installments, beginning in 2002. In December 2009, the Internal Revenue Office issued notices of assessment for 2004. In December 2010 and October 2011, the Internal Revenue Office issued notices of assessment for 2005 and 2006, respectively. We challenged all three notices of assessment (for 2004, 2005 and 2006) before the relevant Provincial Tax Courts.

The total amount of losses in dispute was €62.6 million (approximately $73.2 million as of September 30, 2020). On May 31, 2019, we filed an application to settle the litigation according to law N. 136/2018 and paid the required settlement balance of €1.9 million. As per law N. 136/2018, the Italian Revenue Agency reviewed the settlement and accepted the application by default on July 31, 2020. We recognized a benefit of €5.4 million, approximately $6.5 million, during the third quarter of 2020 as compared to the previously recognized reserve for an uncertain tax position of €15.5 million. The difference of €10.1 million (approximately $11.8 million as of September 30, 2020) was a fully valued deferred tax asset for net operating losses, the reversal of which does not impact the condensed consolidated statement of income (loss).

Other Matters

Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of time. Since the outcome of these matters cannot be predicted with certainty, the costs associated with them could have a material adverse effect on our consolidated net income, financial position or liquidity.

Note 11. Stockholders’ Equity

The tables below present the condensed consolidated statement of stockholders’ equity as of and for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Ordinary Shares	Ordinary Shares - Amount		Additional Paid-In Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
June 30, 2020	49,476	$	76,338	$	1,750,798	$	(1,057)	$	(35,089)	$	(457,804)	$	1,333,186
Stock-based compensation plans	—	—		7,670		4		—		—		7,674
Cancellation of shares	(73)	—		—		—		—		—		—
Net loss	—	—		—		—		—		(14,772)		(14,772)
Other comprehensive income	—	—		—		—		24,704		—		24,704
September 30, 2020	49,403	$	76,338	$	1,758,468	$	(1,053)	$	(10,385)	$	(472,576)	$	1,350,792

June 30, 2019	49,380	$	76,217	$	1,717,220	$	(1,292)	$	(13,174)	$	(295,643)	$	1,483,328
Stock-based compensation plans	1	—		8,262		10		—		—		8,272
Net income	—	—		—		—		—		32,118		32,118
Other comprehensive loss	—	—		—		—		(28,436)		—		(28,436)
September 30, 2019	49,381	$	76,217	$	1,725,482	$	(1,282)	$	(41,610)	$	(263,525)	$	1,495,282


	Ordinary Shares	Ordinary Shares - Amount		Additional Paid-In Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
December 31, 2019	49,411	$	76,257	$	1,734,870	$	(1,263)	$	(19,392)	$	(406,755)	$	1,383,717
Adoption of ASU No. 2016-13 (1)	—	—		—		—		—		(639)		(639)
Stock-based compensation plans	65	81		23,598		210		—		—		23,889
Cancellation of shares	(73)	—		—		—		—		—		—
Net loss	—	—		—		—		—		(65,182)		(65,182)
Other comprehensive income	—	—		—		—		9,007		—		9,007
September 30, 2020	49,403	$	76,338	$	1,758,468	$	(1,053)	$	(10,385)	$	(472,576)	$	1,350,792

December 31, 2018	49,323	$	76,144	$	1,705,111	$	(1,462)	$	(24,476)	$	(251,579)	$	1,503,738
Stock-based compensation plans	58	73		20,371		180		—		—		20,624
Net loss	—	—		—		—		—		(11,946)		(11,946)
Other comprehensive loss	—	—		—		—		(17,134)		—		(17,134)
September 30, 2019	49,381	$	76,217	$	1,725,482	$	(1,282)	$	(41,610)	$	(263,525)	$	1,495,282

(1)Refer to “Note 17. New Accounting Pronouncements”

The table below presents the change in each component of AOCI, net of tax, and the reclassifications out of AOCI into net income for the nine months ended September 30, 2020 and 2019 (in thousands):


	Change in Unrealized Gain (Loss) on Derivatives		Foreign Currency Translation Adjustments Gain (Loss) (1)		Total
December 31, 2019	$	513	$	(19,905)	$	(19,392)
Other comprehensive income before reclassifications, before tax	632		8,008		8,640
Tax expense	(152)		—		(152)
Other comprehensive income before reclassifications, net of tax	480		8,008		8,488
Reclassification of loss from accumulated other comprehensive loss, before tax	681		—		681
Reclassification of tax benefit	(162)		—		(162)
Reclassification of loss from accumulated other comprehensive loss, after tax	519		—		519
Net current-period other comprehensive income, net of tax	999		8,008		9,007
September 30, 2020	$	1,512	$	(11,897)	$	(10,385)

December 31, 2018	$	(944)	$	(23,532)	$	(24,476)
Other comprehensive income (loss) before reclassifications, before tax	933		(16,628)		(15,695)
Tax expense	(224)		—		(224)
Other comprehensive income (loss) before reclassifications, net of tax	709		(16,628)		(15,919)
Reclassification of gain from accumulated other comprehensive loss, before tax	(1,598)		—		(1,598)
Reclassification of tax expense	383		—		383
Reclassification of gain from accumulated other comprehensive loss, after tax	(1,215)		—		(1,215)
Net current-period other comprehensive loss, net of tax	(506)		(16,628)		(17,134)
September 30, 2019	$	(1,450)	$	(40,160)	$	(41,610)

(1)Taxes are not provided for foreign currency translation adjustments as translation adjustments are related to earnings that are intended to be reinvested in the countries where earned.

Note 12. Stock-Based Incentive Plans

Stock-based incentive plans compensation expense is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Service-based restricted stock units (“RSUs”)	$	4,410	$	3,583	$	13,139	$	10,428
Service-based stock appreciation rights (“SARs”)	3,211		2,896		9,185		7,804
Market performance-based restricted stock units	814		757		2,745		2,146
Operating performance-based restricted stock units	(962)		983		882		2,752
Employee share purchase plan	337		312		894		997
Total stock-based compensation expense	$	7,810	$	8,531	$	26,845	$	24,127

During the nine months ended September 30, 2020, we issued stock-based compensatory awards with terms approved by the Compensation Committee of our Board of Directors. The awards with service conditions generally vest ratably over four years, subject to forfeiture unless service conditions are met. Market performance-based awards cliff vest after three years subject to the rank of our total shareholder return for the three-year period ending December 31, 2022 relative to the total shareholder returns for a peer group of companies. Operating performance-based awards cliff vest after three years subject to the achievement of certain thresholds of cumulative adjusted free cash flow for the three year period ending December 31, 2022. Compensation expense related to awards granted during 2020 for the three and nine months ended September 30, 2020 was $3.3 million and $6.6 million, respectively.

Stock-based compensation agreements issued during the nine months ended September 30, 2020, representing potential shares and their weighted average grant date fair values by type follows (shares in thousands, fair value in dollars):


	Nine Months Ended September 30, 2020
	Shares	Weighted Average Grant Date Fair Value
Service-based SARs	1,133	$	15.73
Service-based RSUs	599	$	44.42
Market performance-based RSUs	93	$	39.83
Operating performance-based RSUs	93	$	43.57

Note 13. Income Taxes

Our effective income tax rate from continuing operations for the three and nine months ended September 30, 2020 was 21.3% and (37.9)% compared with (49.6)% and 65.9% for the three and nine months ended September 30, 2019, respectively. 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.

We continually assess the realizability of our worldwide deferred tax asset and valuation allowance positions, and when the need arises, we establish or release valuation allowances accordingly.

Compared with the three months ended September 30, 2019, the change in the effective tax rate for the three months ended September 30, 2020 was primarily attributable to a discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by a valuation allowance for certain jurisdictions outside the U.S., as compared to a U.S. federal tax benefit from a return to provision reconciliation, partially offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses during the three months ended September 30, 2019. We established valuation allowances as it is more likely than not that we will be unable to realize the related historical deferred tax assets.

Compared with the nine months ended September 30, 2019, the change in the effective tax rate for the nine months ended September 30, 2020 was primarily attributable to a $42.4 million realized discrete tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by the establishment of a $74.5 million valuation allowance for the U.K. and

other jurisdictions outside the U.S., as compared to a release of uncertain tax positions and a U.S. federal tax benefit from a return to provision reconciliation, partly offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses and attributes during the nine months ended September 30, 2019.

We operate in multiple jurisdictions throughout the world, and our tax returns are periodically audited or subjected to review by tax authorities. As a result, there is an uncertainty in income taxes recognized in our financial statements. Tax benefits totaling $4.0 million and $12.9 million were unrecognized as of September 30, 2020 and December 31, 2019, respectively. It is reasonably possible that, within the next twelve months, due to the settlement of uncertain tax positions with various tax authorities and the expiration of statutes of limitations, unrecognized tax benefits could decrease by up to approximately $0.7 million.

We monitor income tax developments in countries where we conduct business. On March 27, 2020, the U.S. enacted the CARES Act which provided for a 5-year loss carryback for losses incurred in 2018-2020. We recorded a discrete tax benefit of $42.4 million to account for the effect of the CARES Act during the nine months ended September 30, 2020. Further regulations and notices as well as state legislative changes addressing conformity to the CARES Act are still pending.

Note 14. Earnings Per Share

Reconciliation of the shares used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Basic weighted average shares outstanding	48,652	48,395	48,582	48,329
Add effects of share-based compensation instruments (1)	—	425	—	—
Diluted weighted average shares outstanding	48,652	48,820	48,582	48,329

(1)Excluded from the computation of diluted earnings per share were stock options, SARs and restricted share units totaling 4.1 million and 1.4 million for the three months ended September 30, 2020 and 2019, respectively, and 4.2 million and 3.2 million for the nine months ended September 30, 2020 and 2019, respectively, because to include them would have been anti-dilutive under the treasury stock method.

Note 15. Geographic and Segment Information

We identify operating segments based on the way we manage, evaluate and internally report our business activities for purposes of allocating resources, developing and executing our strategy, and assessing performance. We have two reportable segments: Cardiovascular and Neuromodulation.

The Cardiovascular segment generates its revenue from the development, production and sale of cardiopulmonary products, heart valves and related products and advanced circulatory support. Cardiopulmonary products include oxygenators, heart-lung machines, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. Heart valves include mechanical heart valves, tissue heart valves, related repair products and minimally invasive surgical instruments. Advanced circulatory support includes temporary life support controllers and product kits that can include a combination of pumps, oxygenators, and cannulae.

Our Neuromodulation segment generates its revenue from the design, development and marketing of neuromodulation therapy systems for the treatment of drug-resistant epilepsy, difficult-to-treat depression (“DTD”) and obstructive sleep apnea. Neuromodulation products include the VNS Therapy System, which consists of an implantable pulse generator, a lead that connects the generator to the vagus nerve, and other accessories.

“Other” includes corporate shared service expenses for finance, legal, human resources, information technology and corporate business development.

Net sales of our reportable segments include revenues from the sale of products they each develop and manufacture or distribute. We define segment income as operating income before merger and integration, restructuring and amortization of intangibles.

We operate under three geographic regions: U.S., Europe, and Rest of World. The table below presents net sales by operating segment and geographic region (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cardiopulmonary
United States	$	33,549	$	39,054	$	96,223	$	119,580
Europe	29,947		30,052		87,475		99,933
Rest of World	43,704		50,908		140,925		152,650
	107,200		120,014		324,623		372,163
Heart Valves
United States	3,129		4,626		8,990		13,660
Europe	7,945		9,572		22,822		30,757
Rest of World	10,062		14,679		32,001		43,484
	21,136		28,877		63,813		87,901
Advanced Circulatory Support
United States	12,331		6,313		28,075		22,290
Europe	162		186		835		497
Rest of World	49		36		136		310
	12,542		6,535		29,046		23,097
Cardiovascular
United States	49,009		49,993		133,288		155,530
Europe	38,054		39,810		111,132		131,187
Rest of World	53,815		65,623		173,062		196,444
	140,878		155,426		417,482		483,161
Neuromodulation
United States	79,854		88,433		197,345		245,870
Europe	10,475		10,425		27,474		34,080
Rest of World	8,079		13,685		20,458		31,511
	98,408		112,543		245,277		311,461
Other	797		641		1,927		1,958
Totals
United States	128,863		138,426		330,633		401,400
Europe (1)	48,529		50,235		138,606		165,267
Rest of World	62,691		79,949		195,447		229,913
Total (2)	$	240,083	$	268,610	$	664,686	$	796,580

(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.

(2)No single customer represented over 10% of our consolidated net sales. No country’s net sales exceeded 10% of our consolidated sales except for the U.S.

The table below presents a reconciliation of segment income from continuing operations to consolidated (loss) income from continuing operations before tax (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cardiovascular	$	(7,311)	$	36,180	$	(8,037)	$	47,289
Neuromodulation	21,154		30,010		82,294		52,260
Other	(10,921)		(21,869)		(58,407)		(75,845)
Total reportable segment income from continuing operations	2,922		44,321		15,850		23,704
Merger and integration expenses	1,094		6,716		6,616		14,345
Restructuring expenses	(349)		698		2,025		4,563
Amortization of intangibles	9,685		11,146		29,346		29,690
Operating (loss) income from continuing operations	(7,508)		25,761		(22,137)		(24,894)
Interest income	47		151		482		624
Interest expense	(14,673)		(4,774)		(25,237)		(10,490)
Foreign exchange and other gains (losses)	3,420		327		507		(795)
(Loss) income from continuing operations before tax	$	(18,714)	$	21,465	$	(46,385)	$	(35,555)

Assets by segment are as follows (in thousands):


	September 30, 2020		December 31, 2019
Cardiovascular	$	1,463,523	$	1,546,520
Neuromodulation	668,899		749,069
Other	389,326		116,208
Total assets	$	2,521,748	$	2,411,797

Capital expenditures by segment are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cardiovascular	$	7,040	$	5,178	$	17,777	$	13,564
Neuromodulation	1,210		136		7,285		666
Other	967		691		3,174		2,571
Total	$	9,217	$	6,005	$	28,236	$	16,801

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2020 were as follows (in thousands):


	Neuromodulation		Cardiovascular		Total
December 31, 2019	$	398,754	$	517,040	$	915,794


Foreign currency adjustments	—		2,684		2,684
September 30, 2020	$	398,754	$	519,724	$	918,478

Property, plant and equipment, net by geography are as follows (in thousands):


	September 30, 2020		December 31, 2019
United States	$	64,620	$	61,410
Europe	116,746		110,270
Rest of World	9,143		9,674
Total	$	190,509	$	181,354

Note 16. Supplemental Financial Information

Inventories consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Raw materials	$	48,325	$	45,225
Work-in-process	18,949		14,581
Finished goods	110,817		104,348
	$	178,091	$	164,154

As of September 30, 2020 and December 31, 2019, inventories include adjustments totaling $14.5 million and $12.7 million, respectively, to record balances at lower of cost or net realizable value.

Accrued liabilities and other consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Contingent consideration (1)	$	16,571	$	22,953
Legal and administrative costs	14,034		11,066
Operating lease liabilities	11,941		11,110
Contract liabilities	7,723		6,728
Research and development costs	5,328		5,160
Provisions for agents, returns and other	3,772		3,922
Restructuring related liabilities (2)	1,813		4,315
Product remediation (3)	1,715		3,251
Derivative contract liabilities (4)	1,338		3,173
CRM purchase price adjustment payable to MicroPort Scientific Corporation	—		14,891
Other accrued expenses	34,073		33,531
	$	98,308	$	120,100

(1)Refer to “Note 7. Fair Value Measurements”

(2)Refer to “Note 4. Restructuring”

(3)Refer to “Note 5. Product Remediation Liability”

(4)Refer to “ Note 9. Derivatives and Risk Management”

As of September 30, 2020 and December 31, 2019, contract liabilities of $9.5 million and $8.6 million, respectively, are included within accrued liabilities and other long-term liabilities on the condensed consolidated balance sheets.

Note 17. New Accounting Pronouncements

Adoption of New Accounting Pronouncements

The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the FASB and the impact of the adoption on our condensed financial statements:

Issue Date & Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

June 2016

ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)

The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. We adopted the update effective
January 1, 2020, applying this standard to our accounts receivable by use of a provision matrix approach. This approach utilizes historical loss rates based on the number of days past due, adjusted to reflect current economic conditions and forecasts of future economic conditions.

January 1, 2020

We recognized the following cumulative-effect adjustments, including to retained earnings, upon adoption at January 1, 2020:

Accounts receivable, net decreased $0.6 million and accumulated deficit increased $0.6 million.

January 2017

ASU No. 2017-04,

Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

This update removes step 2 of the goodwill impairment test that compares the implied fair value of goodwill with its carrying amount. Instead, an impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be recorded by the amount a reporting unit’s carrying amount exceeds its fair value.

January 1, 2020

There was no material impact to our consolidated financial statements as a result of adopting this ASU.

August 2018

ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

This update removes, modifies and adds certain disclosure requirements related to fair value measurements.

January 1, 2020

There was no material impact to our consolidated financial statements as a result of adopting this ASU.

August 2018

ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

This update clarifies and aligns the accounting for implementation costs for hosting arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

January 1, 2020

There was no material impact to our consolidated financial statements as a result of adopting this ASU.

Future Adoption of New Accounting Pronouncements

The following table provides a description of future adoptions of new accounting standards that may have an impact on our financial statements when adopted:

Issue Date & Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

August 2018

ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans

This update adds and removes certain disclosure requirements related to defined benefit plans. This ASU is to be implemented on a retrospective basis for all periods presented with early adoption permitted.

January 1, 2021

We do not expect the adoption of this update to have a material effect on our condensed consolidated financial statement disclosures.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2019 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 2019 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

Due to the COVID-19 pandemic, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers have diverted medical resources and priorities towards the treatment of COVID-19. In addition, public health bodies have delayed elective procedures during the COVID-19 pandemic, which has negatively impacted the usage of our products, including the number of Neuromodulation procedures. Further, some people are avoiding seeking treatment for non-COVID-19 emergency procedures, which has also negatively impacted the demand for our products.

While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, our sales and operating results for the third quarter of 2020 were materially adversely impacted. We are seeing signs of stabilization in certain geographies as elective surgeries resume and expect this trend to continue on a global basis during the fourth quarter of 2020. We expect elective procedure recovery rates to vary by country, and to be impacted by COVID-19 case volumes, hospital occupancy and staffing levels, patient’s willingness to re-book previously deferred procedures, travel restrictions, transportation limitations, quarantine restrictions, economic uncertainty and potential COVID-19 resurgence. Further cancellations or delays could materially adversely impact our business, results of operations and overall financial performance.

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 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 employees or vendors 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 the majority of our RECOVER clinical study sites and their corresponding surgical centers were completely closed, though we continued to maintain engagement, including activating more sites for enrollment and also, identifying and consenting patients at existing sites. During the third quarter, sites and surgical centers began to open and currently 90% are completely open. We presently expect implants to continue to return during the fourth quarter of 2020 as study sites are able to progress consented patients and will resume more fully in 2021. However, there can be no assurance that there will not be additional closures of such sites in the future.

Additionally, our ANTHEM-HFrEF international pivotal trial was temporarily paused in March 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 continue to progress as we 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. As a result of the COVID-19 pandemic, we instructed employees at many of our facilities across the globe to work from home on a temporary basis and have implemented travel restrictions. 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 believe that implementing cost reduction efforts will help us mitigate the impact that reduced revenues may have on our fiscal 2020 operating income. We are reducing expenses by evaluating whether projects and initiatives are critical to meet the

current needs of the Company, protecting strategic priorities for future growth, reducing discretionary spending and tightening management of personnel costs.

Given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic on our ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

For further discussion on COVID-19, refer to “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.

Business Overview

We are a public limited company organized under the laws of England and Wales, 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, heart valves and advanced circulatory support products. Cardiopulmonary products include oxygenators, heart-lung machines, autotransfusion systems, perfusion tubing systems, cannulae and other related accessories. Heart valves include mechanical heart valves, tissue heart valves, related repair products and minimally invasive surgical instruments. Advanced circulatory support includes temporary life support controllers and product kits that can include a combination of pumps, oxygenators, and cannulae.

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 devices and other devices we manufactured at our Munich facility are 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 existing users cease using the 3T device, and manufacturing and shipment all of 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.

FDA’s requests. For further information refer to “Note 10. Commitments and Contingencies” in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Product Liability

Cardiopulmonary

In April 2020, the U.S. Food and Drug Administration issued temporary guidance that permitted several of our cardiopulmonary products to be used for Extracorporeal Membrane Oxygenation (“ECMO”) therapy greater than six hours to temporarily expand the availability of devices to address the COVID-19 pandemic. Product indications for use have been modified accordingly for many products within our Cardiopulmonary and Advanced Circulatory Support portfolios.

Also in April 2020, our Bi-Flow ECMO cannula received CE Mark for ECMO procedures where femoral artery cannulation can be applied. Bi-Flow previously received CE Mark in 2019 for cardiac surgery procedures requiring femoral artery cannulation. Now validated for up to 29 days of use, Bi-Flow ECMO is designed to reduce the risk of limb ischemia for patients receiving ECMO.

Heart Valves

In July 2020, we announced that the advanced Perceval Plus sutureless surgical aortic heart valve is available for commercial release in Europe, having successfully completed a one-year limited launch with initial real-world clinical data gathering. This next-generation valve facilitates minimally invasive cardiac surgery to make sutureless aortic valve replacement available to a wide patient population. Key innovations with Perceval Plus include the anticalcification treatment for valve durability, along with design changes intended to improve patient outcomes.

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.

Depression

In February 2020, we announced a research collaboration with Verily, an Alphabet company, to capture measures of depression within our RECOVER clinical study. Through this initial research collaboration, LivaNova and Verily aim to gather quantitative data on patient behavior using technology and analytics developed by Verily to further understand depressive episodes and a patient’s response to treatment. RECOVER clinical sites will have the ability to offer patients the Verily Study Watch, a wearable device designed to capture physiological and environmental data for clinical research, and a Verily mobile phone application. These complementary approaches are expected to help investigators better understand the impact of depression and its treatment on study participants’ lives in a more objective and multi-dimensional manner.

In March 2020, our VNS Therapy System, Symmetry received CE mark approval for DTD, and our first two patients outside the U.S. to receive Symmetry were implanted shortly thereafter.

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 2019 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 17. New Accounting Pronouncements” contained in the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Other

Brexit

On January 31, 2020, the UK departed from the EU (in a move commonly referred to as “Brexit”), and the UK entered a transition period that is scheduled to end on December 31, 2020. During the transition period, the UK will cease to be an EU member but the trading relationship will remain the same under the EU's rules. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU markets, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for medical device companies and increased restrictions on imports and exports throughout Europe. This could adversely affect our ability to conduct and expand our operations in Europe and may have an adverse effect on our business, financial condition and results of operations.

Passage of the withdrawal bill does not change the application of existing tax laws and does not establish a clear framework for what the ultimate outcome of the transition period will be. Various tax reliefs and exemptions that apply to transactions between EU Member States under existing tax laws may cease to apply to transactions between the UK and EU Member States when the transition period is over. It is unclear at this stage if or when any new tax treaties between the UK and the EU or individual EU Member States will replace those reliefs and exemptions. It is also unclear at this stage what financial, trade and legal implications will ensue from Brexit and how Brexit may ultimately affect us, our customers, suppliers, vendors, or our industry.

We and several of our wholly owned subsidiaries that are domiciled either in the UK, various EU Member States, or in the U.S., are party to intercompany transactions and agreements under which we receive various tax reliefs and exemptions in accordance with applicable international tax laws, treaties and regulations. If certain treaties applicable to our transactions and agreements change materially, Brexit may have a material adverse impact on our future financial results and results of operations. We continue to monitor and assess the potential impact of this event and explore possible tax-planning strategies that may mitigate or eliminate potential adverse impacts.

We will not account for the impact of Brexit in our income tax provisions until there are material changes in tax laws or treaties between the UK and other countries.

European Union State Aid Challenge

On October 26, 2017, the European Commission (“EC”) announced that an investigation would be opened with respect to the UK’s controlled foreign company (“CFC”) rules for the period January 1, 2013 through December 31, 2018. Under the CFC rules, financing profits of entities controlled by UK parent companies are taxed when the funding originates in the UK, or Significant People Functions relating to the financing are located in the UK. The provisions under investigation provide group finance exemptions related to the profits of entities involved in financing of the non-UK group activities. On April 2, 2019, the

EC concluded that “when financing income from a foreign group company, channeled through an offshore subsidiary, is financed with UK connected capital and there are no UK activities involved in generating the finance profits, the group finance exemption is justified and does not constitute State aid under EU rules.” However, in relation to Significant People Functions, “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.” Her Majesty’s Revenue and Customs (“HMRC”) has stated that they do not consider the timing and form of the UK’s exit from the EU will have a practical impact on the requirement to recover the alleged aid. On June 14, 2019, the UK filed an appeal to the Commission’s decision. On July 5, 2019, HMRC began the first step in the recovery process to identify beneficiaries and sent letters asking for information. Based upon our assessment of the technical arguments as to whether the exemption is State aid, together with no UK activities involved in our financing, no uncertain tax position reserve 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 similarly, and therefore, we do not believe that the EU state aid decision will result in a material liability.

Results of Operations

The following table summarizes our condensed consolidated results of operations (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net sales	$	240,083	$	268,610	$	664,686	$	796,580
Costs and expenses:
Cost of sales - exclusive of amortization	86,467		86,128		212,152		245,324
Product remediation	1,133		3,076		6,868		11,136
Selling, general and administrative	99,199		123,015		317,424		375,932
Research and development	47,368		45,904		108,422		124,023
Merger and integration expenses	1,094		6,716		6,616		14,345
Restructuring expenses	(349)		698		2,025		4,563
Impairment of intangible assets	—		—		—		50,295
Amortization of intangibles	9,685		11,146		29,346		29,690
Litigation provision, net	2,994		(33,834)		3,970		(33,834)
Operating (loss) income from continuing operations	(7,508)		25,761		(22,137)		(24,894)
Interest income	47		151		482		624
Interest expense	(14,673)		(4,774)		(25,237)		(10,490)
Foreign exchange and other gains (losses)	3,420		327		507		(795)
(Loss) income from continuing operations before tax	(18,714)		21,465		(46,385)		(35,555)
Income tax (benefit) expense	(3,990)		(10,653)		17,581		(23,431)
Losses from equity method investments	(48)		—		(221)		—
Net (loss) income from continuing operations	(14,772)		32,118		(64,187)		(12,124)
Net (loss) income from discontinued operations, net of tax	—		—		(995)		178
Net (loss) income	$	(14,772)	$	32,118	$	(65,182)	$	(11,946)

Net Sales

The table below presents net sales by operating segment and geographic region (in thousands, except for percentages):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		% Change		2020		2019		% Change
Cardiopulmonary
United States	$	33,549	$	39,054	(14.1)	%	$	96,223	$	119,580	(19.5)	%
Europe	29,947		30,052		(0.3)	%	87,475		99,933		(12.5)	%
Rest of World	43,704		50,908		(14.2)	%	140,925		152,650		(7.7)	%
	107,200		120,014		(10.7)	%	324,623		372,163		(12.8)	%
Heart Valves
United States	3,129		4,626		(32.4)	%	8,990		13,660		(34.2)	%
Europe	7,945		9,572		(17.0)	%	22,822		30,757		(25.8)	%
Rest of World	10,062		14,679		(31.5)	%	32,001		43,484		(26.4)	%
	21,136		28,877		(26.8)	%	63,813		87,901		(27.4)	%
Advanced Circulatory Support
United States	12,331		6,313		95.3	%	28,075		22,290		26.0	%
Europe	162		186		(12.9)	%	835		497		68.0	%
Rest of World	49		36		36.1	%	136		310		(56.1)	%
	12,542		6,535		91.9	%	29,046		23,097		25.8	%
Cardiovascular
United States	49,009		49,993		(2.0)	%	133,288		155,530		(14.3)	%
Europe	38,054		39,810		(4.4)	%	111,132		131,187		(15.3)	%
Rest of World	53,815		65,623		(18.0)	%	173,062		196,444		(11.9)	%
	140,878		155,426		(9.4)	%	417,482		483,161		(13.6)	%
Neuromodulation
United States	79,854		88,433		(9.7)	%	197,345		245,870		(19.7)	%
Europe	10,475		10,425		0.5	%	27,474		34,080		(19.4)	%
Rest of World	8,079		13,685		(41.0)	%	20,458		31,511		(35.1)	%
	98,408		112,543		(12.6)	%	245,277		311,461		(21.2)	%
Other	797		641		24.3	%	1,927		1,958		(1.6)	%
Totals
United States	128,863		138,426		(6.9)	%	330,633		401,400		(17.6)	%
Europe (1)	48,529		50,235		(3.4)	%	138,606		165,267		(16.1)	%
Rest of World	62,691		79,949		(21.6)	%	195,447		229,913		(15.0)	%
Total	$	240,083	$	268,610	(10.6)	%	$	664,686	$	796,580	(16.6)	%

(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.”

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		% Change		2020		2019		% Change
Cardiovascular	$	(7,311)	$	36,180	(120.2)	%	$	(8,037)	$	47,289	(117.0)	%
Neuromodulation	21,154		30,010		(29.5)	%	82,294		52,260		57.5	%
Other	(10,921)		(21,869)		(50.1)	%	(58,407)		(75,845)		(23.0)	%
Total reportable segment income from continuing operations (1)	$	2,922	$	44,321	(93.4)	%	$	15,850	$	23,704	(33.1)	%

(1)For a reconciliation of segment income from continuing operations to (loss) income from continuing operations before tax refer to “Note 15. 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 nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 decreased 9.4% and 13.6%, respectively, largely due to the impact of COVID-19. The decline in net sales for the three and nine month periods were due to declines in Cardiopulmonary sales of 10.7% and 12.8%, respectively. Cardiopulmonary sales of $107.2 million and $324.6 million for the three and nine months ended September 30, 2020 were negatively impacted by declines in HLM and oxygenator sales. HLM sales were negatively impacted due to COVID-19 impacts on hospital budgets for capital equipment, while Oxygenator sales were negatively impacted by a decline of non-emergent cardiac surgery procedures globally. Heart Valves sales of $21.1 million and $63.8 million for the three and nine months ended September 30, 2020 declined by $7.7 million and $24.1 million, respectively, primarily due to declines in sales of Perceval and other tissue valves due to a decline in cardiac surgery procedures globally due to COVID-19. Advanced Circulatory Support sales of $12.5 million and $29.0 million for the three and nine months ended September 30, 2020 increased 91.9% and 25.8%, respectively, resulting from the full U.S. commercial release of LifeSPARC during the third quarter of 2020.

Cardiovascular operating income for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 decreased primarily due to the receipt of insurance recovery proceeds related to the litigation involving our 3T device of $33.8 million during the three months ended September 30, 2019 as well as a decline in net sales, as discussed above, partially offset by a decrease in 3T legal expenses.

Neuromodulation

Neuromodulation net sales for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 decreased 12.6% and 21.2%, respectively. The decrease in net sales for the three and nine months ended September 30, 2020 was primarily due to declines in both new patient and end of service implants globally as patients and physicians delayed implant procedures due to COVID-19.

Neuromodulation operating income for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 decreased primarily related to a decline in net sales, as discussed above. Neuromodulation operating income for the nine months ended September 30, 2020 increased compared to the nine months ended September 30, 2019 due to an increase in operating income resulting from the net impact of the change in fair value of contingent consideration arrangements of $28.0 million as well as a $50.3 million impairment of an IPR&D asset during the nine months ended September 30, 2019, partially offset by overall declines in net sales.

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 September 30,						Nine Months Ended September 30,
	2020		2019		Change		2020		2019		Change
Cost of sales - exclusive of amortization	36.0	%	32.1	%	3.9	%	31.9	%	30.8	%	1.1	%
Product remediation	0.5	%	1.1	%	(0.6)	%	1.0	%	1.4	%	(0.4)	%
Selling, general and administrative	41.3	%	45.8	%	(4.5)	%	47.8	%	47.2	%	0.6	%
Research and development	19.7	%	17.1	%	2.6	%	16.3	%	15.6	%	0.7	%
Merger and integration expenses	0.5	%	2.5	%	(2.0)	%	1.0	%	1.8	%	(0.8)	%
Restructuring expenses	(0.1)	%	0.3	%	(0.4)	%	0.3	%	0.6	%	(0.3)	%
Impairment of intangible assets	—	%	—	%	—	%	—	%	6.3	%	(6.3)	%
Amortization of intangibles	4.0	%	4.1	%	(0.1)	%	4.4	%	3.7	%	0.7	%
Litigation provision, net	1.2	%	(12.6)	%	13.8	%	0.6	%	(4.2)	%	4.8	%

Cost of Sales - Exclusive of Amortization

Cost of sales consisted primarily of direct labor, allocated manufacturing overhead and the acquisition cost of raw materials and components. Cost of sales as a percentage of net sales for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 increased primarily due to product mix and unfavorable manufacturing variances of $7.0 million and $13.0 million for the three and nine months ended September 30, 2020, respectively, due to the decline in demand resulting from COVID-19 with these increases for the nine months ended September 30,2020 compared to the nine months ending September 30, 2019 partially offset by a decrease in cost of sales resulting from the net impact of the change in fair value of sales-based contingent consideration arrangements of $18.3 million.

Selling, General and Administrative

SG&A expenses consisted of sales, marketing, general and administrative activities. SG&A expenses as a percentage of net sales for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 decreased primarily due to sales and marketing cost reductions resulting from COVID-19 as well as a decrease in 3T legal expenses, the settlement of tax litigation that resulted in the reversal of a tax penalty of $4.3 million in the third quarter of 2020 and cost containment actions.

Merger and Integration (“M&I”) Expenses

M&I expenses consist primarily of costs associated with computer systems integration efforts, organizational structure integration, synergy and tax planning. M&I expenses as a percentage of net sales for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 decreased primarily due to the completion of certain integration activities associated with our merger and acquisitions.

Research and Development (“R&D”) Expenses

R&D expenses consist 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 months ended September 30, 2020 compared to the three months ended September 30, 2019 increased primarily due to a decline in net sales as well as an increase in R&D expense resulting from the net impact of changes in fair value of milestone-based contingent consideration arrangements of $6.3 million, partially offset by $2.8 million in R&D expenses incurred in the prior year period associated with the Company’s former TMVR program, the impact of COVID-19 on our clinical studies, as well as a decrease in certain 2019 costs for increased investment in Epilepsy.

Impairment of Intangible Assets

During the second quarter of 2019, we determined that LivaNova would experience a delay in the estimated commercialization date of the Company’s obstructive sleep apnea product currently under development. This delay constituted a triggering event that required an impairment evaluation of the IPR&D asset arising from the ImThera acquisition. Based on the assessment performed, we determined that the IPR&D asset was impaired and as a result, recorded an impairment of $50.3 million, which is included in our Neuromodulation segment.

Litigation Provision, Net

In July 2019, we entered into agreements with our insurance carriers to recover $33.8 million under our product liability insurance policies related to the litigation involving our 3T device. The insurance recovery was received and recognized during the third quarter of 2019.

Income Taxes

LivaNova PLC is domiciled and resident in the UK. 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 substantially from one reporting period to another.

We continually assess the realizability of our worldwide deferred tax asset and valuation allowance positions, and when the need arises, we establish or release valuation allowances accordingly.

Compared with the three months ended September 30, 2019, the change in the effective tax rate for the three months ended September 30, 2020 was primarily attributable to a discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by a valuation allowance for certain jurisdictions outside the U.S., as compared to a U.S. federal tax benefit from a return to provision reconciliation, partially offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses during the three months ended September 30, 2019. We established valuation allowances as is more likely than not that we will be unable to realize the related historical deferred tax assets.

Compared with the nine months ended September 30, 2019, the change in the effective tax rate for the nine months ended September 30, 2020 was primarily attributable to a $42.4 million realized discrete tax benefit related to the CARES Act and the discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by the establishment of a $74.5 million valuation allowance for the U.K. and other jurisdictions outside the U.S., as compared to a release of uncertain tax positions and a U.S. federal tax benefit from a return to provision reconciliation, partly offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses and attributes during the nine months ended September 30, 2019.

Liquidity and Capital Resources

In June 2020, we raised combined net proceeds of $699.7 million from our Term Loan and Notes borrowings. Additionally, we utilized the combined net proceeds to repay $525.4 million of aggregate outstanding principal. Refer to “Note 8. 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. As of September 30, 2020, our cash and cash equivalents was $227.8 million.

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. 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 2019 Form 10-K as supplemented by the factors referred to in “Part II, Item 1A, Risk Factors” in our Quarterly Reports on Form 10-Q.

No provision has been made for income taxes on unremitted earnings of our foreign controlled subsidiaries (non-UK subsidiaries) as of September 30, 2020. In the event of the distribution of those earnings in the form of dividends, a sale of the subsidiaries or certain other transactions, we may be liable for income taxes. However, the tax liability on future distributions should not be significant as most jurisdictions with unremitted earnings have various participation exemptions or no withholding tax.

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):


	Nine Months Ended September 30,
	2020		2019
Operating activities	$	(116,407)	$	(94,008)
Investing activities	(33,337)		(30,519)
Financing activities	315,927		153,741
Effect of exchange rate changes on cash and cash equivalents	491		(1,105)
Net increase in cash and cash equivalents	$	166,674	$	28,109

Operating Activities

Cash used in operating activities during the nine months ended September 30, 2020 increased by $22.4 million as compared to the same prior-year period. The increase is primarily due to a decrease in net income adjusted for non-cash items, partially offset by improved working capital management.

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2020 increased $2.8 million as compared to the same prior-year period. The increase is primarily due to an increase in purchases of property, plant and equipment of $11.6 million and the purchase of an investment and loans to investees totaling $5.1 million, partially offset by $10.8 million in cash paid for acquisitions and $3.2 million for purchases of intangible assets in 2019.

Financing Activities

Cash provided by financing activities during the nine months ended September 30, 2020 increased $162.2 million as compared to the same prior-year period. The increase is primarily due to an increase in net borrowings and associated costs of $210.8 million and a decrease in payments of contingent consideration of $9.1 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.

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements.

Contractual Obligations

Except for the financing transactions discussed in “Note 8. Financing Arrangements,” 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 2019 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 9. 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 2019 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.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2020.

(b) Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-5(f) under the Exchange Act) occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal and regulatory proceedings and settlements, refer to “Note 10. Commitments and Contingencies” in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2019 Annual Report on Form 10-K or in Part II Item 1A in our Quarterly Report on Form 10-Q for the period ended March 31, 2020 and June 30, 2020, except as noted below. Those risk factors disclosed in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations.

Risks Related to our Business

Shareholder activists could cause a disruption to our business.

In mid-October 2020, an activist investor indicated its concerns with, among other things, our capital allocation, reporting transparency on sub segment operating margins, corporate governance and leadership. In the future, our business, operating results or financial condition could be adversely affected because activist proposals can be a significant distraction for our management and employees and may require us to expend significant time and resources. Shareholder activists may create uncertainty for our employees, investors and customers, additional risk and uncertainties with respect to our financial position, operations, strategies and management, and may adversely affect our ability to attract and retain key employees. Any perceived uncertainties as to our future direction also may affect the market price and volatility of our securities.

Risks Related to COVID-19

COVID-19 has had, and we expect will continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of which are uncertain and unpredictable.

The continuing global spread of COVID-19, including corresponding preventative and precautionary measures that we and other businesses, communities and governments are taking to mitigate the spread of the disease, has led to unprecedented restrictions on, disruptions in, and other related impacts on business. In addition to travel restrictions put in place in early 2020, countries, states and governments may continue to close borders, impose prolonged quarantines or other restrictions and requirements on travel, and further limit our ability to conduct business in-person as we did prior to COVID-19.

Per “Recent Developments Regarding COVID-19” within “Note 1. Unaudited Condensed Consolidated Financial Statements” and “COVID-19” under “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” our sales and operating results for the third quarter of 2020 were materially adversely impacted. While we are seeing signs of stabilization in certain geographies as elective surgeries resume and expect this trend to continue on a global basis during the fourth quarter of 2020, recovery rates may vary and the ultimate health and economic impact of COVID-19 is uncertain. In certain geographies, hospital systems continue to prioritize treatment of COVID-19 patients and otherwise comply with government guidelines, thereby resulting in the suspension or cancellation of elective medical procedures, which has caused a reduction in sales of these products. To the extent individuals and hospital systems continue to de-prioritize, delay or cancel these procedures, or if unemployment or loss of insurance coverage adversely impacts an individual’s ability to pay for our products and services, our business, cash flows, financial condition and results of operations will continue to be negatively affected. Further, the COVID-19 pandemic is straining hospital systems around the world, resulting in adverse financial impacts to those systems that could result in reduced future expenditures for our products. Clinical trials generally have paused or slowed enrollment due to facility closures and governmental restrictions, which will delay enrollment and timelines, and although many facilities have begun to reopen, there can be no assurance that there will not be additional closures in the future.

As we noted in “COVID-19” under “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” we have not closed any of our manufacturing plants. The supply of raw materials and the distribution of finished products remain operational with no known or foreseen constraints. Regardless, there can be no assurance that any of our facilities will not need to shut down in the future, or that the supply of components, raw materials, and services may be interrupted or insufficient as a direct result of the COVID-19 outbreak. Any disruption of our operations or those of our suppliers could impact our sales and operating results.

In addition, COVID-19 has impacted and may further impact the global economy and capital markets, including by negatively impacting demand for our products, foreign currency exchange rates, and interest rates, each of which may adversely impact our business. We could experience loss of sales and profits due to delayed payments or insolvency of healthcare professionals, hospitals and other customers, suppliers and vendors facing liquidity issues. As a result, we may be compelled to take additional measures to preserve our cash flow.

Finally, COVID-19 could adversely impact our ability to retain key employees and the continued service and availability of skilled personnel necessary to run our productions and operations, including our executive officers and other members of our management team, as well as the ability of our third-party suppliers, manufacturers, distributors and vendors to retain their key employees. To the extent our management or other personnel are impacted in significant numbers by COVID-19 and are not available to perform their job duties, we could experience delays in, or the suspension of, our manufacturing operations, research and product development activities, regulatory work streams, clinical development programs and other important commercial functions.

While the impact of COVID-19 has had, and we expect it to continue to have, an adverse effect on our business, results of operations, financial condition and cash flows, the nature and extent of such impact is uncertain and unpredictable. For more information on the impact of COVID-19 on the Company and LivaNova’s mitigation measures, please refer to “Recent Developments Regarding COVID-19” within “Note 1. Unaudited Condensed Consolidated Financial Statements,” “COVID-19” under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 1A to our 2019 Annual Report on Form 10-K, and Part II, Item 1A in our Quarterly Reports on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Disclosure Pursuant to Section 13(r) of the Exchange Act of 1934

Section 13(r) of the Exchange Act requires issuers to disclose in their quarterly reports certain types of dealings with Iran, including transactions or dealing with government-owned entities, even when those activities are lawful and do not involve U.S. persons. One of our non-U.S. subsidiaries currently sells medical devices, including cardiac surgery and cardiopulmonary products, to privately held distributors in Iran.

We have limited visibility into the identity of these distributors’ customers in Iran. It is possible that their customers include entities, such as government-owned hospitals or sub-distributors, that are owned or controlled directly or indirectly by the Iranian government. To the best of our knowledge at this time, we do not have any contracts or commercial arrangements with the Iranian government.

Our gross revenues and net profits attributable to the above-mentioned Iranian activities were $2.3 million and $0.8 million for the three months ended September 30, 2020, respectively, and $6.3 million and $2.3 million for the nine months ended September 30, 2020, respectively.

We believe our activities are consistent with applicable law, including U.S., EU, and other applicable sanctions laws, though such laws are complex and continue to evolve rapidly. We intend to continue our business in Iran.

Item 6. Exhibits

The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of Exhibit 32.1) with this Quarterly Report on Form 10-Q. The exhibits marked with the cross symbol (†) are management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.


Exhibit Number			Document Description















10.1*†			Form of Long Term Incentive Plan Restricted Stock Unit Award Agreement
10.2*†			Form of Long Term Incentive Plan Performance Stock Unit Award Agreement
10.3*†			Form of Long Term Incentive Plan Stock Appreciation Right Award Agreement
31.1*			Certification of the Chief Executive Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*			Certification of the Chief Financial Officer of LivaNova PLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*			Certification of the Chief Executive Officer and Chief Financial Officer of LivaNova PLC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*			Interactive Data Files Pursuant to Rule 405 of Regulation S-T formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019, (iii) the Condensed Consolidated Balance Sheet as of September 30, 2020 and December 31, 2019, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30 2020 and September 30, 2019, and (vi) the Notes to the Condensed Consolidated Financial Statements
104*			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LIVANOVA PLC

Date: October 29, 2020	By:	/s/ DAMIEN MCDONALD
		Damien McDonald
		Chief Executive Officer
		(Principal Executive Officer)


	LIVANOVA PLC

Date: October 29, 2020	By:	/s/ THAD HUSTON
		Thad Huston
		Chief Financial Officer
		(Principal Financial Officer)