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Table of Contents



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

 

Or

 

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

 

For the transition period from                       to                     .

 

Commission File Number 001-33092

 

 

 

 

LEMAITRE VASCULAR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

04-2825458

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

 

63 Second Avenue, Burlington, Massachusetts

01803

(Address of principal executive offices)

(Zip Code)

 

 

(781) 221-2266

 

(Registrant’s telephone number, including area code)

 

 

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth Company “in 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 Exchange Act).    Yes      No  ☒

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value per share

LMAT 

The Nasdaq Global Market

 

The registrant had 20,341,985 shares of common stock, $.01 par value per share, outstanding as of October 31, 2020.

 

 

 

LEMAITRE VASCULAR

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

Part I.

Financial Information:

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2020 and 2019

4

 

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2020 and 2019

5

 

 

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the three-month and nine-month periods ended September 30, 2020 and 2019

6

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2020 and 2019

8

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

 

 

Item 2.

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

27

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

38

 

 

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

Part II.

Other Information:

 

 

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

 

 

Item 1A.

Risk Factors

40

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42
       
 

Item 5.

Other Information

 

 

 

 

 

 

Item 6.

Exhibits

43

 

 

 

 

Signatures

44

 

 

 

Part I. Financial Information

Item 1. Financial Statements

LeMaitre Vascular, Inc.

 Consolidated Balance Sheets

  

(unaudited)

     
  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(in thousands, except share data)

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $29,279  $11,786 

Short-term marketable securities

  5,097   20,895 

Accounts receivable, net of allowances of $619 at September 30, 2020 and $522 at December 31, 2019

  19,625   16,572 

Inventory and other deferred costs

  45,639   39,527 

Prepaid expenses and other current assets

  2,612   3,312 

Total current assets

  102,252   92,092 
         

Property and equipment, net

  14,133   14,854 

Right-of-use leased assets

  16,372   15,208 

Goodwill

  65,945   39,951 

Other intangibles, net

  60,540   24,893 

Deferred tax assets

  1,385   1,084 

Other assets

  942   259 

Total assets

 $261,569  $188,341 
         

Liabilities and stockholders’ equity

        

Current liabilities:

        

Current portion of long-term debt

 $2,250  $- 

Revolving line of credit

  21,000   - 

Accounts payable

  2,168   2,604 

Accrued expenses

  14,679   14,014 

Acquisition-related obligations

  2,543   2,476 

Lease liabilities - short-term

  1,806   1,757 

Total current liabilities

  44,446   20,851 
         

Long-term debt

  36,229   - 

Lease liabilities - long-term

  15,192   13,955 

Deferred tax liabilities

  90   1,179 

Other long-term liabilities

  4,629   4,215 

Total liabilities

  100,586   40,200 
         

Stockholders’ equity:

        

Preferred stock, $0.01 par value; authorized 3,000,000 shares; none outstanding

  -   - 

Common stock, $0.01 par value; authorized 37,000,000 shares; issued 21,819,924 shares at September 30, 2020, and 21,678,827 shares at December 31, 2019

  218   217 

Additional paid-in capital

  109,640   105,934 

Retained earnings

  65,457   57,029 

Accumulated other comprehensive loss

  (3,009)  (4,007)

Treasury stock, at cost; 1,531,166 shares at September 30, 2020 and 1,501,511 shares at December 31, 2019

  (11,323)  (11,032)

Total stockholders’ equity

  160,983   148,141 

Total liabilities and stockholders’ equity

 $261,569  $188,341 

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Operations

(unaudited)

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(in thousands, except per share data)

  

(in thousands, except per share data)

 
                 

Net sales

 $36,416  $29,100  $91,818  $87,062 

Cost of sales

  13,712   8,934   31,602   27,117 
                 

Gross profit

  22,704   20,166   60,216   59,945 
                 

Sales and marketing

  5,157   7,429   17,788   22,887 

General and administrative

  5,901   4,551   16,425   14,026 

Research and development

  2,098   2,281   7,230   6,777 

Gain on sale of building

  (470)  -   (470)  - 
                 

Total operating expenses

  12,686   14,261   40,973   43,690 
                 

Income from operations

  10,018   5,905   19,243   16,255 
                 

Other income (expense):

                

Interest income

  15   193   194   574 

Interest expense

  (665)  -   (732)  - 

Foreign currency gain (loss)

  10   (208)  (280)  (338)
                 

Income before income taxes

  9,378   5,890   18,425   16,491 

Provision for income taxes

  1,865   706   4,238   3,170 
                 

Net income

 $7,513  $5,184  $14,187  $13,321 
                 

Earnings per share of common stock:

                

Basic

 $0.37  $0.26  $0.70  $0.68 

Diluted

 $0.37  $0.25  $0.69  $0.66 
                 

Weighted-average shares outstanding:

                

Basic

  20,254   19,871   20,201   19,731 

Diluted

  20,474   20,378   20,434   20,277 
                 

Cash dividends declared per common share

 $0.095  $0.085  $0.285  $0.255 

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Comprehensive Income

(unaudited) 

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(in thousands)

  

(in thousands)

 

Net income

 $7,513  $5,184  $14,187  $13,321 

Other comprehensive income (loss):

                

Foreign currency translation adjustment, net

  1,142   (1,072)  988   (1,125)

Unrealized gain (loss) on short-term marketable securities

  8   (4)  10   131 

Total other comprehensive income (loss)

  1,150   (1,076)  998   (994)
                 

Comprehensive income

 $8,663  $4,108  $15,185  $12,327 

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Stockholders’ Equity

(unaudited) 

 

                  

Accumulated

             
          

Additional

      

Other

          

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Treasury Stock

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Equity

 
                                 
                                 

Balance at December 31, 2019

  21,678,927  $217  $105,934  $57,029  $(4,007)  1,522,035  $(11,032) $148,141 
                                 

Net income

            3,174             3,174 

Other comprehensive income (loss)

               (1,518)         (1,518)

Issuance of common stock for stock options exercised

  19,141   -   233               233 

Vested restricted stock units

  4,074   -   -               - 

Stock-based compensation expense

         779                779 

Repurchase of common stock at cost

                 1,601   (57)  (57)

Common stock dividend accrued

            (1,917)            (1,917)
                                 

Balance at March 31, 2020

  21,702,142   217   106,946   58,286   (5,525)  1,523,636   (11,089)  148,835 
                                 

Net income

            3,500             3,500 

Other comprehensive income

               1,366          1,366 

Issuance of common stock for stock options exercised

  3,000   -   42               42 

Vested restricted stock units

  192   -   -               - 

Stock-based compensation expense

         803                803 

Common stock dividend paid

            (1,917)            (1,917)
                                 

Balance at June 30, 2020

  21,705,334   217   107,791   59,869   (4,159)  1,523,636   (11,089)  152,629 
                                 

Net income

            7,513             7,513 

Other comprehensive income

               1,150          1,150 

Issuance of common stock for stock options exercised

  92,014   1   1,162               1,163 

Vested restricted stock units

  22,576   -   -               - 

Stock-based compensation expense

         687                687 

Repurchase of common stock at cost

                 7,530   (234)  (234)

Common stock dividend paid

            (1,925)            (1,925)
                                 

Balance at September 30, 2020

  21,819,924  $218  $109,640  $65,457  $(3,009)  1,531,166  $(11,323) $160,983 

 

 

 

                  

Accumulated

             
          

Additional

      

Other

          

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Treasury Stock

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Equity

 
                                 
                                 

Balance at December 31, 2018

  21,110,224  $211  $98,442  $45,831  $(3,900)  1,501,511  $(10,349) $130,235 
                                 

Net income

            3,513             3,513 

Other comprehensive income (loss)

               (192)         (192)

Issuance of common stock for stock options exercised

  61,419   1   478               479 

Vested restricted stock units

  2,026   -   -               - 

Stock-based compensation expense

         746                746 

Repurchase of common stock at cost

                 926   (21)  (21)

Common stock dividend accrued

            (1,672)            (1,672)
                                 

Balance at March 31, 2019

  21,173,669   212   99,666   47,672   (4,092)  1,502,437   (10,370)  133,088 
                                 

Net income

            4,624             4,624 

Other comprehensive income (loss)

               274          274 

Issuance of common stock for stock options exercised

  77,032   1   530               531 

Vested restricted stock units

  171   -   -               - 

Stock-based compensation expense

         694                694 

Repurchase of common stock at cost

                 1,008   (2)  (2)

Common stock dividend paid

            (1,672)            (1,672)
                                 

Balance at June 30, 2019

  21,250,872   213   100,890   50,624   (3,818)  1,503,445   (10,372)  137,537 
                                 

Net income

            5,184             5,184 

Other comprehensive income (loss)

               (1,076)         (1,076)

Issuance of common stock for stock options exercised

  208,821   2   2,128               2,130 

Vested restricted stock units

  35,613      -               - 

Stock-based compensation expense

         655                655 

Repurchase of common stock at cost

                 11,933   (423)  (423)

Common stock dividend paid

            (1,691)            (1,691)
                                 

Balance at September 30, 2019

  21,495,306   215   103,673   54,117   (4,894)  1,515,378   (10,795)  142,316 

 

See accompanying notes to consolidated financial statements.

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

  

For the nine months ended
September 30,

 
  

2020

  

2019

 
  (in thousands) 

Operating activities

        

Net income

 $14,187  $13,321 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  5,861   3,975 

Stock-based compensation

  2,269   2,095 

Fair value adjustment to contingent consideration obligations

  132   123 

Provision for doubtful accounts

  257   289 

Provision for inventory write-downs

  1,032   508 

Gain on sale of building

  (470)  - 

Foreign currency transaction loss

  49   62 

Changes in operating assets and liabilities:

        

Accounts receivable

  (1,326)  268 

Inventory and other deferred costs

  (3,228)  (9,576)

Prepaid expenses and other assets

  35   (449)

Accounts payable and other liabilities

  1,850   (2,031)

Net cash provided by operating activities

  20,648   8,585 
         

Investing activities

        

Purchases of property and equipment and other assets

  (1,767)  (2,361)

Proceeds from sale of building

  2,023   - 

Payments related to acquisitions

  (72,627)  (6,815)

Purchases of short-term marketable securities

  (2,193)  (18,378)

Proceeds from sales of marketable securities

  18,000   7,000 

Net cash used in investing activities

  (56,564)  (20,554)
         

Financing activities

        

Payments of deferred acquisition consideration

  (976)  (59)

Proceeds from revolving line of credit

  25,000   - 

Proceeds from issuance of long-term debt

  40,000   - 

Payments of revolving line of credit

  (4,000)  - 

Payments of long-term debt

  (500)  - 

Payment of deferred debt issuance costs

  (1,751)  - 

Proceeds from issuance of common stock

  1,437   3,138 

Purchase of treasury stock

  (291)  (446)

Common stock cash dividend paid

  (5,759)  (5,035)

Net cash provided by (used in) financing activities

  53,160   (2,402)
         

Effect of exchange rate changes on cash and cash equivalents

  249   (228)

Net increase in cash and cash equivalents

  17,493   (14,599)

Cash and cash equivalents at beginning of period

  11,786   26,318 

Cash and cash equivalents at end of period

 $29,279  $11,719 
Supplemental disclosures of cash flow information (see Note 13)

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Notes to Consolidated Financial Statements

September 30, 2020

(unaudited)

 

1. Organization and Basis for Presentation

 

Description of Business

 

Unless the context requires otherwise, references to LeMaitre Vascular, we, our, and us refer to LeMaitre Vascular, Inc. and our subsidiaries. We develop, manufacture, and market medical devices and implants used primarily in the field of vascular surgery. We also derive revenues from the processing and cryopreservation of human tissues for implantation in patients. We operate in a single segment in which our principal product lines include the following: anastomotic clips, angioscopes, biologic vascular and dialysis grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy catheters, occlusion catheters, powered phlebectomy devices, radiopaque marking tape, remote endarterectomy devices, surgical glue, synthetic vascular grafts and valvulotomes. Our offices and production facilities are located in Burlington, Massachusetts; Fox River Grove, Illinois; North Brunswick, New Jersey (Note 4); Chandler, Arizona; Vaughan, Canada; Sulzbach, Germany; Milan, Italy; Madrid, Spain; Saint-Etienne, France; Hereford, England; Kensington, Australia; Tokyo, Japan; Shanghai, China; and Singapore.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation of the results of these interim periods have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, sales returns and discounts, share-based compensation, and income taxes are updated as appropriate. The results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the entire year. The information contained in these interim financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2019, including the notes thereto, included in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 11, 2020.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes to unaudited consolidated financial statements. Due to the COVID-19 pandemic, there is heightened volatility and uncertainty in customer demand and the worldwide economy in general.  However, the magnitude and duration of the impact on our revenues and operations from COVID-19 is uncertain and cannot currently be reasonably estimated at this time. The Company is not aware of any specific event or circumstance that would require an update to its accounting estimates or adjustments to the carrying value of its assets and liabilities as November 6, 2020, the issuance date of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates, particularly if the Company experiences material impacts to the carrying value of its assets and liabilities from COVID-19.

 

Consolidation

 

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

 

Revenue Recognition

 

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

 

9

 

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

 

Step 1: Identify the contract with a customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price

 

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

 

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

 

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

 

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

 

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

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

($ in thousands)

  

($ in thousands)

 
                 

Americas

 $24,184  $17,698  $57,462  $51,584 

Europe, Middle East and Africa

  10,039   9,452   28,339   29,479 

Asia/Pacific Rim

  2,193   1,950   6,017   5,999 

Total

 $36,416  $29,100  $91,818  $87,062 

 

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

 

 

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

 

10

 

Recent Accounting Pronouncements

 

In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 as well as clarifying and amending other areas of existing GAAP under Topic 740. The new standard is effective for us beginning January 1, 2021, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

 

2. Income Tax Expense

 

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

 

 

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

 

Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense. Our 2020 income tax expense varies from the statutory rate mainly due to the generation of federal and state tax credits, permanent items, and different statutory rates from our foreign subsidiaries. Our 2019 income tax expense varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign subsidiaries, and discrete stock option exercises.

 

We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2020, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $803,000. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction. The statute of limitations will be open with respect to these tax positions until 2027. A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:

 

  

Nine months ended
September 30, 2020

 
  

(in thousands)

 

Unrecognized tax benefits as of December 31, 2019

 $848 

Additions for tax positions of current year

  - 

Additions for tax positions of prior years

  14 

Reductions for settlements with taxing authorities

  (59)

Reductions for lapses of the applicable statutes of limitations

  - 

Unrecognized tax benefits as of September 30, 2020

 $803 

 

 

As of September 30, 2020, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:

 

United States

2016 and forward

Foreign

2013 and forward

 

 

11

 
 

3. Inventories and Other Deferred Costs

 

Inventories and other deferred costs consist of the following:  

 

  

September 30, 2020

  

December 31, 2019

 
  

(in thousands)

 

Raw materials

 $5,091  $5,359 

Work-in-process

  5,617   6,238 

Finished products

  28,813   23,032 

Other deferred costs

  6,118   4,898 
         

Total inventory and other deferred costs

 $45,639  $39,527 

 

 

We had inventory on consignment at customer sites of $2.1 million and $1.9 million at September 30, 2020 and December 31, 2019, respectively.

 

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

 

 

 

4. Acquisitions and Divestitures

 

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

 

With the exception of Cardial discussed below, our acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of synergies that will be realized by combining businesses. These synergies include the use of our existing sales channel to expand sales of the acquired businesses’ products and services, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure.

 

The fair market valuations associated with these transactions fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and other estimates. Our assumptions associated with these Level 3 valuations are discussed below and in Note 14 to these financial statements.

 

Artegraft Biologic Grafts

 

On June 22, 2020, we entered into an Asset Purchase Agreement (Artegraft APA) to acquire the bovine carotid artery graft business from Artegraft, Inc., who subsequent to the closing changed their name to Accidentals, Inc, (Artegraft, Inc.). Under the terms of the Artegraft APA, we agreed to pay Artegraft, Inc. a total of up to $90.0 million for the purchase of substantially all of its assets related to its business of the manufacturing, marketing, sale and distribution of its bovine carotid artery grafts (Products) , other than specifically identified excluded assets. The acquired assets included inventory, accounts receivable, machinery and equipment, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $72.5 million of the purchase price was paid to Artegraft, Inc. and other parties as specified in the Artegraft APA, including $7.5 million into an escrow account. The escrow amount is to be held until December 31, 2021 to cover any potential claims against LeMaitre or Artegraft, Inc., after which it will be released to Artegraft, Inc. by mutual consent of the parties.

 

12

 

Three earn-out payments of $5,833,333 each are potentially due to Artegraft, Inc. under the Artegraft APA depending on the achievement of specified revenue targets, as follows:

 

 

$5.8 million upon final determination that 20,000 units of Product have been sold to third parties from January 1, 2021 to December 31, 2021;

 

 

$5.8 million upon final determination that 24,000 units of Product have been sold to third parties from January 1, 2022 to December 31, 2022; and

 

 

$5.8 million upon final determination that 28,800 units of Product have been sold to third parties from January 1, 2023 to December 31, 2023.

 

The Artegraft APA includes a catch-up feature on the earn-outs such that, at the end of the three-year period, if the sum of the unit sales for all three years is greater than or equal to 58,240 unit sales (80% of the combined individual-year targets), Artegraft, Inc. will receive a “catch-up payment” in an amount equal to (a) $17,500,000 times a fraction, the numerator of which is the aggregate number of unit sales for the three-year period, and the denominator of which is 72,800 less (b) any individual-year earn-out previously paid. We recorded this liability at a fair value of $0.4 million to reflect management’s estimate of the likelihood of achieving these targets, as well as the time value of money until payment.

 

On the date of Acquisition, the Company allocated the consideration given to the individual assets acquired and the liabilities assumed based on a preliminary estimate of their fair values.   During the three months ended September 30, 2020, the Company obtained and considered additional information related to the assets acquired and liabilities assumed, and recorded measurement period adjustments to the allocation of the purchase price. The following table summarizes the as yet preliminary purchase price allocation:

 

  

Allocated

 
  

Fair Value

 
  

(in thousands)

 

Inventory

 $3,859 

Accounts receivable

  1,789 

Equipment and supplies

  1,140 

Accounts payable and other

  (53)

Intangible assets

  39,056 

Goodwill

  27,115 
     

Purchase price

 $72,906 

 

 

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

 

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

 

  

Allocated

 

Estimated

  

Fair Value

 

Useful Life

  

(in thousands)

  (in years)

Customer relationships

 $20,310 

15.0

Intellectual property

  16,449 

10.0

Non-compete agreement

  104 

5.0

Tradenames

  2,193 

10.0

      

Total intangible assets

 $39,056  

 

The weighted-average amortization period of the acquired intangible assets was 12.6 years.

 

13

 

The results of operations of the Artegraft biologic graft business have been included in the results of operations of LeMaitre since the date of acquisition of June 22, 2020. Revenues since the acquisition date through September 30, 2020 were $5.6 million. The following unaudited pro forma financial information presents the results of operations for the three-month period ended September 30, 2019 and the nine-month periods ended September 30, 2020 and 2019 as if the acquisition had occurred at the beginning of 2019. The pro forma financial information presents historical operating results for the combined entities with adjustments for amortization expense, interest, management fees and related tax effects. This information has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisitions had taken place at the beginning of fiscal 2019, or of future results.

 

  

Unaudited Pro Forma Financial Information

 
  

Three months ended

  

Nine months ended

 
  

September 30,

  September 30,  
  

2019

  

2020

  

2019

 
  

($ in thousands)

   ($ in thousands) 
             

Net sales

 $32,764  $99,902  $97,873 
             

Net income

  4,315   13,081   11,130 
             

Net income per share

            

Basic

 $0.22  $0.65  $0.57 

Diluted

 $0.21  $0.64  $0.55 

 

 

CardioCel and VascuCel Biologic Patches

 

On October 11, 2019 (the Closing Date), we entered into an asset purchase agreement (Admedus APA) to acquire the biologic patch business assets and a related technology license from Admedus Ltd (now known as Anteris Technologies Ltd) and various of its subsidiaries (collectively, Admedus). The biologic patch business consists of the CardioCel and VascuCel product lines, which are manufactured in a manner intended to reduce the risk of calcification. The products are sold worldwide. On the same date, the parties entered into a Transition Services Agreement (TSA) under which Admedus will manufacture and supply LeMaitre with inventory for a period of up to three years, unless extended in writing by both parties.

 

Under the Admedus APA we agreed to pay Admedus a total of up to $15.3 million for the purchase of substantially all of its biologic patch business assets, other than specifically identified excluded assets, plus $8.0 million for the technology license. The acquired assets (in combination with the license) included inventory, intellectual property, permits and approvals, data and records, and customer and supplier information, as well as a small amount of machinery and equipment. At closing, $14.2 million of the purchase price was paid to Admedus. Shortly thereafter another $0.3 million was paid in connection with delivery of audited financial statements of the acquired business to LeMaitre. Additional payments of $0.7 million are due within 15 days of the first and third anniversaries of the closing date. Additional contingent consideration may be payable as follows:

 

 

$2.0 million within 15 days following LeMaitre’s receipt of a CE mark on all acquired products;

 

$2.5 million if revenues in the first 12-month period following the Closing Date exceed $20 million, or, $1.2 million if revenues in the first 12-month period following the Closing Date exceed $15 million;

 

$2.5 million if revenues in the second 12-month period following the Closing Date exceed $30 million, or, $1.2 million if revenues in the first 12-month period following the Closing Date exceed $22.5 million; and

 

$0.5 million if by the first anniversary of the Closing Date Admedus extends the shelf life of the products from 36 months to at least 60 months

 

This contingent consideration of $7.5 million was initially valued in total at $2.3 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations. See Note 14.

 

14

 

During the quarter ended September 30, 2020, we recorded a $1.3 million adjustment to goodwill with an offsetting adjustment to deferred income taxes to reflect the difference between book basis and tax basis of the technology license. The following table summarizes the purchase price allocation:

 

  

Allocated

 
  

Fair Value

 
  

(in thousands)

 

Inventory and other

 $1,343 

Deferred tax assets

  1,345 

Intangible assets

  8,725 

Goodwill

  5,999 
     

Purchase price

 $17,412 

 

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

 

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

 

     

Weighted

  

Allocated

 

Average

  

Fair Value

 

Useful Life

  

(in thousands)

  (in years)

Customer relationships

 $5,562 

12.0

Intellectual property

  2,335 

8.0

Non-compete agreement

  361 

5.0

Tradenames

  467 

8.0

      

Total intangible assets

 $8,725  

 

The weighted-average amortization period of the acquired intangible assets was 10.4 years.

 

Tru-Incise Valve Cutter

 

On July 12, 2019, we entered into an agreement with UreSil, LLC to purchase the remaining assets of their Tru-Incise valve cutter business, including distribution rights in the United States. We also entered into a TSA under which UreSil, LLC continued to manufacture the acquired products for us for a specified time, until we transitioned the full manufacturing process to our Burlington, Massachusetts facilities. This manufacturing transfer is now complete.

 

The purchase price for the acquired assets, which included inventory, machinery and equipment, intellectual property, and customer and supplier information, was $8.0 million. Of this amount, $6.8 million was paid at closing, with three follow-on payments $0.4 million each due on the first, second and third anniversaries of the closing date.  The deferred amounts totaling $