10-Q 1 lmat20220331_10q.htm FORM 10-Q lmat20220331_10q.htm
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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 March 31, 2022

 

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

 

(Registrants telephone number, including area code)

   

 

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

 

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  ☒

 

The registrant had 21,951,998 shares of common stock, $.01 par value per share, outstanding as of April 29, 2022.

 

 

 

LEMAITRE VASCULAR

FORM 10-Q

TABLE OF CONTENTS

 

       
     

Page

Part I.

Financial Information:

 
       
 

Item 1.

Financial Statements

 
       
   

Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021

3
       
   

Unaudited Consolidated Statements of Operations for the three-month periods ended March 31, 2022 and 2021

4
       
   

Unaudited Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2022 and 2021

5
       
   

Unaudited Consolidated Statements of Stockholders’ Equity for the three-month periods ended March 31, 2022 and 2021

6
       
   

Unaudited Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2022 and 2021

7
       
   

Notes to Unaudited Consolidated Financial Statements

8
       
 

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

21
       
 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

31
       
 

Item 4.

Controls and Procedures

31
     

Part II.

Other Information:

 
       
 

Item 1.

Legal Proceedings

33
       
 

Item 1A.

Risk Factors

33
       
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35
       
 

Item 6.

Exhibits

35
     
 

Signatures

37

 

 

 

Part I. Financial Information

Item 1. Financial Statements

 

LeMaitre Vascular, Inc.

Consolidated Balance Sheets

 

  

(unaudited)

     
  

March 31,

  

December 31,

 
  

2022

  

2021

 
  

(in thousands, except share data)

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $15,560  $13,855 

Short-term marketable securities

  55,322   56,104 

Accounts receivable, net of allowances of $777 at March 31, 2022 and $679 at December 31, 2021

  21,386   19,631 

Inventory and other deferred costs

  46,664   46,104 

Prepaid expenses and other current assets

  2,479   4,189 

Total current assets

  141,411   139,883 
         

Property and equipment, net

  16,683   17,059 

Right-of-use leased assets

  14,687   15,071 

Goodwill

  65,945   65,945 

Other intangibles, net

  51,194   52,710 

Deferred tax assets

  1,977   1,566 

Other assets

  556   568 

Total assets

 $292,453  $292,802 

Liabilities and stockholders equity

        

Current liabilities:

        

Accounts payable

 $2,194  $2,340 

Accrued expenses

  12,918   16,332 

Acquisition-related obligations

  1,283   1,271 

Lease liabilities - short-term

  1,872   1,870 

Total current liabilities

  18,267   21,813 

Lease liabilities - long-term

  13,705   14,067 

Deferred tax liabilities

  68   70 

Other long-term liabilities

  2,626   2,701 

Total liabilities

  34,666   38,651 
         

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 23,509,859 shares at March 31, 2022, and 23,477,784 shares at December 31, 2021

  235   235 

Additional paid-in capital

  183,305   181,630 

Retained earnings

  91,420   88,125 

Accumulated other comprehensive loss

  (4,624)  (3,435)

Treasury stock, at cost; 1,557,921 shares at March 31, 2022 and 1,554,905 shares at December 31, 2021

  (12,549)  (12,404)

Total stockholders’ equity

  257,787   254,151 

Total liabilities and stockholders’ equity

 $292,453  $292,802 

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Operations

(unaudited)

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands, except per share data)

 
         

Net sales

 $39,561  $35,883 

Cost of sales

  13,599   12,084 
         

Gross profit

  25,962   23,799 
         

Sales and marketing

  7,850   6,466 

General and administrative

  7,252   6,544 

Research and development

  2,932   2,844 
         

Total operating expenses

  18,034   15,854 
         

Income from operations

  7,928   7,945 
         

Other income (expense):

        

Interest income

  108   1 

Interest expense

  -   (577)

Foreign currency gain (loss)

  (40)  124 
         

Income before income taxes

  7,996   7,493 

Provision for income taxes

  1,958   1,564 
         

Net income

 $6,038  $5,929 
         

Earnings per share of common stock:

        

Basic

 $0.28  $0.29 

Diluted

 $0.27  $0.28 
         

Weighted-average shares outstanding:

        

Basic

  21,935   20,546 

Diluted

  22,103   20,847 
         

Cash dividends declared per common share

 $0.125  $0.110 

 

See accompanying notes to consolidated financial statements. 

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Comprehensive Income

(unaudited) 

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Net income

 $6,038  $5,929 

Other comprehensive income (loss):

        

Foreign currency translation adjustment, net

  (300)  (937)

Unrealized gain (loss) on short-term marketable securities

  (889)  (1)

Total other comprehensive income (loss)

  (1,189)  (938)
         

Comprehensive income

 $4,849  $4,991 

 

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, 2020

  22,061,554  $221  $114,924  $70,554  $(1,525)  1,538,572  $(11,602) $172,572 
                                 

Net income

            5,929             5,929 

Other comprehensive income (loss)

               (938)         (938)

Issuance of common stock for stock options exercised

  63,895   -   1,385               1,385 

Vested restricted stock units

  5,974   -                  - 

Repurchase of common stock for net settlement of equity awards

                 2,241   (88)  (88)

Stock-based compensation expense

         927                927 

Common stock dividend paid

            (2,262)            (2,262)

Balance at March 31, 2021

  22,131,423  $221  $117,236  $74,221  $(2,463)  1,540,813  $(11,690) $177,525 

 

                  

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, 2021

  23,477,784  $235  $181,630  $88,125  $(3,435)  1,554,905  $(12,404) $254,151 
                                 

Net income

            6,038             6,038 

Other comprehensive income

               (1,189)         (1,189)

Issuance of common stock for stock options exercised

  24,917   -   508               508 

Vested restricted stock units

  7,158   -                  - 

Repurchase of common stock for net settlement of equity awards

                 3,016   (145)  (145)

Stock-based compensation expense

         1,167                1,167 

Common stock cash dividend paid

            (2,743)            (2,743)

Balance at March 31, 2022

  23,509,859  $235  $183,305  $91,420  $(4,624)  1,557,921  $(12,549) $257,787 

 

See accompanying notes to consolidated financial statements.

 

 

 

LeMaitre Vascular, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

  

For the three months ended

 
  March 31, 
  

2022

  

2021

 
  

(in thousands)

 

Operating activities

        

Net income

 $6,038  $5,929 

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

        

Depreciation and amortization

  2,373   2,624 

Stock-based compensation

  1,167   927 

Fair value adjustment to contingent consideration obligations

  (32)  47 

Provision for doubtful accounts

  60   59 

Provision for inventory write-downs

  498   1,005 

Foreign currency transaction loss

  (428)  33 

Changes in operating assets and liabilities:

        

Accounts receivable

  (1,951)  (857)

Inventory and other deferred costs

  (1,267)  (1,346)

Prepaid expenses and other assets

  1,692   638 

Accounts payable and other liabilities

  (3,439)  (2,985)

Net cash provided by operating activities

  4,711   6,074 

Investing activities

        

Purchases of property and equipment and other assets

  (536)  (1,059)

Purchases of short-term marketable securities

  -   (1)

Net cash used in investing activities

  (536)  (1,060)

Financing activities

        

Payments of long-term debt

  -   (7,000)

Proceeds from stock option exercises

  508   1,385 

Purchase of treasury stock for net settlement of equity awards

  (145)  (88)

Common stock cash dividend paid

  (2,743)  (2,262)

Net cash used in financing activities

  (2,380)  (7,965)
         

Effect of exchange rate changes on cash and cash equivalents

  (90)  (288)

Net increase (decrease) in cash and cash equivalents

  1,705   (3,239)

Cash and cash equivalents at beginning of period

  13,855   26,764 

Cash and cash equivalents at end of period

 $15,560  $23,525 

 

See accompanying notes to consolidated financial statements.

 

 

LeMaitre Vascular, Inc.

Notes to Consolidated Financial Statements

March 31, 2022

(unaudited)

 

 

 

1. Organization and Basis for Presentation

 

Description of Business

 

Unless the context requires otherwise, references to LeMaitre, 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, radiopaque marking tape, synthetic vascular grafts and valvulotomes. Our offices and production facilities are located in Burlington, Massachusetts; Fox River Grove, Illinois; North Brunswick, New Jersey; 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 three months ended March 31, 2022 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, 2021, including the notes thereto, included in our Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2022.

 

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. 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 any impact on our revenues and operations from COVID-19 is uncertain and cannot 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 of May 10, 2022, the issuance date of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates.

 

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. 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.

 

8

 

We record 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 record 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 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 March 31,

 
         
  

2022

  

2021

 
  

($ in thousands)

 
         

Americas

 $26,543  $23,699 

Europe, Middle East and Africa

  10,494   9,862 

Asia Pacific

  2,524   2,322 

Total

 $39,561  $35,883 

 

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.

 

9

 

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 was effective for us beginning January 1, 2021. The adoption of this standard did not 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 2022 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 2021 income tax expense varied from the statutory rate mainly due to the generation of federal and state tax credits, permanent items, different statutory rates from our foreign subsidiaries, and discrete stock option exercises.

 

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 March 31, 2022, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $749,000. 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 2030. A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:

 

  

Three months ended

March 31, 2022

 
  

(in thousands)

 

Unrecognized tax benefits as of December 31, 2021

 $768 

Additions/adjustments for tax positions of current year

  - 

Additions/adjustments for tax positions of prior years

  (19)

Reductions for settlements with taxing authorities

  - 

Reductions for lapses of the applicable statutes of limitations

  - 

Unrecognized tax benefits as of March 31, 2022

 $749 

 

As of March 31, 2022, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:

 

United States

2018 and forward

Foreign

2014 and forward

 

10

 

 

3. Inventories and Other Deferred Costs

 

Inventories and other deferred costs consist of the following:

 

  

March 31, 2022

  

December 31, 2021

 
  

(in thousands)

 

Raw materials

 $12,451  $5,945 

Work-in-process

  3,273   9,416 

Finished products

  25,624   25,286 

Other deferred costs

  5,316   5,457 
         

Total inventory and other deferred costs

 $46,664  $46,104 

 

We had inventory on consignment at customer sites of $2.0 million and $2.1 million at March 31, 2022 and December 31, 2021, respectively.

 

In connection with our RestoreFlow allograft business, other deferred costs include costs incurred for the preservation of human 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 tissues we preserve are not held as inventory, and the costs we incur to procure and process tissues 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

 

Our acquisitions are accounted for using the acquisition method, and the acquired businesses’ 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.

 

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, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure.

 

The fair market valuations associated with these transactions fall within Level 3 (see Note 13) 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.

 

Artegraft Biologic Grafts

 

On June 22, 2020, we entered into an Asset Purchase Agreement (Artegraft APA) to acquire the biologic graft business from Artegraft, Inc., which 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 the assets related to its business of manufacturing, marketing, sale and distribution of 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 was held until December 31, 2021 to cover any potential claims against LeMaitre or Artegraft, Inc. and subsequently was released to Artegraft, Inc. by mutual consent of the parties.

 

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 the Product have been sold to third parties from January 1, 2021 to December 31, 2021 (this milestone was not met and accordingly no payment was made);

 

 

$5.8 million upon final determination that 24,000 units of the 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 the 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 at the time of the closing of the acquisition, as well as the time value of money until payment. This amount will be remeasured each quarter during the earn-out period, with any adjustments recorded in income from operations.

 

11

 

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 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: 

 

      

Estimated

 
  

Allocated

  

Useful Life

 
  Fair Value   (years) 
  

(in thousands)

     

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.

 

12

 

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. In August 2021, the term of this arrangement was extended through July 11, 2023.

 

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; the first payment was made in October 2020. Additional contingent consideration was or may be payable as follows:

 

 

$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 (this milestone was not met and accordingly no payment was made);

 

$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 second 12-month period following the Closing Date exceed $22.5 million (this milestone was not met and accordingly no payment was made);

 

$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 milestone was not met and accordingly no payment was made); and

 

$2.0 million (less a deduction described below) following LeMaitre’s receipt of a CE mark under MDR regulations on all acquired products (the Third Holdback Amount) on a schedule described below.

 

This contingent consideration of $7.5 million was initially valued in total at $2.0 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations.

 

During the quarter ended September 30, 2021, the Company entered into an amendment to the Admedus APA. Under the amendment, the Third Holdback Amount, less a deduction for certain expenses incurred by LeMaitre in order to achieve CE mark certification, will be paid as follows: 75% within 15 days following LeMaitre’s receipt of a CE mark under MDR regulations for CardioCel products, and 25% within 15 days following LeMaitre’s receipt of a CE mark under MDR regulations for VascuCel products. During the quarter ended September 30, 2021 we recorded a reduction to the liability of $0.5 million, with the offset recorded in income from operations, to reflect our estimate of costs to be deducted from the Third Holdback Amount in connection with this amendment.

 

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 (years)

 
  

(in thousands)

     

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.

 

13

 

 

5. Goodwill and Other Intangible Assets

 

There was no change to goodwill during the three months ended March 31, 2022. Other intangible assets consist of the following:

 

  

March 31, 2022

  

December 31, 2021

 
  

Gross

      

Net

  

Gross

      

Net

 
  

Carrying

  

Accumulated

  

Carrying

  

Carrying

  

Accumulated

  

Carrying

 
  

Value

  

Amortization

  

Value

  

Value

  

Amortization

  

Value

 
  

(in thousands)

 

Product technology and intellectual property

 $29,549  $11,180  $18,369  $29,549  $10,473  $19,076 

Trademarks, tradenames and licenses

  3,647   1,233   2,414   3,647   1,139   2,508 

Customer relationships

  36,197   6,324   29,873   36,197   5,674   30,523 

Other intangible assets

  1,461   923   538   1,461   858   603 
                         

Total identifiable intangible assets

 $70,854  $19,660  $51,194  $70,854  $18,144  $52,710 

 

These assets are being amortized over useful lives ranging from 2 to 16 years. The weighted-average amortization period for these intangibles as of March 31, 2022 is 11.1 years. Amortization expense is included in general and administrative expense and was as follows for the periods indicated.

 

  

Three months ended March 31,

 
  

2022

  

2021

 
  

(in thousands)

 
         

Amortization expense

 $1,516  $1,566 

 

We estimate that amortization expense for the remainder of 2022 and for each of the five succeeding fiscal years will be as follows:

 

  

Year ended December 31,

 
  

2022

  

2023

  

2024

  

2025

  

2026

  

2027

 
  

(in thousands)

     
                         

Amortization expense

 $4,500  $5,884  $5,702  $5,464  $4,997  $4,720 

 

 

6. Revolving Line of Credit and Long-term Debt

 

In connection with the acquisition of the Artegraft biologic graft business, we incurred debt in the amount of $65 million under a senior secured credit facility with a group of banks. This credit arrangement included a $25 million revolving credit line that was fully drawn at inception, as well as a $40 million five-year term loan. During the year ended December 31, 2021, we made scheduled principal payments on the term loan of $1.0 million, repaid the loan in full, and terminated the credit agreement in accordance its terms. During the three months ended March 31, 2021, we made a scheduled principal payment on the term loan of $0.5 million and also made additional optional prepayments of $6.5 million.

 

Under the terms of the agreement, the loans bore interest at a rate per annum of, at our option, either (i) the Base Rate plus an applicable margin of from 1.25% to 1.75% depending on our consolidated leverage ratio, or (ii) the Eurodollar Rate plus an applicable margin of from 2.25% to 2.75% depending on our consolidated leverage ratio. Base Rate was defined in the credit agreement as a fluctuating rate per annum of the Federal Funds rate plus 0.5% or the prime rate of interest established from time to time by KeyBank National Association. At March 31, 2021, all outstanding borrowings were designated as Eurodollar loans and bore interest of 3.25%.

 

We incurred debt issuance costs in connection with this credit arrangement of approximately $1.8 million. These costs were allocated between the revolving line of credit and the term loans, with the portion related to the revolving line of credit of $0.7 million recorded in other assets on our balance sheet, and the portion allocated to the term loan recorded as a deduction from the amount of the debt. All of these transaction costs were being amortized into interest expense on a straight-line basis as the result would not be materially different from using the interest method, over the five-year term of the arrangement. This resulted in an effective interest rate of approximately 4.2%. During the quarter ended March 31, 2021, in connection with making optional prepayments of $6.5 million on the term loan, we expensed a proportionate amount of the unamortized transaction costs in the amount of $0.1 million. Cash paid for interest during the three months ended March 31, 2021 was $0.3 million.

 

14

 
 

7. Leases

 

We conduct the majority of our operations in leased facilities, all of which are accounted for as operating leases, as they do not meet the criteria for finance leases. Our principal worldwide executive, distribution, and manufacturing operations are located in five leased facilities with square footage totaling 109,354 in Burlington, Massachusetts. All five Burlington leases expire in December 2030. In addition, our European operations are headquartered at a 16,470 square foot leased facility located in Sulzbach, Germany under a lease which expires in August 2023. This lease contains two five-year renewal options. We also lease a facility in Hereford, England which houses our United Kingdom sales and distribution business. During the quarter ended June 30, 2021 we executed an expansion of the Hereford lease under terms substantially similar to the original lease. In connection with our acquisition of the Artegraft biologic graft business, we assumed a 16,732 square foot lease in North Brunswick, New Jersey, which expires in October 2029. In June 2021 we entered into a six-year lease in Milan, Italy which houses a customer service and warehouse facility. This lease contains a six-year renewal option. We also have smaller long-term leased sales, marketing and other facilities located in Arizona, Canada, Australia, Singapore and China, and short-term leases in Japan, Spain and Illinois. Our lease in Canada contains a five-year renewal option exercisable in February 2023. Our leases in Germany and Italy are subject to periodic rent increases based on increases in the consumer price index as measured on an annual basis, with such increases applicable to the subsequent twelve months of lease payments. None of our noncancelable lease payments include non-lease components such as maintenance contracts; we generally reimburse the landlord for direct operating costs associated with the leased space. We have no subleases, and there are no residual value guarantees associated with, or restrictive covenants imposed by, any of our leases. There were no assets held under capital leases at March 31, 2022.

 

We also lease automobiles under operating leases in the United States as well as certain of our international subsidiaries. The terms of these leases are generally three years, with older vehicles replaced by newer vehicles from time to time. During the fiscal year 2021, we entered into a five-year lease for printing equipment.

 

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

 

Our most significant judgment involved in determining the amounts to initially record as lease liabilities and right-of-use assets upon initial adoption of this standard, and for leases entered into subsequently, was the selection of a discount rate; because we had no debt as of the adoption of this standard, we had no incremental borrowing rate to reference. We therefore derived an incremental borrowing rate using quotes from potential lenders as the primary inputs, augmented by other available information. The resulting rate selected was 5.25%. We determined that it was appropriate to apply this single rate to our portfolio of leases worldwide, as the lease terms and conditions are substantially similar, and because we believe our subsidiaries would be unable to obtain borrowings on their own without a commitment of parent company support. In connection with the assumption of the Artegraft North Brunswick, New Jersey lease, we used LeMaitre’s borrowing rate of 3.5% as of the acquisition date associated with debt incurred to finance the acquisition to value the lease.

 

Additional information with respect to our leases is as follows:

 

 

Three Months Ended

 
 

March 31,

 
 

2022

 

2021

 

Lease cost

      

Operating lease cost

 525  607 

Short-term lease cost

 163  64 

Total lease cost

$688 $671 
       

Other information

      

Cash paid for amounts included in the measurement of operating lease liabilities

$674 $748 
       

Right-of-use assets obtained in exchange for new operating lease liabilities

$141 $16 
       

Weighted average remaining lease term in years - operating leases

 7.6  8.0 

 

      

Weighted average discount rate - operating leases

 4.90% 5.02%

 

At March 31, 2022, the minimum noncancelable operating lease rental commitments with initial or remaining terms of more than one year are as follows:

 

Remainder of 2022

 $2,061 

Year ending March 31,

    

2023

  2,349 

2024

  2,092 

2025

  2,141 

2026

  2,143 

2027

  2,124 

Thereafter

  6,049 

Adjustment to net present value as of March 31, 2022

  (3,382)
     

Minimum noncancelable lease liability

 $15,577 

 

15

 
 

8. Accrued Expenses and Other Long-term Liabilities

 

Accrued expenses consist of the following:

 

  

March 31, 2022

  

December 31, 2021

 
  

(in thousands)

 

Compensation and related taxes

 $6,705  $10,236 

Income and other taxes

  1,211   551 

Professional fees

  202   129 

Other

  4,800   5,416 
         

Total

 $12,918  $16,332 

 

Other long-term liabilities consist of the following:

 

  

March 31, 2022

  

December 31, 2021

 
  

(in thousands)

 

Aquisition-related liabilities

 $1,712  $1,761 

Income taxes

  766   799 

Other

  148   141 
         

Total

 $2,626  $2,701 

 

 

9. Segment and Enterprise-Wide Disclosures

 

The FASB establishes standards for reporting information regarding operating segments in financial statements. Operating segments are identified as components of an enterprise that engage in business activities for which separate, discrete financial information is available and is regularly reviewed by the chief operating decision-maker in making decisions on how to allocate resources and assess performance. We view our operations and manage our business as one operating segment. No discrete operating information is prepared by us except for sales by product line and operations by legal entity for local purposes.

 

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

 

  

Three months ended

 
   March 31, 
  

2022

  

2021

 
  

(in thousands)

 

United States

 $24,264  $21,968 

Germany

  2,991   3,063 

Other countries

  12,306   10,852 
         

Net Sales

 $39,561  $35,883 

 

16

 
 

10. Share-based Compensation

 

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

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Stock option awards

 $619  $594 

Restricted stock units

  408   333 

Performance-based restricted stock units

  140   - 
         

Total share-based compensation

 $1,167  $927 

 

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

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Cost of sales

 $138  $100 

Sales and marketing

  209   169 

General and administrative

  712   561 

Research and development

  108   97 
         

Total stock-based compensation

 $1,167  $927 

 

We did not grant any options during the three-month periods ended March 31, 2022 or 2021. During the three months ended March 31, 2022 and 2021, we awarded restricted stock units of 112 and 694, respectively. We issued approximately 32,000 and 70,000 shares of common stock following the exercise or vesting of underlying stock options or restricted stock units during the three months ended March 31, 2022 and 2021, respectively.

 

17

 
 

11. Net Income per Share

 

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

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands, except per share data)

 

Basic:

        

Net income available for common stockholders

 $6,038  $5,929 
         

Weighted average shares outstanding

  21,935   20,546 
         

Basic earnings per share

 $0.28  $0.29 
         

Diluted:

        

Net income available for common stockholders

 $6,038  $5,929 
         

Weighted-average shares outstanding

  21,935   20,546 

Common stock equivalents, if dilutive

  168   301 

Shares used in computing diluted earnings per common share

  22,103   20,847 
         

Diluted earnings per share

 $0.27  $0.28 
         

Shares excluded in computing diluted earnings per share as those shares would be anti-dilutive

  430   256 

 

 

12. Stockholders Equity

 

Share Repurchase Program

 

On February 22, 2022, our Board of Directors authorized the repurchase of up to $20.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 22, 2023. The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program.

 

18

 

Dividends

 

In February 2011, our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors on a quarterly basis. The dividend activity for the periods presented is as follows:

 

Record Date

 

Payment Date

 

Per Share Amount

  

Dividend Payment

 
        

(in thousands)

 

Fiscal Year 2022

          

March 8, 2022

 

March 24, 2022

 $0.125  $2,743 
           

Fiscal Year 2021

          

March 9, 2021

 

March 25, 2021

 $0.110  $2,262 

May 19, 2021

 

June 3, 2021

 $0.110  $2,267 

August 26, 2021

 

September 9, 2021

 $0.110  $2,401 

November 19, 2021

 

December 2, 2021

 $0.110  $2,405 

 

On April 26, 2022, our Board of Directors approved a quarterly cash dividend on our common stock of $0.125 per share payable on June 2, 2022, to stockholders of record at the close of business on May 17, 2022.

 

 

13. Supplemental Cash Flow Information

 

  

For the three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Cash paid for income taxes, net

 $731  $337 

 

 

 

14. Fair Value Measurements

 

The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

Level 1 assets being measured at fair value on a recurring basis as of March 31, 2022 included our short-term investment and short-duration bond mutual fund accounts.

 

We had no Level 2 assets being measured at fair value on a recurring basis as of March 31, 2022. 

 

As discussed in Note 4, several of our acquisition-related assets and liabilities have been measured using Level 3 techniques. During 2020 we recorded a contingent liability associated with our acquisition of the bovine carotid graft business from Artegraft. The agreement requires us to make potential additional payments to Artegraft of up to $17.5 million depending on the achievement of certain unit sales milestones during the first three calendar years following the acquisition. We recorded this liability at a fair value of $0.4 million to reflect management’s estimate of the likelihood of achieving these targets at the time of the Closing, as well as the time value of money until payment. This amount is being remeasured each quarter during the earn-out period, with any adjustments recorded in income from operations.

 

19

 

During 2019, we recorded contingent liabilities associated with our acquisition of the Admedus biologic patch business. The agreement includes the potential for us to pay up to $7.8 million of additional consideration beyond payments made to date, with $0.3 million contingent upon the delivery of audited financial statements of the acquired business to us; $2.0 million contingent on LeMaitre’s success in obtaining CE marks under MDR regulations on the acquired products, $0.5 million contingent upon Admedus’ success in extending the shelf life of the acquired products as specified in the agreement, and another $5.0 million contingent on the achievement of specified levels of revenues in the first 12 and 24 months following the acquisition date. This additional contingent consideration 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. The contingent payment related to the delivery of audited financial statements of the business was paid in November 2019 upon satisfaction of the deliverable. The contingent payments related to Admedus’ extending the shelf life of the acquired products and achieving the revenue targets during the first 12 and 24 month periods following the acquisition were not met, and the portion of the liabilities related to these items was adjusted through income from operations. The agreement was amended in August 2021 such that the contingent payment of $2.0 million potentially due upon LeMaitre Vascular’s success in obtaining CE marks under MDR regulations on the acquired products may be reduced for certain costs incurred by LeMaitre in achieving the CE marks.

 

The following table provides a rollforward of the fair value of these liabilities, as determined by Level 3 unobservable inputs including management’s forecast of future revenues for the acquired businesses, as well as, management’s estimates of the likelihood of achieving the other specified criteria:

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Beginning balance

 $1,492  $2,240 

Additions

  -   - 

Payments

  -   - 

Change in fair value included in earnings

  14   30 
         

Ending balance

 $1,506  $2,270 

 

 

15. Accumulated Other Comprehensive Loss

 

Changes to our accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021 consisted primarily of foreign currency translation:

 

  

Three months ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Beginning balance

 $(3,435) $(1,525)
         

Other comprehensive income (loss) before reclassifications

  (1,189)  (938)

Amounts reclassified from accumulated other comprehensive loss

  -   - 
         

Ending Balance

 $(4,624) $(2,463)

 

 

16. Subsequent Events

 

On April 26, 2022, the Company committed to a plan to close its St. Etienne, France factory in order to streamline its manufacturing operations and to reduce expenses. The Company expects production of all devices manufactured in St. Etienne will halt, and the site will close, by June 30, 2022. The Company will terminate the employment of all personnel at that site in connection with the closure. The Company estimates that it will incur total expenses relating to employment terminations of approximately $2.7 million, all of which represent cash expenditures. In addition, the Company estimates that it will incur expenses related to the impairment of fixed assets, inventory and intangible assets of approximately $0.5 million. This factory closure will result in a total of approximately $3.2 million of special charges. The Company expects to record $3.1 million of these charges in 2022.

 

In April 2022, the Company agreed to buy out its Korean distributor, JiSang, for $540,000 and signed a 5-year office/warehouse lease in Seoul totaling 2,300 square feet. The Company expects to begin selling direct-to-hospital in Korea in January 2023.

 

In April 2022, the Company signed a new 9-year office/warehouse lease in Sulzbach, Germany, increasing square footage by 4,940 to a total of 21,410 square feet.

 

20

 
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve substantial risks and uncertainties, particularly risks related to the regulatory environment, our common stock, fluctuations in our quarterly and annual results, our ability to successfully integrate acquisitions into our business, and risks related to our business and industry generally, such as risks inherent in the process of developing and commercializing products and services that are safe and effective for use in the peripheral vascular disease market. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales, gross margin expectations, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words anticipates, believes, estimates, expects, intends, may, plans, projects, will, would, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections, or expectations prove incorrect, our actual results, performance, or financial condition may vary materially and adversely from those anticipated, estimated, or expected. No forward-looking statement can be guaranteed and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. These risks and uncertainties include, but are not limited to: the status of our global regulatory approvals and compliance with foreign regulatory requirements to market and sell our products outside the United States; the duration and severity of the impact of COVID-19 on the global economy, our customers, our suppliers and our company; the risk of significant fluctuations in our quarterly and annual results due to numerous factors; the risk that assumptions about the market for the Companys products and the productivity of the Companys direct sales force and distributors may not be correct; the risk that we may not be able to maintain our recent levels of profitability; the risk that the Company may not realize the anticipated benefits of its strategic activities; risks related to the integration of acquisition targets; the acceleration or deceleration of product growth rates; risks related to product demand and market acceptance of the Companys products and pricing; the risk that a recall of our products could result in significant costs or negative publicity; the risk that the Company is not successful in transitioning to a direct-selling model in new territories.

 

Forward-looking statements reflect managements analysis as of the date of this quarterly report. Further information on potential risk factors that could affect our business and financial results is detailed in Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, including under the section headed Risk Factors in our most recent Annual Report on Form 10-K. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included in this report and our other SEC filings, including our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Unless the context indicates otherwise, references to LeMaitre Vascular, we, our, and us in this Quarterly Report on Form 10-Q refer to LeMaitre Vascular, Inc. and its subsidiaries.

 

LeMaitre, AlboGraft, AnastoClip, Artegraft, CardioCel, Omniflow, RestoreFlow, VascuCel and XenoSure are registered trademarks of LeMaitre Vascular or one of its subsidiaries. This Quarterly Report on Form 10-Q also includes the registered and unregistered trademarks of other persons, which are the property of their respective owners.         

 

Overview

 

LeMaitre Vascular is a global provider of medical devices and human tissue cryopreservation services largely used in the treatment of peripheral vascular disease, end-stage renal disease, and to a lesser extent cardiovascular disease. We develop, manufacture, and market vascular devices to address the needs of vascular surgeons and, to a lesser degree, other specialties such as cardiac surgeons, general surgeons and neurosurgeons. Our diversified portfolio of devices consists of brand name products that are used in arteries and veins and are well known to vascular surgeons. Our principal product offerings are sold globally, primarily in the United States, Europe, the United Kingdom, Canada and Asia Pacific. We estimate that the annual worldwide market for peripheral vascular devices exceeds $5 billion, within which we estimate that the addressable market for our products is approximately $750 million. We have grown our business using a simple three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of low-rivalry, niche products, and 3) expanding our worldwide direct sales force while acquiring and, to a lesser extent, developing complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue to pursue this strategy in the future. We currently manufacture most of our products in our Burlington, Massachusetts headquarters.

 

 

Our products and services are used primarily by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and therefore can provide a wider range of treatment options to their patients. More recently, however, we have begun to explore adjacent market customers, or non-vascular surgeon customers, who can be served by our vascular device technologies, such as cardiac surgeons and neurosurgeons.

 

Since March 2020, the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures in response to the onset of the pandemic and then periodically when infection rates have increased. Many of our devices are used in elective procedures. Additionally, our sales representatives’ access to hospitals and surgeons has periodically been restricted by hospitals or local governments. More recently, however, in many geographies we have seen restrictions eased, although the prevalence of COVID-19 variants has not always resulted in the re-opening of hospital access. During 2020 and into 2022, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales.

 

Our principal product lines include the following: anastomotic clips, biologic vascular and dialysis grafts, biologic vascular and cardiac patches, carotid shunts, embolectomy catheters, occlusion catheters, radiopaque marking tape, synthetic vascular grafts, and valvulotomes. Through our RestoreFlow allografts business, we also provide services related to the processing and cryopreservation of human vascular and cardiac tissue.

 

Our principal biologic offerings include vascular and cardiac patches as well as vascular and dialysis grafts. In Q1 2022, biologics represented 48% of worldwide sales. We view the biologic device offerings favorably, as we believe it contains differentiated and in some cases growing product segments.

 

To assist us in evaluating our business strategies, we regularly monitor long-term technology trends in the peripheral vascular device market. Additionally, we consider the information obtained from discussions with the medical community in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the peripheral vascular device market and our manufacturing capacity requirements.

 

Our business opportunities include the following:

 

 

adding complementary products through acquisitions;

 

 

growing our direct sales force in North America, Europe, the United Kingdom, and Asia Pacific, including when replacing a distributor with our sales personnel;

 

 

introducing our products into new territories upon receipt of regulatory approvals or registrations in these territories;

   

 

 

consolidating and automating product manufacturing at our Burlington, Massachusetts facilities, and

   

 

 

updating existing products and introducing new products through research and development.

 

Our ability to execute on these opportunities on a timely basis, or at all, may be impacted by the COVID-19 pandemic, the duration and severity of which are uncertain.

 

We sell our products and services primarily through a direct sales force. As of March 31, 2022, our sales force was comprised of 112 sales representatives in North America, Europe, the United Kingdom and Asia Pacific, including three export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have North American sales offices in Chandler, Arizona and Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have sales offices in Milan, Italy; Madrid, Spain; and Hereford, England. Our Asia Pacific headquarters is located in Singapore, and we also have sales offices in Tokyo, Japan; Shanghai, China; and Kensington, Australia. During the current quarter, approximately 95% of our net sales were generated in territories in which we employ direct sales representatives. We also sell our products in other countries through distributors.

 

 

Historically we have experienced success in lower-rivalry niche segments, for example the markets for valvulotomes and carotid shunts. In the valvulotome market, our highly differentiated devices have historically allowed us to increase our selling prices while maintaining unit share. In contrast, we have experienced less success in highly competitive markets such as the polyester vascular graft market, where we face competition from larger companies with greater resources. While we believe these challenging market dynamics can be mitigated by our relationships with vascular surgeons, there can be no assurance that we will succeed in highly competitive markets.

 

We have also experienced success in international markets, such as Europe, where we have a significant sales force, and sometimes offer comparatively lower average selling prices. If we continue to seek growth opportunities outside of North America, we may experience downward pressure on our gross margin.

 

Our strategy for growing our business includes the acquisition of complementary product lines and companies and occasionally the discontinuance or divestiture of products or activities that are no longer complementary:

 

 

In July 2019, we entered into an agreement with UreSil, LLC to purchase the remaining assets of their Eze-Sit valve cutter business, including U.S. distribution rights, for $8.0 million.

   

 

 

In October 2019, we entered into an agreement with Anteris to purchase the assets of their CardioCel biologic patch business for $15.5 million plus additional payments of up to $7.8 million, depending upon the satisfaction of certain contingencies.

   

 

 

In June 2020, we entered into an agreement with Artegraft to purchase the assets of their bovine graft business for $72.5 million plus additional payments of up to $17.5 million, depending upon 2021 – 2023 unit sales.

   

 

 

During 2021, we made decisions to wind down or discontinue TRIVEX powered phlebectomy systems, remote endarterectomy devices and surgical glue. These product lines combined to account for approximately $2.2 million in revenues in 2021.

     
 

In March 2022, we made the decision to wind down the ProCol graft product line, which totaled approximately $0.7 million in revenues in 2021.

 

Because we believe that direct-to-hospital sales engender closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices into our direct sales organization:

 

 

During 2020, we entered into definitive agreements with, or participated with Anteris in concluding agreements with, several former Anteris distributors in Europe and Canada, in order to terminate their distribution of our acquired bovine cardiac and vascular patch products, and we began selling direct-to-hospital in those geographies. The termination fees totaled approximately $0.1 million.

 

During 2020, we participated with Artegraft in concluding agreements with several of their former U.S. distributors in order to terminate their distribution of our bovine graft products. We now sell Artegraft products direct-to-hospital throughout the United States.

 

We also rely, to a much lesser extent, on internal product development efforts to bring differentiated technology and next-generation products to market:

 

 

In 2019, we launched DuraSure, a biologic patch indicated for closing or repairing dural defects during open neurosurgical procedures.

   

 

 

In 2020, we launched RestoreFlow cardiac allografts for use in cardiac repair and restoration.

   

 

 

In March 2022, we received U.S. FDA approval to market PhasTIPP, a portable powered phlebotomy device used to remove larger varicose veins in the leg.

 

In addition to our sales growth strategies, we have also executed on several operational initiatives designed to consolidate manufacturing into our Burlington facilities. We expect these plant consolidations will result in improved control over production quality as well as reduced costs. Our most recent manufacturing transfers included:

 

 

In September 2018, we acquired the Syntel embolectomy catheter business assets from Applied Medical. We immediately initiated a project to transfer the production to our Burlington facilities. This transfer is now complete.

 

 

In 2018 and 2019, we expanded our Burlington biologic clean room in order to transfer the production of our Omniflow II vascular graft from our North Melbourne, Australia facility to Burlington. This transfer is substantially complete, and the North Melbourne facility has been sold.

   

 

 

In October 2019, we acquired the biologic patch business assets from Admedus. In July 2020, we initiated a project to transfer the production of these devices to our Burlington facilities. We expect this transfer to be complete in 2023.

 

 

Our execution of these initiatives may affect the comparability of our financial results and may cause fluctuations from period to period as we incur related process engineering and other charges.

 

Fluctuations in the exchange rates between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the three months ended March 31, 2022 approximately 39% of our sales took place outside the U.S., largely in currencies other than the U.S. dollar. We expect foreign currencies will represent a significant percentage of future sales. Selling, marketing, and administrative costs related to these sales are also denominated in foreign currencies, thereby partially mitigating our bottom-line exposure to exchange rate fluctuations. However, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases we will record less revenue in U.S. dollars than we did before the exchange rate changed. For the quarter ended March 31, 2022, we estimate that the effects of changes in foreign exchange rates decreased our reported sales by approximately $0.8 million, as compared to rates in effect for the quarter ended March 31, 2021.

 

Net Sales and Expense Components

 

The following is a description of the primary components of our net sales and expenses:

 

Net sales. We derive our net sales from the sale of our products and services, less discounts and returns. Net sales include the shipping and handling fees paid for by our customers. Most of our sales are generated by our direct sales force and are shipped and billed to hospitals or clinics throughout the world. In countries where we do not have a direct sales force, sales are primarily to distributors, who in turn sell to hospitals and clinics. In certain cases our products are held on consignment at a hospital or clinic prior to purchase; in those instances we recognize revenue at the time the product is used in surgery rather than at shipment.

 

Cost of sales. We manufacture the majority of the products that we sell. Our cost of sales consists primarily of manufacturing personnel, raw materials and components, depreciation of property and equipment, and other allocated manufacturing overhead, as well as freight expense we pay to ship products to customers.

 

Sales and marketing. Our sales and marketing expense consists primarily of salaries, commissions, stock-based compensation, travel and entertainment, sales meetings, attendance at vascular congresses, training programs, advertising and product promotions, direct mail and other marketing costs.

 

General and administrative. General and administrative expense consists primarily of executive, finance and human resource salaries, stock based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense and insurance expense.

 

Research and development. Research and development expense primarily includes costs associated with obtaining and maintaining regulatory approval of our products, salaries, laboratory testing and supply costs. It also includes costs associated with the design and execution of clinical studies, costs to register, maintain, and defend our intellectual property, and costs to transfer the manufacturing of acquired product lines to our Burlington facility. Also included are costs associated with the design, development, testing and enhancement of new or existing products.

 

Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses).

 

Income tax expense. We are subject to federal and state income taxes for earnings generated in the U.S., which include operating losses or profits in certain foreign jurisdictions for certain years depending on tax elections made, and foreign taxes on earnings of our wholly-owned foreign subsidiaries. Our consolidated tax expense is affected by the mix of our taxable income (loss) in the U.S. and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill for U.S. tax reporting purposes.

 

 

Results of Operations

 

Since March 2020, the COVID-19 pandemic has significantly impacted the markets for our products as well as our business. In response to COVID-19, many hospitals limited elective procedures in response to the onset of the pandemic and then periodically over the last two years when infection rates have increased. Many of our devices are used in elective procedures. Additionally, our sales representatives’ access to hospitals and surgeons has periodically been restricted by hospitals or local governments. More recently, however, in many geographies we have seen restrictions eased, although the prevalence of COVID-19 variants has not always resulted in the re-opening of hospital access. During 2020 and into 2022, these dynamics resulted in, and we expect will continue to result in, variable and unpredictable sales.

 

For reasons described above, our results could be materially impacted in the near term. These financial statements and management’s discussion and analysis of financial condition and results of operations should be read in that context.

 

Comparison of the three-month period ended March 31, 2022 to the three-month month period ended March 31, 2021:

 

The following tables set forth, for the periods indicated, our net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:

 

   

Three months ended March 31,

 

(unaudited)

                 

Percent

 
   

2022

   

2021

   

change

 
   

($ in thousands)

 

Net sales

  $ 39,561     $ 35,883       10 %
                         

Net sales by geography:

                       

Americas

  $ 26,543     $ 23,699       12 %

Europe, Middle East and Africa

    10,494       9,862       6 %

Asia Pacific

    2,524       2,322       9 %

Total

  $ 39,561     $ 35,883       10 %

 

Net sales. Net sales increased $3.7 million, or 10%, to $39.6 million for the three months ended March 31, 2022, compared to $35.9 million for the three months ended March 31, 2021. The increase was driven primarily by an increase in bovine graft sales of $1.0 million, and carotid patch sales of $0.7 million, largely due to carotid patch CE mark issues in the prior year. Additionally, shunt, allograft, and valvulotome sales increased by $0.7 million, $0.6 million, and $0.5 million, respectively, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. We estimate that the stronger U.S. dollar decreased net sales by $0.8 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

 

Direct-to-hospital net sales were 95% of our total net sales for the three months ended March 31, 2022, and 94% for the three-months ended March 31, 2021.

 

 

Net sales by geography. Net sales in the Americas increased $2.8 million, or 12%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was driven mainly by increased bovine graft sales of $1.0 million, or 16%, increased allograft sales of $0.6 million, or 28%, and increased valvulotome sales of $0.5 million, or 10%.

 

EMEA net sales increased $0.6 million, or 6%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Higher sales of carotid shunts and bovine carotid patches led the growth, with increased sales of $0.4 million each, offset by a $0.1 million decline in embolectomy catheter sales.

 

Asia Pacific net sales increased $0.2 million, or 9%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, with increased bovine carotid patch sales of $0.2 million. This and other product sales increases were offset, in part, by a $0.1 million decline in bovine cardiac patch sales.

 

The following table sets forth the change in our gross profit and gross margin for the periods indicated:

 

   

Three months ended March 31,

 

(unaudited)

                         

Percent

 
   

2022

   

2021

   

Change

   

change

 
   

($ in thousands)

 

Gross profit

  $ 25,962     $ 23,799     $ 2,163       9 %
                                 

Gross margin

    65.6 %     66.3 %     (0.7% )     *  

 

*Not applicable

 

Gross Profit. Gross profit increased $2.2 million, or 9%, to $26.0 million for the three months ended March 31, 2022, and gross margin decreased 70 basis points to 65.6% in the period. The increase in gross profit was driven primarily by increased sales from bovine grafts and valvulotomes. The decrease in the gross margin was driven primarily by an increase in labor costs, unfavorable product mix, including higher sales of comparatively low margin polyester grafts, unfavorable changes in foreign currency exchange rates and manufacturing inefficiencies largely related to bovine carotid patches.

 

 

Operating Expenses

 

The following tables set forth changes in our operating expenses for the periods indicated and the change between the specified periods expressed as a percentage increase or decrease:

 

   

Three months ended March 31,

 

(unaudited)

                         

Percent

 
   

2022

   

2021

   

$ Change

   

change

 
                                 

Sales and marketing

  $ 7,850     $ 6,466     $ 1,384       21 %

General and administrative

    7,252       6,544       708       11 %

Research and development

    2,932       2,844       88       3 %

Total

  $ 18,034     $ 15,854     $ 2,180       14 %

 

   

Three months ended March 31,

 
   

2022

   

2021

         
   

% of Net Sales

   

% of Net Sales

   

Change

 
                         

Sales and marketing

    20 %     18 %     2 %

General and administrative

    18 %     18 %     0 %

Research and development

    7 %     8 %     (1 %)

 

Sales and marketing. For the three months ended March 31, 2022, sales and marketing expense increased 21% to $7.9 million. The increase was driven primarily by higher sales rep headcount, resulting in higher salaries and related expenses of $1.1 million, including higher selling commissions of approximately $0.3 million. Travel and related expenses were also higher by $0.2 million. Expense reduction programs implemented during the second quarter of 2020 through the fiscal year 2021 in response to the COVID-19 global pandemic, including a reduction in force, lowered expenses for the three months ended March 31, 2021. Since the pandemic has abated, we have hired in many areas, including our sales force. As a percentage of net sales, sales and marketing expense increased to 20% for the three months ended March 31, 2022, up from 18% in the prior period.

 

General and administrative. For the three months ended March 31, 2022, general and administrative expenses increased 11% to $7.3 million. Compensation and related expenses increased by $0.7 million, largely due to salary and stock-based compensation increases, as well as an increase in personnel. As a percentage of sales, general and administrative expenses were unchanged at 18% for each of the three month periods ended March 31, 2022 and 2021, respectively.

 

Research and development. For the three months ended March 31, 2022, research and development expense increased $0.1 million, or 3%, to $2.9 million.  The increase was driven by higher salaries and related expenses of $0.4 million, as well as an increase in personnel. These increases were largely offset by a decrease in professional fees and outside services of $0.3 million. As a percentage of sales, total research and development expense decreased to 7% for the three months ended March 31, 2022, from 8% in the prior period.

 

 

Income tax expense. We recorded a tax provision of $2.0 million on pre-tax income of $8.0 million for the three months ended March 31, 2022, compared to a $1.6 million tax provision on pre-tax income of $7.5 million for the three months ended March 31, 2021. Our effective income tax rate was 24.5% for the three month period ended March 31, 2022. Our tax expense for the current period is based on an estimated annual effective tax rate of 24.5%, adjusted in the applicable quarterly periods for discrete stock option exercises and other discrete items. Our income tax expense for the current period varies from the statutory rate mainly due to federal and state tax credits, permanent items, and different statutory rates from our foreign entities.

 

Our effective income tax rate was 20.8% for the three month period ended March 31, 2021. Our 2021 provision was based on the estimated annual effective tax rate of 24.0%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for the three month period ended March 31, 2021 varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and a discrete item for stock option exercises.

 

We monitor the mix of profitability by tax jurisdiction and adjust our annual expected rate on a quarterly basis as needed. While it is often difficult to predict the final outcome or timing of the resolution for any particular tax matter, we believe our tax reserves reflect the probable outcome of known contingencies.

 

We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount that we believe is more likely than not to be realized. As of March 31, 2022, we have provided a valuation allowance of $1.7 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.

 

Liquidity and Capital Resources

 

At March 31, 2022, our cash and cash equivalents were $15.6 million as compared to $13.9 million at December 31, 2021. We also had $55.3 million in short-term marketable securities as of March 31, 2022 and $56.1 million as of December 31, 2021. Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, and consist primarily of operating bank accounts. Our short-term marketable securities consist of a managed income mutual fund investing mainly in short-term investment grade, U.S.-dollar denominated fixed and floating-rate debt, and a short-duration bond fund.

 

On July 16, 2021, we closed an offering of 1,000,0000 shares of our common stock, $0.01 par value per share, at a price to the public of $54.50 per share less underwriting discounts. The net proceeds, after deducting the underwriting discounts and other offering expenses, were approximately $51.0 million. We used a portion of the proceeds from the offering to repay our outstanding debt. We plan to use the remaining proceeds for general corporate purposes, including working capital needs and capital expenditures, dividend payments, deferred payments related to prior acquisitions, and the funding of future acquisitions. On August 4, 2021, the underwriters purchased an additional 150,000 shares pursuant to an option granted to them in connection with the offering described above. The net proceeds to the Company, after deducting underwriting discounts and other offering expenses, were approximately $7.6 million. We plan to use the proceeds for general corporate purposes.

 

 

On February 22, 2022, our Board of Directors authorized the repurchase of up to $20.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 22, 2023. The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program.

 

In June 2020, in connection with the Artegraft acquisition, we incurred debt of $65 million including a five-year revolving line of credit of $25 million and a five-year term loan of $40 million. The loans bore interest at either the Base Rate as defined in the agreement plus an applicable margin of 1.25% to 1.75% depending on our consolidated leverage ratio, or the Eurodollar Rate plus an applicable margin of 2.25% to 2.75% depending on our consolidated leverage ratio. In July 2021 we repaid the balance under the term loan, plus accrued interest, in full.

 

In November 2021, we terminated the credit agreement, including the revolving line of credit, as allowed for in the original agreement.

 

Operating and Capital Expenditure Requirements 

 

We require cash to pay our operating expenses, make capital expenditures, and pay our long-term liabilities. Since our inception, we have funded our operations through public offerings and private placements of equity securities, short-term and long-term borrowings, and funds generated from our operations.

 

We recognized operating income of $7.9 million for the three months ended March 31, 2022. For the year ended December 31, 2021, we had operating income of $36.4 million. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

 

 

the revenues generated by sales of our products and services;

 

 

payments associated with potential future quarterly cash dividends to our common stockholders;

 

 

future acquisition-related payments;

 

 

payments associated with income and other taxes;

 

 

the costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;

 

 

the costs associated with our initiatives to sell direct-to-hospital in new countries;

 

 

the costs of obtaining and maintaining U.S. FDA and other regulatory clearances for our existing and future products;

 

 

the costs associated with obtaining European MDR clearances for our existing and future products;

 

 

the number, timing, and nature of acquisitions, divestitures and other strategic transactions, and

 

 

potential future share repurchases.

 

Our cash balances may decrease as we continue to use cash to fund our operations, make acquisitions, repay outstanding debt, pay dividends, repurchase shares of our common stock and make deferred payments related to prior acquisitions. We believe that our cash, cash equivalents, investments and the interest we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next twelve months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond the next twelve months, we may seek to sell additional equity or debt securities or take out a loan. The sale of additional equity and debt securities may result in dilution to our stockholders, as was the case with our July 2021 equity offering. If we raise additional funds through the issuance of debt securities, such securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations and possibly our ability to pay dividends. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.

 

 

Dividends 

 

In February 2011, our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors on a quarterly basis. The dividend activity for the periods presented is as follows:

 

Record Date

 

Payment Date

 

Per Share Amount

   

Dividend Payment

 
               

(in thousands)

 

Fiscal Year 2022

                   

March 8, 2022

 

March 24, 2022

  $ 0.125     $ 2,743  
                     

Fiscal Year 2021

                   

March 9, 2021

 

March 25, 2021

  $ 0.110     $ 2,262  

May 19, 2021

 

June 3, 2021

  $ 0.110     $ 2,267  

August 26, 2021

 

September 9, 2021

  $ 0.110     $ 2,401  

November 19, 2021

 

December 2, 2021

  $ 0.110     $ 2,405  

 

On April 26, 2022 our Board of Directors approved a quarterly cash dividend on our common stock of $0.125 per share payable on June 2, 2022, to stockholders of record at the close of business on May 17, 2022.

 

Cash Flows

 

   

Three months ended March 31,

 
   

(in thousands)

 
   

2022

   

2021

   

Net Change

 

Cash and cash equivalents

  $ 15,560     $ 23,525     $ (7,965 )
                         

Cash flows provided by (used in):

                       

Operating activities

  $ 4,711     $ 6,074     $ (1,363 )

Investing activities

    (536 )     (1,060 )     524  

Financing activities

    (2,380 )     (7,965 )     5,585  

 

Net cash provided by operating activities. Net cash provided by operating activities was $4.7 million for the three months ended March 31, 2022, consisting of $6.0 million in net income, adjustments for non-cash or non-operating items of $3.6 million (including primarily depreciation and amortization of $2.4 million, stock-based compensation of $1.2 million, provisions for inventory write-offs and doubtful accounts of $0.6 million), and also a net use of working capital of $5.0 million. The net cash used for working capital was driven by an increase in accounts receivable of $2.0 million, an increase in inventory and other deferred costs of $1.3 million, and payments of accounts payable and accrued liabilities of $3.4 million. These cash uses were offset by a decrease in prepaid expenses and other assets of $1.7 million.

 

Net cash provided by operating activities was $6.1 million for the three months ended March 31, 2021, consisting of $5.9 million in net income, adjustments for non-cash or non-operating items of $4.7 million (including depreciation and amortization of $2.6 million, stock-based compensation of $0.9 million, provisions for inventory write-offs and doubtful accounts of $1.1 million), and also a net use of working capital of $4.6 million. The net cash used for working capital was driven by payments of accounts payable and accrued liabilities of $3.0 million, an increase in inventory and other deferred costs of $1.3 million and an increase in receivable of $0.9 million. These cash uses were offset by a decrease in prepaid expenses and other assets of $0.6 million.

 

 

Net cash used in investing activities. Net cash used in investing activities was $0.5 million for the three months March 31, 2022, consisting of expenditures on equipment and technology.

 

Net cash used in investing activities was $1.1 million for the three months ended March 31, 2021, consisting of expenditures on equipment and technology.

 

Net cash used in financing activities. Net cash used in financing activities was $2.4 million for the three months ended March 31, 2022, consisting primarily of a dividend payment of $2.7 million. This use of cash was partly offset by proceeds from stock option exercises of $0.4 million, net of shares repurchased to cover employee payroll taxes.

 

Net cash used in financing activities was $8.0 million for the three months ended March 31, 2021, consisting primarily of payments made on our long-term debt of $7.0 million and a dividend payment of $2.3 million. These uses of cas