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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-Q

(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2023
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: 001-37599
lnlogomain280x78.jpg
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 classTrading Symbol(s)Name of each exchange on which registered
Ordinary Shares - £1.00 par value per shareLIVNThe NASDAQ Stock Market LLC
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 ☑
ClassOutstanding at October 26, 2023
Ordinary Shares - £1.00 par value per share53,870,826


LIVANOVA PLC
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONPAGE NO.
 PART II. OTHER INFORMATION



2

DEFINITIONS
In this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (this “Report”), the following terms and abbreviations have the meanings listed below. “LivaNova” and “the Company” refer to LivaNova PLC and its consolidated subsidiaries.
AbbreviationDefinition
2015 PlanLivaNova PLC 2015 Incentive Award Plan
2022 Form 10-KLivaNova PLC’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 27, 2023
2022 PlanLivaNova PLC 2022 Incentive Award Plan
ACSAdvanced Circulatory Support
ALungALung Technologies, Inc.
AOCIAccumulated other comprehensive income
A&R 2022 PlanAmended and Restated LivaNova PLC 2022 Incentive Award Plan
BEPSBase Erosion and Profit Shifting
Bridge Loan FacilityIncremental Facility Amendment No. 1 to the 2021 First Lien Credit Agreement, relating to a €200 million bridge loan facility, dated February 24, 2022, and repaid on July 6, 2022
CEOChief Executive Officer
CFOChief Financial Officer
CMSU.S. Centers for Medicare & Medicaid Services
Court of AppealCourt of Appeal in Milan
CPBCardiopulmonary bypass
Delayed Draw Term Facility$50 million delayed draw term facility under the 2021 First Lien Credit Agreement resulting from the Incremental Facility Amendment No. 2
DREDrug-resistant epilepsy
DTDDifficult-to-treat depression
ECJEuropean Court of Justice
Exchange ActU.S. Securities Exchange Act of 1934, as amended
FDAU.S. Food and Drug Administration
FXForeign currency exchange rate
Hemolung RASHemolung Respiratory Assist System
HLMHeart-lung machine
ImTheraImThera Medical, Inc., acquired by LivaNova in 2018, a company developing an implantable neurostimulation device system for the treatment of obstructive sleep apnea
Incremental Facility Amendment No. 2
An incremental facility amendment to the 2021 First Lien Credit Agreement, dated July 6, 2022
Initial Term Facility$300 million term facility under the 2021 First Lien Credit Agreement resulting from the Incremental Facility Amendment No. 2
ISIN
National Inspectorate for Nuclear Safety and Radiation Protection, a sub-body of the Italian Ministry of Economic Development
LivaNova USALivaNova USA, Inc.
LSMLivaNova Site Management S.r.l.
MDLFederal multi-district litigation in the U.S. District Court for the Middle District of Pennsylvania
MitralMitral Holdco S.à r.l.
Notes$287.5 million aggregate principal amount of 3.00% senior notes due December 2025, issued June 17, 2020
OCIOther comprehensive income (loss)
OECDOrganisation for Economic Co-operation and Development
OrderAdministrative order
OSAObstructive sleep apnea
3

AbbreviationDefinition
OSPREY clinical trial
LivaNova’s clinical trial, “Treating Obstructive Sleep Apnea using Targeted Hypoglossal Neurostimulation”
Public AdministrationsThe Italian Ministry of the Environment and other Italian government agencies
R&DResearch and Development
RECOVER clinical studyLivaNova’s clinical study “A Prospective, Multi-center, Randomized Controlled Blinded Trial Demonstrating the Safety and Effectiveness of VNS Therapy System as Adjunctive Therapy Versus a No Stimulation Control in Subjects With Treatment-Resistant Depression”
RSUsService-based restricted stock units
SARsService-based stock appreciation rights
SECU.S. Securities and Exchange Commission
Securities ActU.S. Securities Act of 1933, as amended
SG&ASelling, general and administrative expense
SNIASNIA S.p.A.
SNIA Litigation GuaranteeA first demand bank guarantee of €270.0 million in connection with the SNIA litigation
SOFRSecured Overnight Financing Rate
Sorin spin-offThe spin-off of Sorin from SNIA in 2004
Term FacilitiesThe Initial Term Facility, together with the Delayed Draw Term Facility
UKUnited Kingdom
UK ActFinance (No.2) Act 2023
U.S.United States of America
U.S. GAAPGenerally Accepted Accounting Principles in the U.S.
USDU.S. dollar
VNSVagus nerve stimulation

INTELLECTUAL PROPERTY, TRADEMARKS AND TRADE NAMES
This report may contain references to LivaNova’s proprietary intellectual property, including among others:
•Trademarks for LivaNova’s Neuromodulation systems, the VNS Therapy™ System, the VITARIA™ System and LivaNova’s proprietary pulse generator products: Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse™), Model 104 (Demipulse Duo™), Model 106 (AspireSR™), Model 1000 (SenTiva™), Model 1000-D (SenTiva™ Duo), Model 7103 (VITARIA™ and TitrationAssist™) and Model 8103 (Symmetry™).
•Trademarks for LivaNova’s Cardiopulmonary products and systems: Essenz™, S5™, S3™, S5 Pro™, B-Capta™, Inspire™, Heartlink™, XTRA™, 3T Heater-Cooler™, Connect™ and Revolution™.
•Trademarks for LivaNova’s advanced circulatory support systems: TandemLife™, TandemHeart™, TandemLung™, ProtekDuo™, LifeSPARC™, ALung™, Hemolung™, Respiratory Dialysis™ and ActivMix™.
•Trademarks for LivaNova’s obstructive sleep apnea system: ImThera™ and aura6000™.
These trademarks and trade names are the property of LivaNova or the property of LivaNova’s consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, LivaNova’s trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ™ symbol, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, LivaNova’s rights to these trademarks and trade names.
4

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, other than statements of historical or current fact, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of 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, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. Generally, 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 the Company’s control, that could cause the Company’s 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 following risks and uncertainties: volatility in the global market and worldwide economic conditions, including as caused by the invasion of Ukraine, the evolving instability in the Middle East, inflation, foreign exchange fluctuations, changes to existing trade agreements and relationships between the U.S. and other countries including the implementation of sanctions; cyber-attacks or other disruptions to the Company’s information technology systems or those of third parties with which the Company interacts; costs of complying with privacy and security of personal information requirements and laws; losses or costs from pending or future lawsuits and governmental investigations, including in the case of the Company’s 3T Heater-Cooler and SNIA litigations; risks related to reductions, interruptions or increasing costs related to the supply of raw materials and components and the distribution of finished products, including as a result of inflation, war and extreme weather; changes in technology, including the development of superior or alternative technology or devices by competitors and/or competition from providers of alternative medical therapies; failure to obtain approvals or reimbursement in relation to the Company’s products; failure to establish, expand or maintain market acceptance of the Company’s products for the treatment of the Company’s approved indications; failure to develop and commercialize new products and the rate and degree of market acceptance of such products; unfavorable results from clinical studies or failure to meet milestones; failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of the Company’s products; risks relating to recalls, enforcement actions or product liability claims; changes or reduction in reimbursement for the Company’s products or failure to comply with rules relating to reimbursement of healthcare goods and services; failure to comply with anti-bribery laws; risks associated with environmental laws and regulations as well as environmental liabilities, violations, protest voting and litigation; product liability, intellectual property, shareholder-related, environmental-related, income tax and other litigation, disputes, losses and costs; failure to retain key personnel, prevent labor shortages, or manage labor costs; the failure of the Company’s R&D efforts to keep up with the rapid pace of technological development in the medical device industry; the impact of climate change and the risk of environmental, social and governance pressures from internal and external stakeholders; the risk of quality concerns and the impacts thereof; failure to protect the Company’s proprietary intellectual property; the potential loss of funds resulting from recent and potential future bank failures; failure of new acquisitions to further the Company’s strategic objectives or strengthen the Company’s existing businesses; the potential for impairments of intangible assets and goodwill; risks relating to the Company’s indebtedness including under the exchangeable senior notes, the Company’s revolving credit facility and the Company’s 2022 Term Facilities, as defined herein; effectiveness of the Company’s internal controls over financial reporting; changes in the Company’s profitability and/or failure to manage costs and expenses; fluctuations in future quarterly operating results and/or variations in revenue and operating expenses relative to estimates; changes in tax laws and regulations, including exposure to additional income tax liabilities; and other unknown or unpredictable factors that could harm the Company’s financial performance.
Other factors that could cause LivaNova’s actual results to differ from projected results are described in (1) “Part II, Item 1A. Risk Factors” and elsewhere in this and the Company’s other Quarterly Reports on Form 10-Q, (2) the Company’s 2022 Form 10-K, (3) the Company’s reports and registration statements filed and furnished from time to time with the SEC and (4) other announcements LivaNova makes from time to time.
Readers are cautioned not to place undue reliance on the Company’s forward-looking statements, which speak only as of the date hereof. The Company undertakes 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 the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Operating results for the nine months ended September 30, 2023, are not necessarily indicative of future results, including the full fiscal year. You should also refer to the Company’s “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in LivaNova’s 2022 Form 10-K and in the Company’s 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 U.S. GAAP. The reporting currency of the Company’s condensed consolidated financial statements is USD.
5

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,
2023202220232022
Net revenue$286,113 $252,605 $843,413 $746,931 
Cost of sales84,310 81,687 262,330 223,220 
Gross profit201,803 170,918 581,083 523,711 
Operating expenses:
Selling, general and administrative134,794 114,630 384,795 349,637 
Research and development46,541 35,725 147,651 110,872 
Impairment of goodwill— 129,396 — 129,396 
Other operating expense16,010 23,140 29,145 24,518 
Operating income (loss)4,458 (131,973)19,492 (90,712)
Interest expense(14,986)(12,661)(43,232)(34,889)
Foreign exchange and other income/(expense)8,550 38,528 36,810 44,065 
(Loss) income before tax(1,978)(106,106)13,070 (81,536)
Income tax expense 5,308 1,295 11,776 6,347 
(Loss) income from equity method investments(32)57 (87)(24)
Net (loss) income$(7,318)$(107,344)$1,207 $(87,907)
Basic (loss) income per share$(0.14)$(2.01)$0.02 $(1.64)
Diluted (loss) income per share$(0.14)$(2.01)$0.02 $(1.64)
Shares used in computing basic (loss) income per share53,989 53,534 53,837 53,474 
Shares used in computing diluted (loss) income per share53,989 53,534 54,107 53,474 

See accompanying notes to the condensed consolidated financial statements
6

LIVANOVA PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net (loss) income$(7,318)$(107,344)$1,207 $(87,907)
Other comprehensive income (loss):
Net change in unrealized income (loss) on derivatives— 1,653 (966)(274)
Tax effect— — — — 
Net of tax— 1,653 (966)(274)
Foreign currency translation adjustment(19,222)(39,887)(5,716)(85,653)
Total other comprehensive loss(19,222)(38,234)(6,682)(85,927)
Total comprehensive loss$(26,540)$(145,578)$(5,475)$(173,834)

See accompanying notes to the condensed consolidated financial statements
7

LIVANOVA PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)
 September 30, 2023December 31, 2022
ASSETS
Current Assets:
Cash and cash equivalents$233,941 $214,172 
Restricted cash298,781 301,446 
Accounts receivable, net of allowance of $11,628 at September 30, 2023 and $11,862 at December 31, 2022
189,871 183,110 
Inventories161,539 129,379 
Prepaid and refundable taxes25,505 31,708 
Prepaid expenses and other current assets44,230 26,321 
Total Current Assets953,867 886,136 
Property, plant and equipment, net149,302 147,187 
Goodwill767,055 768,787 
Intangible assets, net347,672 368,559 
Operating lease assets31,533 35,830 
Investments22,698 16,266 
Deferred tax assets1,506 1,384 
Long-term derivative assets43,669 54,393 
Other assets12,115 16,231 
Total Assets$2,329,417 $2,294,773 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations$19,027 $23,434 
Accounts payable62,780 74,310 
Accrued liabilities and other89,680 81,481 
Current litigation provision liability26,704 29,481 
Taxes payable22,300 16,505 
Accrued employee compensation and related benefits74,905 72,187 
Total Current Liabilities295,396 297,398 
Long-term debt obligations568,163 518,067 
Contingent consideration89,808 85,292 
Deferred tax liabilities9,929 8,516 
Long-term operating lease liabilities25,192 29,548 
Long-term employee compensation and related benefits15,894 16,804 
Long-term derivative liabilities53,303 85,675 
Other long-term liabilities46,260 45,849 
Total Liabilities1,103,945 1,087,149 
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 53,903,564 shares issued and 53,860,644 shares outstanding at September 30, 2023; 53,851,979 shares issued and 53,564,664 shares outstanding at December 31, 2022
82,491 82,424 
Additional paid-in capital2,180,661 2,157,724 
Accumulated other comprehensive loss(54,801)(48,119)
Accumulated deficit(982,823)(984,030)
Treasury stock at cost, 42,920 ordinary shares at September 30, 2023; 287,315 ordinary shares at December 31, 2022
(56)(375)
Total Stockholders’ Equity1,225,472 1,207,624 
Total Liabilities and Stockholders’ Equity$2,329,417 $2,294,773 
See accompanying notes to the condensed consolidated financial statements
8

LIVANOVA PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended September 30,
20232022
Operating Activities:
Net income (loss)$1,207 $(87,907)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation28,069 32,492 
Remeasurement of derivative instruments(25,730)(38,825)
Amortization19,129 18,970 
Depreciation18,582 16,593 
Amortization of debt issuance costs14,246 16,394 
Amortization of operating lease assets7,270 7,100 
Remeasurement of contingent consideration to fair value4,516 (33,323)
Impairment of goodwill— 129,396 
Other2,513 1,369 
Changes in operating assets and liabilities:
Accounts receivable, net(8,239)(1,665)
Inventories(33,024)(22,571)
Other current and non-current assets(2,981)12,191 
Accounts payable and accrued current and non-current liabilities(8,084)(5,395)
Taxes payable6,347 (1,772)
Litigation provision liability(2,865)8,171 
Net cash provided by operating activities20,956 51,218 
Investing Activities:
Purchases of property, plant and equipment(22,062)(17,383)
Purchase of investments(6,570)(928)
Acquisition, net of cash acquired— (8,857)
Other439 (293)
Net cash used in investing activities(28,193)(27,461)
Financing Activities:
Proceeds from long-term debt obligations50,000 507,547 
Repayment of long-term debt obligations(16,061)(220,784)
Shares repurchased from employees for minimum tax withholding(6,995)(8,550)
Repayments of short-term borrowings (maturities greater than 90 days)(1,901)— 
Proceeds from share issuances under ESPP1,625 1,788 
Proceeds from deferred consideration from sale of Heart Valves, net of working capital adjustments— 4,597 
Payment of debt issuance costs— (3,292)
Other(166)481 
Net cash provided by financing activities26,502 281,787 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(2,161)(7,257)
Net increase in cash, cash equivalents and restricted cash17,104 298,287 
Cash, cash equivalents and restricted cash at beginning of period515,618 207,992 
Cash, cash equivalents and restricted cash at end of period$532,722 $506,279 
See accompanying notes to the condensed consolidated financial statements
9

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, 2023 and 2022, 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, 2022 has been derived from audited financial statements contained in LivaNova’s 2022 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 considered necessary for a fair statement of the operating results of LivaNova and its subsidiaries for the three and nine months ended September 30, 2023, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying LivaNova’s 2022 Form 10-K.
Macroeconomic Environment
The current macroeconomic environment, including foreign exchange volatility, inflationary pressures, geopolitical instability, and supply chain challenges, has impacted and may continue to impact LivaNova’s business and profitability. Furthermore, LivaNova continues to experience supply chain delays and interruptions, labor shortages, inflationary pressures and logistical and capacity constraints, though, to date, the Company’s supply of raw materials and the production and distribution of finished products have not been materially affected. Moreover, freight and labor costs at LivaNova’s manufacturing facilities have increased substantially in the wake of inflation globally. The Company continues to respond to such challenges, and while LivaNova has business continuity plans in place, the impact of the ongoing challenges the Company is navigating, along with their potential escalation, may adversely affect its business.
Conflicts, including those in Ukraine and the Middle East, have caused the Company to assess its ability to sell in certain markets due to any applicable international sanctions, consider the potential impact of raw material sourced from these areas, and determine whether LivaNova is able to transact in a compliant fashion. Net revenues from each of these conflict areas represented approximately 1%, respectively, of LivaNova’s total net revenue for 2022. These conflicts have increased economic uncertainties, and a significant escalation or continuation of these conflicts could have a material, global impact on the Company’s operating results.
Reclassifications
The Company has reclassified certain prior period amounts on the condensed consolidated balance sheets for comparative purposes. These reclassifications had no impact on LivaNova’s financial condition.
Significant Accounting Policies
LivaNova’s significant accounting policies are detailed below and in “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” and “Note 3. Revenue Recognition” of LivaNova’s 2022 Form 10-K.
Note 2. Business Combinations
As of December 31, 2021, LivaNova owned a 3% investment in ALung, a privately held medical device company focused on creating advanced medical devices for treating respiratory failure. On May 2, 2022, LivaNova acquired the remaining 97% of equity interests in ALung for a purchase price of up to $110.0 million, consisting of $10.0 million paid at closing, subject to customary adjustments, and contingent consideration of up to $100.0 million payable upon achievement of certain sales-based milestones beginning in 2023 and ending in 2027. Total consideration included approximately $5.5 million of non-cash consideration.
10

The following table presents the acquisition date fair value of the consideration transferred and the fair value of LivaNova’s interest in ALung prior to the acquisition, including certain measurement period adjustments (in thousands):
Initial Fair Value of Consideration
Measurement Period Adjustments (1)
Adjusted Fair Value of Consideration
Cash and other considerations$15,586 $— $15,586 
Contingent consideration 26,369 (9,578)16,791 
Fair value of consideration transferred $41,955 $(9,578)$32,377 
(1)During the third quarter of 2022, measurement period adjustments were recorded based on information obtained about facts and circumstances that existed as of the acquisition date.
The purchase price allocation at fair value for the ALung acquisition was finalized during the second quarter of 2023 and is presented in the following table, which includes certain measurement period adjustments (in thousands):
Initial Purchase Price Allocation
Measurement Period Adjustments (1)
Adjusted Purchase Price Allocation
Developed technology - 15-year life
$13,950 $(11,050)$2,900 
Goodwill25,893 977 26,870 
Other assets and liabilities, net 2,112 495 2,607 
Net assets acquired$41,955 $(9,578)$32,377 
(1)During the third quarter of 2022, measurement period adjustments were recorded based on information obtained about facts and circumstances that existed as of the acquisition date.
Goodwill arising from the ALung acquisition, which is not deductible for tax purposes, primarily represents the synergies anticipated between ALung and the Company’s ACS business. The assets acquired, including goodwill, are recognized in LivaNova’s ACS segment. The goodwill for the ACS reporting unit was fully impaired during the third quarter of 2022.
The Company’s condensed consolidated financial statements include the operating results of ALung from the acquisition date. Separate post-acquisition operating results and pro forma financial information for this acquisition have not been presented as the effect was not material.
The contingent consideration payments are triggered upon the achievement of thresholds associated with sales of products covered by the purchase agreement and are estimated to occur during the years reflected in the table below. The sales-based earnout was valued using projected sales from the Company’s internal strategic plan and is a Level 3 fair value measurement, which includes the following significant unobservable inputs (in thousands):
ALung AcquisitionFair value at May 2, 2022Valuation TechniqueUnobservable InputRanges
Sales-based earnout$16,791 Monte Carlo simulationRisk-adjusted discount rate7.0%-8.4%
Credit risk discount rate6.4%-8.0%
Revenue volatility25.7%
Projected years of earnout2023-2027
For a reconciliation of the beginning and ending balance of contingent consideration liabilities, refer to “Note 5. Fair Value Measurements.”
Note 3. Divestiture of Heart Valve Business
On December 2, 2020, LivaNova entered into a Purchase Agreement with Mitral, a company incorporated under the laws of Luxembourg and wholly owned and controlled by funds advised by Gyrus Capital S.A., a Swiss private equity firm. The Purchase Agreement provided for the divestiture of certain of LivaNova’s subsidiaries as well as certain other assets and liabilities relating to the Company’s Heart Valve business and site management operations conducted by the Company’s subsidiary LSM at the Company’s Saluggia campus for $64.1 million.
On April 9, 2021, LivaNova and Mitral entered into an Amended & Restated Purchase Agreement to, among other things, defer the closing of the sale and purchase of LSM by up to two years and include or amend certain additional terms relating to such deferral, including certain amendments relating to the potential hazardous substances provision of LSM and the related expense reimbursement provisions. On April 7, 2023, Mitral provided notice to LivaNova, consistent with the terms of the Amended & Restated Purchase Agreement, that they would not exercise their right to purchase LSM.
11

Note 4. Goodwill and Intangible Assets
LivaNova tests goodwill and indefinite-lived intangible assets for impairment on an annual basis on October 1 or when events or changes in circumstances indicate that a potential impairment exists.
As part of LivaNova’s assessment as of September 30, 2022, the Company considered that revenue for the ACS reporting unit during the nine months ended September 30, 2022, had declined by approximately 29% compared to the prior year period, primarily as a result of a reduction in severe COVID-19 cases, hospital-related challenges and product mix. Furthermore, future revenue projections were reduced. Based on these circumstances, LivaNova concluded it was more likely than not that the goodwill of the Company’s ACS reporting unit was impaired, and performed a quantitative assessment of the goodwill as of September 30, 2022, using management’s current estimate of future cash flows. Based on the valuation performed, LivaNova determined that the fair value of the ACS reporting unit was less than the carrying value and recognized a goodwill impairment of $129.4 million in the Company’s condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2022. Cumulative goodwill impairments from continuing operations since the merger of Cyberonics, Inc. and Sorin S.p.A. in October 2015 through September 30, 2022 totaled $193.1 million.
LivaNova also performed an interim impairment analysis related to the ImThera IPR&D intangible asset as of September 30, 2022. As a result of this analysis, the Company determined that the fair value of the asset exceeded the carrying value by 11% and that the IPR&D intangible asset was not impaired.
Note 5. Fair Value Measurements
The Company reviews 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, 2023 and 2022.
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, 2023Fair Value Measurements Using Inputs Considered as:
Level 1Level 2Level 3
Assets:
Derivative assets - freestanding instruments (FX)$2,625 $— $2,625 $— 
Derivative assets - capped call derivatives43,669 — — 43,669 
Convertible notes receivable275 — — 275 
$46,569 $— $2,625 $43,944 
Liabilities:
Derivative liabilities - freestanding instruments (FX) $207 $— $207 $— 
Derivative liabilities - embedded exchange feature53,303 — — 53,303 
Contingent consideration arrangements89,808 — — 89,808 
$143,318 $— $207 $143,111 

12

Fair Value as of December 31, 2022
Fair Value Measurements Using Inputs Considered as:
Level 1Level 2Level 3
Assets:
Derivative assets - designated as cash flow hedges (interest rate swap)
$1,333 $— $1,333 $— 
Derivative assets - capped call derivatives54,393 — — 54,393 
Convertible notes receivable285 — — 285 
$56,011 $— $1,333 $54,678 
Liabilities:
Derivative liabilities - freestanding instruments (FX)$5,886 $— $5,886 $— 
Derivative liabilities - embedded exchange feature85,675 — — 85,675 
Contingent consideration arrangements85,292 — — 85,292 
$176,853 $— $5,886 $170,967 
The following table provides a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable inputs (Level 3) (in thousands):
Capped Call Derivative AssetConvertible Notes ReceivableEmbedded Exchange Feature Derivative LiabilityContingent Consideration Liability Arrangements
As of December 31, 2022 - long-term
$54,393 $285 $85,675 $85,292 
Changes in fair value(10,724)(10)(32,372)4,516 
Total at September 30, 2023 - long-term$43,669 $275 $53,303 $89,808 
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 6. 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, an unobservable input that is significant to the valuation. In general, an increase in LivaNova’s 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, 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. Changes in the fair value of the embedded exchange feature derivative and capped call derivatives are recognized in foreign exchange and other income/(expense) in the condensed consolidated statements of income.
The fair value of the embedded exchange feature derivative liability and the capped call derivative assets was $53.3 million and $43.7 million, respectively, as of September 30, 2023, and the stock price volatility was 37%. As of September 30, 2023, a 10% lower volatility, holding other inputs constant, would reduce the fair value for the embedded exchange feature derivative liability by $14.0 million, and a 10% higher volatility, holding other inputs constant, would increase the fair value by $14.1 million. As of September 30, 2023, a 10% lower volatility, holding other inputs constant, would reduce the fair value for the capped call derivatives by $8.5 million, and a 10% higher volatility, holding other inputs constant, would increase the fair value by $3.7 million.
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Contingent Consideration Arrangements
The following table provides the fair value of Level 3 contingent consideration arrangements by acquisition (in thousands):
September 30, 2023December 31, 2022
ImThera$78,525 $69,389 
ALung11,283 15,903 
$89,808 $85,292 
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 earnouts are valued using projected sales from LivaNova’s internal strategic plan. These arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of September 30, 2023:
ImThera AcquisitionValuation TechniqueUnobservable InputInputs
Regulatory milestone-based paymentDiscounted cash flowDiscount rate7.9%
Probability of payment85%
Projected payment year2026
Sales-based earnoutMonte Carlo simulationRisk-adjusted discount rate
14.6% - 14.8%
Credit risk discount rate
8.1% - 8.6%
Revenue volatility32.5%
Probability of payment85%
Projected years of earnout
2026 - 2029
The ALung business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain sales-based thresholds associated with sales of products. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2023:
ALung AcquisitionValuation TechniqueUnobservable InputInputs
Sales-based earnoutMonte Carlo simulationRisk-adjusted discount rate
10.2% - 11.0%
Credit risk discount rate
7.6% - 8.3%
Revenue volatility27.4%
Projected years of earnout
2023 - 2027
Note 6. Financing Arrangements
The outstanding principal amount of long-term debt as of September 30, 2023 and December 31, 2022 was as follows (in thousands, except interest rates):
September 30, 2023December 31, 2022MaturityInterest Rate
Term Facilities$332,433 $289,294 July 20278.87%
2020 Cash Exchangeable Senior Notes251,315 239,568 December 20253.00%
Bank of America Merrill Lynch Banco Múltiplo S.A.— 6,462 N/AN/A
Mediocredito Italiano799 1,601 December 2023
0.50% - 7.15%
Bank of America, U.S.1,500 1,500 January 20258.31%
Other533 534 
Total long-term facilities586,580 538,959 
Less current portion of long-term debt18,417 20,892 
Total long-term debt obligations$568,163 $518,067 
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Revolving Credit
The outstanding principal amount of LivaNova’s short-term unsecured revolving credit agreements and other agreements with various banks was $0.6 million and $2.5 million as of September 30, 2023 and December 31, 2022, respectively, with an interest rate of 4.24% and loan terms ranging from overnight to 364 days as of September 30, 2023.
On August 13, 2021, LivaNova PLC and its wholly-owned subsidiary, LivaNova USA as borrower, entered into a First Lien Credit Agreement with the lenders and issuing banks party thereto and Goldman Sachs Bank USA, as First Lien Administrative Agent and First Lien Collateral Agent, relating to a $125 million senior secured multi-currency revolving credit facility to be made available to the borrower, referred to as the 2021 First Lien Credit Agreement. The 2021 First Lien Credit Agreement, as amended from time to time, expires on August 13, 2026, and bears interest at a rate equal to, for USD-denominated loans, an adjusted SOFR with a floor of 0.00%, or a Base Rate, plus, in each case, a variable margin based on the Company’s Total Net Leverage Ratio, as defined in the agreement. Interest is paid monthly or quarterly, as selected by the borrower, with any outstanding principal due at maturity. The 2021 First Lien Credit Agreement also contemplates the payment of commitment fees on the unused portion of the commitments, at a variable percentage based on the Company’s Total Net Leverage Ratio. As of September 30, 2023 and December 31, 2022, the applicable commitment fee percentage was 0.5% per annum. The 2021 First Lien Credit Agreement is available for working capital and other general corporate purposes and, if drawn, can be repaid at any time without premium or penalty. As of September 30, 2023, the Company was in compliance with the financial covenants contained in its 2021 First Lien Credit Agreement.
There were no outstanding borrowings under the 2021 First Lien Credit Agreement’s $125 million revolving credit facility as of September 30, 2023 and December 31, 2022.
Bridge Loan Facility
On February 24, 2022, LivaNova PLC and its wholly-owned subsidiary LivaNova USA entered into the €200 million Bridge Loan Facility. On March 16, 2022, LivaNova entered into Amendment No. 2 to the 2021 First Lien Credit Agreement, which converted the available borrowings under the Bridge Loan Facility from €200 million to $220 million and converted the EURIBOR rate in the 2021 First Lien Credit Agreement to SOFR. LivaNova delivered a borrowing notice for $220 million in connection with the Bridge Loan Facility, which was funded on March 17, 2022.
On March 18, 2022, LivaNova PLC, acting through its Italian branch, entered into an Indemnity Letter and an Account Pledge Agreement with Barclays, further to which Barclays issued the SNIA Litigation Guarantee. As security for the SNIA Litigation Guarantee, LivaNova is required to grant cash collateral to Barclays in USD in an amount equal to the USD equivalent of 105% of the amount of the SNIA Litigation Guarantee calibrated on a biweekly basis. The proceeds of the Bridge Loan Facility were used by LivaNova to post a portion of the cash collateral supporting the SNIA Litigation Guarantee. Cash collateral classified as restricted cash on the condensed consolidated balance sheet was $298.8 million and $301.4 million as of September 30, 2023 and December 31, 2022, respectively. For additional information regarding the SNIA litigation, please refer to “Note 8. Commitments and Contingencies.”
Debt discounts and issuance costs related to the Bridge Loan Facility were approximately $4.5 million. Amortization of debt discount and issuance costs for the Bridge Loan Facility was $4.5 million for the nine months ended September 30, 2022 and is included in interest expense on the condensed consolidated statement of income.
The Bridge Loan Facility was repaid in full on July 6, 2022.
Term Facilities
On July 6, 2022, LivaNova and its wholly-owned subsidiary, LivaNova USA, entered into Incremental Facility Amendment No. 2. Incremental Facility Amendment No. 2 provides for LivaNova USA to, among other things, obtain commitments for term loan facilities from a syndicate of lenders in an aggregate principal amount of $350 million consisting of (i) the Initial Term Facility with an aggregate principal amount of $300 million and (ii) the Delayed Draw Term Facility with an additional aggregate principal amount of $50 million. On April 6, 2023, LivaNova drew $50 million under the Delayed Draw Term Facility for general corporate purposes.
Proceeds from the Initial Term Facility were used to repay in full the Bridge Loan Facility on July 6, 2022, with the remainder used for general corporate purposes of the Company. The Term Facilities have a maturity of the earlier of (i) five years or (ii) 91 days prior to December 15, 2025, the maturity date of the 2020 Cash Exchangeable Senior Notes, unless by that date LivaNova USA will have either redeemed or refinanced the Notes, or set aside an amount of cash equal to the then-outstanding principal amount of the Notes. The Term Facilities bear interest at a rate equal to an adjusted term SOFR plus a variable margin based on the Company’s consolidated total net leverage ratio. As of September 30, 2023, the applicable margin over Adjusted SOFR was equal to 3.50% per annum. The Term Facilities are subject to an original issue discount of 1.5% of
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their principal amount. The Term Facilities are subject to quarterly principal repayment, based on the following amortization schedule: (i) during the first year from the initial funding date: 1.9%; (ii) year two: 5.0%; (ii) year three: 5.0%; (iv) year four: 7.5%; and (v) year five: 10.0%, with the remainder to be paid at maturity. The effective interest rate of the Term Facilities at September 30, 2023 was 6.53%.
The 2021 First Lien Credit Agreement, as amended, contains customary representations, warranties and covenants, including the requirement to maintain a Senior Secured First Lien Net Leverage Ratio, calculated as the ratio of Consolidated Senior Secured First Lien Net Indebtedness to Consolidated EBITDA, as defined in the credit agreement, for the period of four consecutive fiscal quarters ended on the calculation date, of not more than 3.50 to 1.00 and an Interest Coverage Ratio, calculated as the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the credit agreement, for the period of four consecutive fiscal quarters ended on the calculation date, of not less than 3.00 to 1.00. As of September 30, 2023, the Company was in compliance with the financial covenants contained in the 2021 First Lien Credit Agreement.
Debt discounts and issuance costs related to the Initial Term Facility were approximately $9.6 million. Amortization of debt discount and issuance costs for the Initial Term Facility was $0.5 million and $1.5 million for the three and nine months ended September 30, 2023, respectively, and is included in interest expense on the condensed consolidated statement of income. The unamortized discount and issuance costs related to the Initial Term Facility as of September 30, 2023 and December 31, 2022 were $7.3 million and $8.7 million, respectively. Issuance costs related to the Delayed Draw Term Facility were approximately $1.6 million. Amortization of issuance costs for the Delayed Draw Term Facility was nil and $0.5 million for the three and nine months ended September 30, 2023, respectively, and is included in interest expense on the condensed consolidated statement of income. The issuance costs related to the Delayed Draw Term Facility were fully amortized as of September 30, 2023.
2020 Cash Exchangeable Senior Notes
On June 17, 2020, LivaNova’s wholly-owned subsidiary, LivaNova USA, issued $287.5 million aggregate principal amount of 3.00% Notes by private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. 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. The effective interest rate of the Notes at September 30, 2023 was 9.95%. 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 for the Notes was $4.1 million and $11.7 million for the three and nine months ended September 30, 2023, respectively, and $3.7 million and $10.6 million for the three and nine months ended September 30, 2022, respectively, and is included in interest expense on the condensed consolidated statement of income. The unamortized discount related to the Notes as of September 30, 2023 and December 31, 2022 was $36.2 million and $47.9 million, respectively.
Holders of the Notes are entitled to exchange the Notes at any time during specified periods, at their option. This includes the right to exchange the Notes during any calendar quarter, if the last reported sale price of LivaNova’s ordinary shares, with a nominal value of £1.00 per share, is greater than or equal to 130% of the exchange price, or $79.27 per share for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter. The exchange condition was not satisfied during the quarterly period ending September 30, 2023. As a result, the Company has included its obligations from the Notes and the associated embedded exchange feature derivative as a long-term liability on the condensed consolidated balance sheet as of September 30, 2023. The Notes are exchangeable solely into cash and are not exchangeable into ordinary shares of LivaNova or any other security under any circumstances. The initial exchange rate for the Notes is 16.3980 ordinary shares per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $60.98 per share). The exchange rate is subject to adjustment in certain circumstances, as set forth in the indenture governing the Notes.
The Company may redeem the Notes at its option, on or after June 20, 2023 and prior to the 51st scheduled trading day immediately preceding the maturity date, 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 their stated maturity, in whole but not in part, in connection with certain tax-related events.
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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 the unrealized gain or loss reflected within “Foreign exchange and other income/(expense)” in the condensed consolidated statements of income. The fair value of the embedded exchange feature derivative liability was $53.3 million and $85.7 million as of September 30, 2023 and December 31, 2022, respectively.
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 capped call transactions expire on December 15, 2025 and must be settled in cash. If the capped call transactions are converted or redeemed early, settlement occurs at their termination value, which is equal to their fair value at the time of the redemption. The capped call transactions are 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 within foreign exchange and other income/(expense) in the condensed consolidated statements of income. The fair value of the capped call derivative assets was $43.7 million and $54.4 million as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the capped call derivative assets were classified as long-term.
Note 7. Derivatives and Risk Management
Due to the global nature of LivaNova’s operations, LivaNova is exposed to FX fluctuations. Historically, the Company has entered into FX derivative contracts and interest rate swap contracts to reduce the impact of FX and interest rate fluctuations, respectively, on earnings and cash flow. LivaNova is also exposed to equity price risk in connection with its Notes, including exchange and settlement provisions based on the price of the Company’s ordinary shares at exchange or maturity of the Notes. The capped call transactions associated with the Notes also include settlement provisions that are based on the price of LivaNova’s ordinary shares, subject to a capped price per share. LivaNova does not enter into derivative contracts for speculative purposes.
LivaNova measures all outstanding derivatives each period end at fair value and reports the fair value as either financial assets or liabilities on the condensed consolidated balance sheets. 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. These derivatives are intended to serve as economic hedges and follow the cash flows of the economic hedged item. The cash flows from these derivative contracts are reported as operating activities on LivaNova’s condensed consolidated statements of cash flows.
If the derivative qualifies for hedge accounting, changes in the fair value of the derivative will be recorded in AOCI until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to the condensed consolidated statements of income as shown in the tables below, and interest rate swap gains and losses in AOCI are reclassified to interest expense on the condensed consolidated statements of income. The Company evaluates hedge effectiveness at inception.
Freestanding FX Derivative Contracts
The gross notional amount of FX derivative contracts not designated as hedging instruments outstanding at September 30, 2023 and December 31, 2022 was $174.2 million and $154.5 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans and trade receivables. For these freestanding derivatives, LivaNova recorded net gains of $5.0 million and $7.7 million for the three months ended September 30, 2023 and 2022, respectively, and net gains of $4.1 million and $12.7 million for the nine months ended September 30, 2023 and 2022, respectively. These gains and losses are included in foreign exchange and other income/(expense) on the condensed consolidated statements of income.
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Counterparty Credit Risk
LivaNova is exposed to credit risk in the event of non-performance by the counterparties to the Company’s derivatives.
The two counterparties to the capped call transactions are financial institutions. To limit its credit risk, LivaNova selected financial institutions with a minimum long-term investment grade credit rating. LivaNova’s exposure to the credit risk of the counterparties is not secured by any collateral. If a counterparty becomes subject to insolvency proceedings, the Company will become an unsecured creditor in those proceedings, with a claim equal to LivaNova’s exposure at that time under the capped call transactions with that counterparty.
To manage credit risk with respect to its 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
Foreign Currency Risk
Historically, LivaNova utilized FX derivative contracts, designed as cash flow hedges, to hedge the variability of cash flows associated with LivaNova’s 12-month USD forecasts of revenues and costs denominated in British Pound, Japanese Yen and the Euro. The Company transferred to earnings from AOCI the gain or loss realized on the FX derivative contracts at the time of invoicing. Upon the settlement of LivaNova’s foreign currency cash flow hedges in the fourth quarter of 2022 and following an in-depth analysis of the utility of the Company’s cash flow hedging program, LivaNova discontinued its foreign currency cash flow hedging program.
Interest Rate Risk
Historically, LivaNova entered into interest rate swaps associated with the Initial Term Facility, which qualified for and were designated as cash flow hedges. The Company’s interest rate swaps expired on April 6, 2023. LivaNova elected not to renew the interest rate swaps as interest expense associated with the Initial Term Facility is principally offset by holding a significant portion of the Initial Term Facility in a depository account, which earns a floating rate of interest.
The gross notional amounts of open derivative contracts designated as cash flow hedges at September 30, 2023 and December 31, 2022 were as follows (in thousands):
Description of Derivative ContractSeptember 30, 2023December 31, 2022
Interest rate swap contracts$— $210,000 
Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in OCI and the amount reclassified to earnings from AOCI were as follows (in thousands):
Three Months Ended September 30,
2022
Description of Derivative ContractLocation in Earnings of Reclassified Gain or LossGains Recognized in OCIGains (Losses) Reclassified from AOCI to Earnings
FX derivative contractsForeign exchange and other income/(expense)$413 $1,838 
FX derivative contractsSG&A— (1,927)
Interest rate swap contractsInterest expense1,151 — 
$1,564 $(89)
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Nine Months Ended September 30,
20232022
Description of Derivative ContractLocation in Earnings of Reclassified Gain or LossLosses Recognized in OCIGains Reclassified from AOCI to Earnings(Losses) Gains Recognized in OCIGains (Losses) Reclassified from AOCI to Earnings
FX derivative contractsForeign exchange and other income/(expense)$— $— $(1,345)$3,517 
FX derivative contractsSG&A— — — (3,437)
Interest rate swap contractsInterest expense(433)533 1,151 — 
$(433)$533 $(194)$80 
The Company offsets fair value amounts associated with its derivative instruments on the condensed consolidated balance sheets that are executed with the same counterparty under master netting arrangements. 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):
Asset DerivativesLiability Derivatives
September 30, 2023Balance Sheet Location
Fair Value (1)
Balance Sheet Location
Fair Value (1)
Derivatives Not Designated as Hedging Instruments:
Capped call derivativesLong-term derivative assets$43,669 
Embedded exchange featureLong-term derivative liabilities$53,303 
FX derivative contractsPrepaid expenses and other current assets2,625 Accrued liabilities and other207 
Total derivatives not designated as hedging instruments46,294 53,510 
Total derivatives$46,294 $53,510 
Asset DerivativesLiability Derivatives
December 31, 2022Balance Sheet Location
Fair Value (1)
Balance Sheet Location
Fair Value (1)
Derivatives Designated as Hedging Instruments:
Interest rate swap contractsPrepaid expenses and other current assets$1,333 
Total derivatives designated as hedging instruments1,333 
Derivatives Not Designated as Hedging Instruments:
Capped call derivativesLong-term derivative assets54,393 
FX derivative contractsAccrued liabilities and other$5,886 
Embedded exchange featureLong-term derivative liabilities85,675 
Total derivatives not designated as hedging instruments54,393 91,561 
Total derivatives$55,726 $91,561 
(1)For the classification of inputs used to evaluate the fair value of derivatives, refer to “Note 5. Fair Value Measurements.”
Note 8. Commitments and Contingencies
Saluggia Site Hazardous Substances
LSM, formerly a subsidiary of Sorin, one of the companies that merged into LivaNova PLC in 2015, manages site services for the campus in Saluggia, Italy. In addition to being a former LivaNova manufacturing facility, the Saluggia campus is also the location of manufacturing facilities of third parties, a cafeteria for workers, and storage facilities for hazardous substances and equipment previously used in a nuclear research center, later turned nuclear medicine business, between the 1960s and the
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late 1990s. Pursuant to authorization from the Italian government, LSM has performed, and continues to perform, ordinary maintenance, secure the facilities, monitor air and water quality and file applicable reports with the competent environmental authorities.
In 2020, LSM received correspondence from ISIN requesting that, within five years, LSM demonstrate the financial capacity to meet its obligations under Italian law to clean and dismantle any contaminated buildings and equipment as well as to deliver hazardous substances to a national repository. This repository will be built by the Italian government at a location and time yet to be determined. ISIN subsequently published Technical Guide n. 30, which identifies the technical criteria, and general safety and protection requirements for the design, construction, operation and dismantling of temporary storage facilities for the hazardous substances. In January 2021, a list of 67 potential sites for the national repository was published.
Although there is no legal obligation to begin any work or deliver the hazardous substances, as the performance of these obligations is contingent on the construction of the as-yet unbuilt national repository, based on the aforementioned factors, the Company concluded its obligation to clean, dismantle, and deliver any hazardous substances to a national repository is probable and reasonably estimable. The estimated liability as of September 30, 2023 was €36.0 million ($38.1 million), which represented the low end of the estimated range of loss of €36.0 million ($38.1 million) to €45.8 million ($48.4 million) as of September 30, 2023. The estimated liability as of December 31, 2022 was €34.2 million ($36.6 million). The increase in the Saluggia site provision from December 31, 2022 was due to adjustments associated with expected disposal costs.
Product Liability Litigation
The Company is currently involved in litigation involving LivaNova’s 3T Heater-Cooler device. The litigation includes the MDL, various U.S. state court cases and cases in jurisdictions outside the U.S. On March 29, 2019, LivaNova announced a settlement framework that provided for a comprehensive resolution of the personal injury cases pending in the MDL, the related class action in federal court, as well as certain cases in state courts across the United States. The agreement, which made no admission of liability, was subject to certain conditions, including acceptance of the settlement by individual claimants and provided for a total payment of up to $225 million to resolve the claims covered by the settlement. Per the agreed-upon terms, the second and final payment of $90 million was paid into a qualified settlement fund in January 2020.
Cases in state courts in the U.S. and in jurisdictions outside the U.S. continue to progress. As of November 1, 2023, the Company was aware of approximately 75 filed and unfiled claims worldwide, with the majority of the claims in various federal or state courts throughout the United States, including some cases removed to the MDL after the settlement described above. This number includes six cases in the process of settlement or dismissal. 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.
During the three and nine months ended September 30, 2023, the Company recorded an additional liability of $13.6 million and $25.7 million, respectively, due to new information received about the nature of certain claims. At September 30, 2023 and December 31, 2022, the provision for these matters was $29.7 million and $32.5 million, respectively. While the amount accrued represents the Company’s best estimate for those filed and unfiled claims that the Company believes are both probable and estimable at this time, and which are a subset of the filed and unfiled claims worldwide of which LivaNova is currently aware, the actual liability for resolution of these matters may vary from the Company’s estimate. The remaining claims for which a provision has not been recorded are remote or the potential loss is not estimable at this time.
Changes in the carrying amount of the litigation provision liability are as follows (in thousands):
Total litigation provision liability at December 31, 2022
$32,487 
Payments(28,604)
Adjustments (1)
25,739 
FX and other60 
Total litigation provision liability at September 30, 202329,682 
Less current portion of litigation provision liability at September 30, 202326,704 
Long-term portion of litigation provision liability at September 30, 2023 (2)
$2,978 
(1)Adjustments to the litigation provision are included within other operating expense on the condensed consolidated statements of income.
(2)Included within other long-term liabilities on the condensed consolidated balance sheet.
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SNIA Environmental Liability
Sorin was created as a result of a spin-off from SNIA in 2004, and in 2015, Sorin was merged into LivaNova. SNIA subsequently became insolvent, and the Public Administrations sought compensation from SNIA in an aggregate amount of approximately $3.6 billion for remediation costs relating to the environmental damage at chemical sites previously operated by SNIA’s other subsidiaries.
There are proceedings relating to the SNIA bankruptcy to which LivaNova is not a party in the Bankruptcy Court of Udine and the Bankruptcy Court of Milan. In 2011, the Bankruptcy Court of Udine held that 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. In 2016, the Court of Udine rejected the appeal, and the Public Administrations appealed to the Supreme Court. Similarly, in 2014, the Bankruptcy Court of Milan held that the Public Administrations were not creditors of either SNIA or its subsidiaries. The Public Administrations appealed. In April 2022, Bankruptcy Court of Milan declared the Public Administrations to be a non-privileged creditor of SNIA for up to €454 million, and the Public Administrations appealed to the Supreme Court.
In 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 entered voluntarily into the proceeding, asking Sorin, as jointly liable with SNIA, to pay compensation for SNIA’s environmental damages. In 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 $308,952 as of September 30, 2023) for legal fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal. 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 $605.3 million as of September 30, 2023). LivaNova appealed the partial decision on liability to the Italian Supreme Court in August 2019.
In 2021, the Court of Appeal delivered the remainder of its decision, ordering LivaNova to pay damages of approximately €453.6 million (approximately $479.9 million as of September 30, 2023). LivaNova appealed the decision on damages in December 2021. On February 21, 2022, the Court of Appeal notified the Company that it granted the Company a suspension with respect to the payment of damages until a decision has been reached on the appeal to the Italian Supreme Court. This suspension was subject to LivaNova providing a first demand bank guarantee of €270.0 million (approximately $285.7 million as of September 30, 2023) within 30 calendar days, and on March 21, 2022, LivaNova delivered the guarantee, thereby satisfying the condition. Refer to “Note 6. Financing Arrangements” for information on the financing of the guarantee.
In November 2022, in response to one of a number of appeals asserted by LivaNova, the Supreme Court issued an ordinance, a procedural document, whereby the Supreme Court referred a question on interpretation of a European directive on demergers to the ECJ. Specifically, the ordinance asks the ECJ to provide a binding decision as to whether a company resulting from a demerger can be held jointly and severally liable not only for the established liabilities of the demerged company that were articulated at the time of demerger, but also for the environmental liabilities of the demerged company that materialized after the demerger which are derived from actions performed prior to the demerger. Following receipt of the binding decision from the ECJ, the Supreme Court is expected to incorporate and issue a decision in response to all of the appeals of LivaNova and counter-appeals submitted by the Public Administrations. While the timing of the decisions by the ECJ and, subsequently, the Supreme Court are uncertain, the Company believes that the effect of the ordinance will result in a delay of any final decision until at least 2024.
In 2011, Caffaro, a SNIA subsidiary, sold its Brescia chemical business to Caffaro Brescia, a third party belonging to the Todisco group, and as part of the acquisition, Caffaro Brescia agreed to secure hydraulic barriers at the site and maintain existing environmental security measures. In 2020, Caffaro Brescia declared it was withdrawing from its agreement to maintain the environmental measures. In 2021, LivaNova (in addition to Caffaro Brescia, and other non-LivaNova entities) received an Order from the Italian Ministry of the Environment requiring the Company to ensure the maintenance of the environmental measures and to guarantee that such works remain fully operational, the annual management and maintenance for which is estimated at approximately €1 million per year. LivaNova’s receipt of the Order appears to be based on the aforementioned Court of Appeal decision regarding LivaNova’s alleged joint liability with SNIA for SNIA’s environmental liabilities. LivaNova’s response, dated February 16, 2021, disputes the grounds upon which the Order is based. LivaNova also appealed the Order in the Administrative Court in Brescia.
LivaNova has not recognized a liability in connection with these related matters because any potential loss is not currently probable.
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Caisson Contract Litigation
On November 25, 2019, LivaNova received notice of a lawsuit initiated by former members of 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., was filed in the United States District Court for the District of Minnesota. The complaint alleged (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 program and the Company’s November 20, 2019 announcement that it was ending the program at the end of 2019. The lawsuit sought damages arising out of the 2017 acquisition agreement, including various regulatory milestone payments. In May 2022, the District Court granted LivaNova’s motion for summary judgment, and in June 2023, the Eighth Circuit Court of Appeal affirmed the decision. The Company now considers Caisson’s claim against LivaNova to be closed.
Mitral Litigation
On July 29, 2022, LivaNova received a demand letter from Mitral for approximately €20.8 million ($22.0 million as of September 30, 2023) for breach of warranty claims under the A&R Purchase Agreement. Specifically, the claims allege failure to disclose certain information relating to a supplier, thereby allegedly impacting the profitability of Mitral’s business in China and Japan. The Company does not believe that Mitral’s claims will be sustained or that LivaNova is responsible for any alleged breach of warranty. Subject to certain exceptions, warranty claims of this type are contractually capped at €8.0 million ($8.5 million as of September 30, 2023). On March 22, 2023, Mitral served a formal claim on LivaNova in the High Court of Justice Commercial Court (King’s Bench Division) alleging damages flowing from the aforementioned asserted breaches of warranties in the A&R Purchase Agreement. Although the claim is in excess of €20.8 million, Mitral acknowledges the €8.0 million cap. The Company filed its Defense on May 17, 2023. As of September 30, 2023, the Company had recorded an accrued liability for an immaterial amount related to this matter.
Italian MedTech Payback Measure
As previously disclosed, in 2015, the Italian Parliament introduced rules regarding public contracts with the National Healthcare System for the supply of goods and services. In particular, the law introduced a “payback” measure requiring companies selling medical devices in Italy to repay a percentage of the healthcare expenditures exceeding the regional maximum caps for medical devices. In the intervening years since the rules were first issued, there has been considerable uncertainty about how the law will operate and what the exact timeline is for finalization. In August 2022, a decree was published which provided guidance and timetables for the rule. In response, LivaNova filed an appeal at the Administrative Court against the Decree of the Ministry of Health assessing the amount payable and against the MedTech Payback Guidelines. LivaNova also filed appeals against the regions requesting payments. In August 2023, the Administrative Court upheld LivaNova’s request to suspend the effect of the requests for payment by the regions, pending the decision by the court on the merits of the case. The Company has accrued for the law since 2015 based on market and product information. As of September 30, 2023 and December 31, 2022, the total amount reserved for this matter was $7.6 million and $6.4 million, respectively; however, the actual liability could vary.
Other Matters
Additionally, LivaNova is the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of LivaNova’s 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 LivaNova’s consolidated net income, financial position or liquidity.
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Note 9. Stockholders' Equity
The tables below present the condensed consolidated statements of stockholders’ equity as of and for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Ordinary SharesOrdinary Shares - AmountAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated Deficit
Total Stockholders' Equity (1)
June 30, 202353,904 $82,441 $2,169,346 $(95)$(35,579)$(975,505)$1,240,608 
Stock-based compensation plans— 50 11,315 39 — — 11,404 
Net income— — — — — (7,318)(7,318)
Other comprehensive loss— — — — (19,222)— (19,222)
September 30, 202353,904 $82,491 $2,180,661 $(56)$(54,801)$(982,823)$1,225,472 
June 30, 202253,810 $82,359 $2,133,258 $(397)$(54,870)$(878,347)$1,282,003 
Stock-based compensation plans4 17 10,504 17 — — 10,538 
Net loss— — — — — (107,344)(107,344)
Other comprehensive loss— — — — (38,234)— (38,234)
September 30, 202253,814 $82,376 $2,143,762 $(380)$(93,104)$(985,691)$1,146,963 
Ordinary SharesOrdinary Shares - AmountAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated Deficit
Total Stockholders' Equity (1)
December 31, 202253,852 $82,424 $2,157,724 $(375)$(48,119)$(984,030)$1,207,624 
Stock-based compensation plans52 67 22,937 319 — — 23,323 
Net income— — — — — 1,207 1,207 
Other comprehensive loss— — — — (6,682)— (6,682)
September 30, 202353,904 $82,491 $2,180,661 $(56)$(54,801)$(982,823)$1,225,472 
December 31, 202153,762 $82,295 $2,117,961 $(650)$(7,177)$(897,784)$1,294,645 
Stock-based compensation plans52 81 25,801 270 — — 26,152 
Net loss— — — — — (87,907)(87,907)
Other comprehensive loss— — — — (85,927)— (85,927)
September 30, 202253,814 $82,376 $2,143,762 $(380)$(93,104)$(985,691)$1,146,963 
23

The table below presents the change in each component of AOCI, net of tax, and the reclassifications out of AOCI into net income (loss) for the nine months ended September 30, 2023 and 2022 (in thousands):
Change in Unrealized Gain (Loss) on Derivatives
Foreign Currency Translation Adjustments Gain (Loss) (1)
Total
December 31, 2022$966 $(49,085)$(48,119)
Other comprehensive loss before reclassifications, before tax(433)(5,716)(6,149)
Tax benefit— — — 
Other comprehensive loss before reclassifications, net of tax(433)(5,716)(6,149)
Reclassification of gain from accumulated other comprehensive loss, before tax(533)— (533)
Reclassification of tax benefit— — — 
Reclassification of gain from accumulated other comprehensive loss, after tax(533)— (533)
Net current-period other comprehensive loss, net of tax(966)(5,716)(6,682)
September 30, 2023$— $(54,801)$(54,801)
December 31, 2021$(945)$(6,232)$(7,177)
Other comprehensive loss before reclassifications, before tax(194)(85,653)(85,847)
Tax benefit— — — 
Other comprehensive loss before reclassifications, net of tax(194)(85,653)(85,847)