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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2016

Or

 

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

For the transition period from                      to                     .

Commission File Number 001-33092

 

 

LEMAITRE VASCULAR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-2825458

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(781) 221-2266

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The registrant had 18,379,235 shares of common stock, $.01 par value per share, outstanding as of May 2, 2016.

 

 

 


Table of Contents

LEMAITRE VASCULAR

FORM 10-Q

TABLE OF CONTENTS

 

              Page  
Part I.   Financial Information:   
  Item 1.   

Financial Statements

 

Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015

     3   
     Unaudited Consolidated Statements of Operations for the three-month period ended March 31, 2016 and 2015      4   
     Unaudited Consolidated Statements of Comprehensive Income for the three-month period ended March 31, 2016 and 2015      5   
     Unaudited Consolidated Statements of Cash Flows for the three-month period ended March 31, 2016 and 2015      6   
     Notes to Unaudited Consolidated Financial Statements      7   
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   
  Item 3.    Quantitative and Qualitative Disclosure about Market Risk      26   
  Item 4.    Controls and Procedures      26   
Part II.   Other Information:   
  Item 1.    Legal Proceedings      27   
  Item 1A.    Risk Factors      27   
  Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      27   
  Item 6.    Exhibits      28   
  Signatures      29   
  Index to Exhibits   

 

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Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

LeMaitre Vascular, Inc.

Consolidated Balance Sheets

 

     (unaudited)        
     March 31,
2016
    December 31,
2015
 
     (in thousands, except share data)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 25,941      $ 27,451   

Accounts receivable, net of allowances of $273 at March 31, 2016, and $243 at December 31, 2015

     13,017        11,971   

Inventory

     17,897        15,205   

Prepaid expenses and other current assets

     2,887        3,557   
  

 

 

   

 

 

 

Total current assets

     59,742        58,184   

Property and equipment, net

     7,355        7,022   

Goodwill

     18,192        17,789   

Other intangibles, net

     6,660        6,336   

Deferred tax assets

     1,265        1,205   

Other assets

     170        168   
  

 

 

   

 

 

 

Total assets

   $ 93,384      $ 90,704   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 1,773      $ 1,366   

Accrued expenses

     7,668        8,837   

Acquisition-related obligations

     723        165   
  

 

 

   

 

 

 

Total current liabilities

     10,164        10,368   

Deferred tax liabilities

     1,680        1,678   

Other long-term liabilities

     916        774   
  

 

 

   

 

 

 

Total liabilities

     12,760        12,820   

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 19,770,843 shares at March 31, 2016, and 19,748,321 shares at December 31, 2015

     198        197   

Additional paid-in capital

     82,563        82,094   

Retained earnings

     9,502        8,161   

Accumulated other comprehensive loss

     (3,120     (4,049

Treasury stock, at cost; 1,431,139 shares at March 31, 2016 and December 31, 2015

     (8,519     (8,519
  

 

 

   

 

 

 

Total stockholders’ equity

     80,624        77,884   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 93,384      $ 90,704   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

LeMaitre Vascular, Inc.

Consolidated Statements of Operations

(unaudited)

 

     For the three months ended
March 31,
 
     2016     2015  
     (in thousands, except per share data)  

Net sales

   $ 20,258      $ 18,947   

Cost of sales

     5,902        5,830   
  

 

 

   

 

 

 

Gross profit

     14,356        13,117   

Sales and marketing

     6,273        5,858   

General and administrative

     3,337        3,617   

Research and development

     1,446        1,152   

Medical device excise tax

     —          181   
  

 

 

   

 

 

 

Total operating expenses

     11,056        10,808   
  

 

 

   

 

 

 

Income from operations

     3,300        2,309   

Other income (expense):

    

Interest income

     15        —     

Foreign currency gain (loss)

     (50     17   
  

 

 

   

 

 

 

Income before income taxes

     3,265        2,326   

Provision for income taxes

     1,099        957   
  

 

 

   

 

 

 

Net income

   $ 2,166      $ 1,369   
  

 

 

   

 

 

 

Earnings per share of common stock:

    

Basic

   $ 0.12      $ 0.08   
  

 

 

   

 

 

 

Diluted

   $ 0.11      $ 0.08   
  

 

 

   

 

 

 

Weighted-average shares outstanding:

    

Basic

     18,336        17,422   
  

 

 

   

 

 

 

Diluted

     18,860        17,796   
  

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.045      $ 0.040   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

LeMaitre Vascular, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

Net income

   $ 2,166       $ 1,369   

Other comprehensive income (loss):

     

Foreign currency translation adjustment, net

     929         (1,596
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     929         (1,596
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 3,095       $ (227
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

LeMaitre Vascular, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

     For the three months ended
March 31,
 
     2016     2015  
     (in thousands)  

Operating activities

    

Net income

   $ 2,166      $ 1,369   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     881        832   

Stock-based compensation

     330        328   

Provision for doubtful accounts

     52        52   

Provision for inventory write-downs

     36        139   

Foreign currency transaction gain

     4        19   

Changes in operating assets and liabilities:

    

Accounts receivable

     (825     (1,656

Inventory

     (392     (395

Prepaid expenses and other assets

     827        (165

Accounts payable and other liabilities

     (1,821     (1,123
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     1,258        (600

Investing activities

    

Purchases of property and equipment

     (720     (323

Payments related to acquisitions

     (2,382     (138
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,102     (461

Financing activities

    

Proceeds from issuance of common stock

     141        325   

Purchase of treasury stock

     —          (6

Common stock cash dividend paid

     —          (700
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     141        (381

Effect of exchange rate changes on cash and cash equivalents

     193        (225
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,510     (1,667

Cash and cash equivalents at beginning of period

     27,451        18,692   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 25,941      $ 17,025   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information (see Note 12)

    

See accompanying notes to consolidated financial statements.

 

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Table of Contents

LeMaitre Vascular, Inc.

Notes to Consolidated Financial Statements

March 31, 2016

(unaudited)

 

1. Organization and Basis for Presentation

Description of Business

Unless the context requires otherwise, references to LeMaitre Vascular, we, our, and us refer to LeMaitre Vascular, Inc. and our subsidiaries. We develop, manufacture, and market medical devices and implants used primarily in the field of vascular surgery. We operate in a single segment in which our principal product lines include the following: valvulotomes, balloon catheters, carotid shunts, biologic patches, biologic grafts, radiopaque marking tape, anastomotic clips, remote endarterectomy devices, laparoscopic cholecystectomy devices, vascular grafts, angioscopes, and powered phlebectomy devices. Our offices are located in Burlington, Massachusetts; Mississauga, Canada; Sulzbach, Germany; Milan, Italy; Madrid, Spain; North Melbourne, Australia; Tokyo, Japan; and Shanghai, China.

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, 2016 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, 2015, including the notes thereto, included in our Form 10-K filed with the Securities and Exchange Commission (SEC).

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.

Recent Accounting Pronouncements

In March 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 which simplifies several aspects of the accounting for share-based payment award transactions, including a) income tax consequences, b) classification of awards as either equity or liabilities and c) classification on the statement of cash flows. This standard will be effective for us on January 1, 2017, with early adoption permitted. We have not yet determined the impact of adopting this ASU.

 

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

 

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Table of Contents

likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within the tax provision in the statement of operations. We do not provide for income taxes on undistributed earnings of foreign subsidiaries, as our intention is to permanently reinvest these earnings.

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

Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense.

Our 2016 income tax expense varies from the statutory rate mainly due to the generation of federal and state tax credits and certain permanent items, offset by lower statutory rates from a mix of our foreign entities. Our 2015 income tax expense varies from the statutory rate mainly due to certain permanent items, offset by lower statutory rates from a mix of our foreign entities.

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, 2016, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $164,000. 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 2025. A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:

 

     2016  
     (in thousands)  

Unrecognized tax benefits as of December 31, 2015

   $ 82   

Additions for tax positions of current year

     82   

Additions for tax positions of prior years

     —     

Reductions for settlements with taxing authorities.

     —     

Reductions for lapses of the applicable statutes of limitations

     —     
  

 

 

 

Unrecognized tax benefits as of March 31, 2016

   $ 164   
  

 

 

 

As of March 31, 2016, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:

 

United States

  2012 and forward

Foreign

  2008 and forward

 

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Table of Contents
3. Inventory

Inventory consists of the following:

 

     March 31,2016      December 31, 2015  
     (in thousands)  

Raw materials

   $ 4,045       $ 3,062   

Work-in-process

     3,271         2,681   

Finished products

     10,581         9,462   
  

 

 

    

 

 

 

Total inventory

   $ 17,897       $ 15,205   
  

 

 

    

 

 

 

We had inventory on consignment of $1.1 million as of both March 31, 2016 and December 31, 2015.

 

4. Acquisition and Divestitures

ProCol Biologic Graft

On March 18, 2016, we acquired the ProCol vascular bioprosthesis (“ProCol”) business for $2.7 million from Hancock Jaffe Laboratories, Inc. (HJL) and CryoLife, Inc. (CRY). HJL was the owner and manufacturer of ProCol and CRY was the exclusive distributor of the ProCol graft. CRY also owned an option to purchase the ProCol business, which we acquired from CRY. We bought finished goods inventory and other ProCol related assets from CRY for $2.0 million, which was paid in full at closing. We bought other ProCol assets from HJL for $0.7 million, half of which was paid at closing and the other half of which will be paid within one year of closing. Additional consideration is payable to HJL for a three-year period following the closing, calculated at 10% of ProCol net sales. This additional consideration has been initially valued at $0.3 million and will be re-measured each reporting period until the payment requirement ends.

Assets acquired include inventory, intellectual property and a related license, the ProCol trade name, customer lists, non-compete agreements and certain equipment and supplies. We did not assume any liabilities.

The following table summarizes the preliminary purchase price allocation at the date of the acquisition:

 

     Allocated  
     Fair Value  
     (in thousands)  

Inventory

   $ 2,094   

Manufacturing equipment and supplies

     25   

Intangible assets

     620   

Goodwill

     304   
  

 

 

 

Purchase price

   $ 3,043   
  

 

 

 

The goodwill is deductible for tax purposes over 15 years.

 

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

 

     Allocated
Fair Value
     Weighted
Average
Useful Life
     (in thousands)       

Non-compete agreement

   $ 84       5.0 years

Tradename

     109       9.5 years

Intellectual property

     277       9.0 years

Customer relationships

     150       9.0 years
  

 

 

    

Total intangible assets

   $ 620      
  

 

 

    

The weighted-average amortization period for the acquired intangible assets is 8.6 years.

Tru-Incise Valvulotome

In May 2015, we entered into an asset purchase agreement with UreSil, LLC (UreSil) to acquire the production and distribution rights of UreSil’s Tru-Incise valvulotome for sales outside the United States for a purchase price of approximately $1.4 million. We paid $1.1 million at the closing with the remaining $0.3 million payable at various points in 2016 and 2017. We accounted for the acquisition as a business combination. Assets acquired included inventory and intellectual property. We did not assume any liabilities. The purchase accounting is complete.

The following table summarizes the purchase price allocation at the date of the acquisition:

 

     Allocated  
     Fair Value  
     (in thousands)  

Inventory

   $ 88   

Intangible assets

     545   

Goodwill

     742   
  

 

 

 

Purchase price

   $ 1,375   
  

 

 

 

The goodwill is deductible for tax purposes over 15 years.

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

 

            Weighted
     Allocated      Average
     Fair Value      Useful Life
     (in thousands)       

Non-compete agreement

   $ 120       5.0 years

Tradename license

     17       3.0 years

Technology

     391       7.0 years

Customer relationships

     17       3.0 years
  

 

 

    

Total intangible assets

   $ 545      
  

 

 

    

 

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Other 2015 Items

In August 2015, we entered into a definitive agreement with Grex Medical Oy (Grex), our distributor in Finland, in order to terminate their distribution of our products, and we began selling directly to hospitals in Finland as of January 1, 2016. The agreement required us to pay approximately $0.2 million in exchange for the purchase of customer lists and a non-compete agreement.

Following the May 2015 Tru-Incise valvulotome acquisition, we entered into definitive agreements with seven UreSil distributors to terminate their distribution of the Tru-Incise valvulotome for aggregated termination fees of $0.2 million. We recorded approximately $0.2 million of intangible assets with a weighted-average amortization period of 3.0 years.

Angioscope

In September 2014, we entered into an asset purchase agreement with Applied Medical Resource Corporation (Applied Medical) to acquire substantially all the assets related to Applied Medical’s angioscope product line for a purchase price of $0.4 million. We paid $0.3 million at closing and the remaining $0.1 million was paid in December 2015 and March 2016. We accounted for the acquisition as a business combination. Assets acquired included inventory, property and equipment, and intellectual property. We recorded $0.1 million of tangible assets, $0.3 million of intangible assets, and $0.1 million of goodwill. The weighted-average amortization period for the acquired intangible assets is 7.5 years. The goodwill is deductible for tax purposes over 15 years. The purchase accounting is complete.

Xenotis Pty Ltd

In August 2014, we entered into a stock purchase agreement with the shareholders of Xenotis Pty Ltd (Xenotis) to acquire all of the capital stock of Xenotis for $6.7 million with a mechanism for a purchase price adjustment based on the net tangible assets of Xenotis at closing. Xenotis was the parent company of Bio Nova International, the manufacturer and marketer of the Omniflow II biosynthetic vascular graft for lower extremity bypass and AV access. We paid $5.1 million at the closing and the remaining $1.4 million was paid in August 2015. The net tangible asset purchase price adjustment of $0.2 million was paid in November 2014. We accounted for the acquisition as a business combination. We recorded $2.1 million of tangible assets, $2.1 million of property and equipment, $1.8 million of intangible assets, and $2.5 million of goodwill. The weighted-average amortization period for the acquired intangible assets is 5.0 years. Liabilities assumed included payables and debt totaling $1.7 million; the accounts payable of $0.6 million was paid in the ordinary course, and the assumed debt was paid in full in August 2014. The purchase accounting is complete.

The goodwill of $2.5 million is not deductible for tax purposes. In addition, we acquired deferred tax assets of $2.4 million which consist primarily of net operating loss carry-forwards and capital loss carry-forwards. We recorded a full valuation allowance on these deferred tax assets.

In September 2014, we entered into definitive agreements with eight former Xenotis distributors in Europe to terminate their distribution of our Omniflow II biosynthetic vascular grafts, for aggregated termination fees of $1.3 million. We paid approximately $1.1 million in 2014 with the remainder paid in 2015. We recorded $0.4 million of inventory and $0.9 million of intangible assets. We allocated the payment to the tangible and intangible assets acquired based on the estimated fair value of each of these elements to the transactions. The weighted-average amortization period for the acquired intangible assets is 5.0 years.

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.

 

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

 

5. Goodwill and Other Intangibles

Goodwill consists of the following:

 

     (in thousands)  

Balance at beginning of year

   $ 17,789   

Additions for acquisitions

     304   

Effects of currency exchange

     99   
  

 

 

 

Balance at March 31, 2016

   $ 18,192   
  

 

 

 

Other intangibles consist of the following:

 

     March 31,2016      December 31, 2015  
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Value
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Value
 
     (in thousands)  

Product technology

   $ 7,452       $ 3,442       $ 4,010       $ 7,113       $ 3,247       $ 3,866   

Trademarks and licenses

     1,675         1,268         407         1,560         1,230         330   

Customer relationships

     4,024         2,301         1,723         3,801         2,143         1,658   

Other intangible assets

     1,389         869         520         1,297         815         482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total identifiable intangible assets

   $ 14,540       $ 7,880       $ 6,660       $ 13,771       $ 7,435       $ 6,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These intangible assets are being amortized over their useful lives ranging from 1 to 13 years. The weighted-average amortization period for these intangibles as of March 31, 2016 is 7.1 years. Amortization expense is included in general and administrative expense and is as follows:

 

     Three months ended March 31,  
     2016      2015  
     (in thousands)  

Amortization expense

   $ 380       $ 379   
  

 

 

    

 

 

 

 

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Estimated amortization expense for the remainder of 2016 and each of the five succeeding fiscal years is as follows:

 

     Year ended December 31,  
     2016      2017      2018      2019      2020      2021  
     (in thousands)  

Amortization expense

   $ 1,157       $ 1,305       $ 1,119       $ 930       $ 670       $ 489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

6. Accrued Expenses

Accrued expenses consist of the following:

 

     March 31, 2016      December 31, 2015  
     (in thousands)  

Compensation and related taxes

   $ 3,387       $ 6,062   

Income and other taxes

     1,537         483   

Professional fees

     419         530   

Dividend payable

     825         —     

Other

     1,500         1,762   
  

 

 

    

 

 

 

Total

   $ 7,668       $ 8,837   
  

 

 

    

 

 

 

 

7. Commitments and Contingencies

As of March 31, 2016, as part of our normal course of business, we have purchase commitments to purchase $4.1 million of inventory through 2017.

 

8. 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 about which separate, discrete financial information is evaluated by the chief operating decision-maker in making decisions on how to allocate resources and assess performance. We view our operations and manage our business as one operating segment. No discrete operating information is prepared by us except for product sales by product line and by legal entity for local reporting purposes.

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

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

United States

   $ 11,104       $ 10,748   

Germany

     2,586         2,418   

Other countries

     6,568         5,781   
  

 

 

    

 

 

 

Net Sales

   $ 20,258       $ 18,947   
  

 

 

    

 

 

 

 

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9. Share-based Compensation

Our 2006 Stock Option and Incentive Plan allows for granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, unrestricted stock awards, and deferred stock awards to our officers, employees, directors and consultants.

The components of share-based compensation expense were as follows:

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

Stock option awards

   $ 223       $ 229   

Restricted stock units

     107         99   
  

 

 

    

 

 

 

Total share-based compensation

   $ 330       $ 328   
  

 

 

    

 

 

 

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

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

Cost of sales

   $ 38       $ 36   

Sales and marketing

     64         82   

General and administrative

     183         186   

Research and development

     45         24   
  

 

 

    

 

 

 

Total stock-based compensation

   $ 330       $ 328   
  

 

 

    

 

 

 

We did not issue option grants in the three months ended March 31, 2016 and 2015. The weighted-average fair value per share of restricted stock unit grants issued for the three months ended March 31, 2016 and 2015 was $14.38 and $7.42, respectively.

We issued approximately 23,000 and 140,000 shares of common stock following the exercise or vesting of underlying stock options or restricted stock units in the three months ended March 31, 2016 and 2015, respectively.

 

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10. Net Income per Share

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

 

     Three months ended  
     March 31,  
     2016      2015  
     (in thousands, except per share data)  

Basic:

     

Net income available for common stockholders

   $ 2,166       $ 1.369   
  

 

 

    

 

 

 

Weighted average shares outstanding

     18,336         17,422   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.12       $ 0.08   
  

 

 

    

 

 

 

Diluted:

     

Net income available for common stockholders

   $ 2,166       $ 1,369   
  

 

 

    

 

 

 

Weighted-average shares outstanding

     18,336         17,422   

Common stock equivalents, if dilutive

     524         374   
  

 

 

    

 

 

 

Shares used in computing diluted earnings per common share

     18,860         17,796   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.11       $ 0.08   
  

 

 

    

 

 

 

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

     2         277   
  

 

 

    

 

 

 

 

11. Stockholders’ Equity

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 2016

        

March 21, 2016

     April 4, 2016       $ 0.045       $ 825   

Fiscal Year 2015

        

March 20, 2015

     April 3, 2015       $ 0.040       $ 700   

May 22, 2015

     June 5, 2015       $ 0.040       $ 705   

August 20, 2015

     September 3, 2015       $ 0.040       $ 715   

November 20, 2015

     December 4, 2015       $ 0.040       $ 725   

On April 25, 2016 our Board of Directors approved a quarterly cash dividend on our common stock of $0.045 per share payable on June 8, 2016 to stockholders of record at the close of business on May 25, 2016, which will total approximately $0.8 million.

 

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12. Supplemental Cash Flow Information

 

     Three months ended  
     March 31,  
     2016      2015  
     (in thousands)  

Cash paid for income taxes, net

   $ 108       $ 695   

 

13. 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.

As of March 31, 2016, we had cash equivalents in a money market fund that was valued using Level 1 inputs (quoted market prices for identical assets) at a fair value of $16.0 million.

We had no Level 2 assets being measured at fair value on a recurring basis as of March 31, 2016.

As discussed in Note 4, we have contingent liabilities related to certain of our acquired businesses. These liabilities are or have been remeasured each reporting period using Level 3 techniques to assess of the probability that we will be required to make future payments and to estimate amount of those payments. There were no changes in estimated liability during the three months ended March 31, 2016.

 

14. Accumulated Other Comprehensive Loss

Changes to our accumulated other comprehensive loss consisted of foreign currency translation for the three months ended March 31, 2016 and 2015, respectively.

 

     Three months ended  
     March 31,  
     2016      2015  

Beginning balance

   $ (4,049    $ (2,365

Other comprehensive loss before reclassifications

     929         (1,596

Amounts reclassified from accumulated other comprehensive loss

     —           —     
  

 

 

    

 

 

 

Ending Balance

   $ (3,120    $ (3,961
  

 

 

    

 

 

 

 

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Item 2. Management’s 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 federal securities law) that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales, 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. These risks and uncertainties include, but are not limited to: the risk that the Company may not realize the anticipated benefits of its strategic activities; risks related to the integration of acquisition targets; the risk that assumptions about the market for the Company’s products and the productivity of the Company’s direct sales force and distributors may not be correct; risks related to product demand and market acceptance of the Company’s products and pricing; risks related to attracting, training and retaining sales representatives and other employees in new markets such as Finland and New Zealand; and the risk that the Company is not successful in transitioning to a direct-selling model in new territories.

Forward-looking statements reflect management’s 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, 2015, as filed with the SEC on March 10, 2016. 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 requires 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, AlboSure, MultiTASC, Omniflow, 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

We are a medical device company that develops, manufactures, and markets medical devices and implants for the treatment of peripheral vascular disease. Our principal product offerings are sold throughout the world, primarily in the United States, Europe and, to a lesser extent, Asia and the Pacific Rim. We estimate that the annual worldwide market for all peripheral vascular devices approximates $4 billion, within which our core product lines address roughly $770 million. We have grown our business by using a three-pronged strategy: competing for sales of niche products, expanding our worldwide direct sales force, and acquiring and developing complementary vascular devices. We have used acquisitions as a primary means of further accessing the larger peripheral vascular device market, and we expect to continue to pursue this strategy in the future. Additionally, we have increased our efforts to expand our vascular device offerings through new product development. We currently manufacture most of our product lines in our Burlington, Massachusetts headquarters.

 

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Our products are used by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, neither of whom are certified to perform open surgical procedures, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wider range of treatment options to patients.

Our principal product lines include the following: valvulotomes, balloon catheters, carotid shunts, biologic vascular patches, radiopaque marking tape, anastomotic clips, remote endarterectomy devices, laparoscopic cholecystectomy devices, prosthetic vascular grafts, biosynthetic and biologic vascular grafts, and powered phlebectomy devices.

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:

 

    the long-term growth of our direct sales force in North America, Europe, Asia and the Pacific Rim;

 

    the addition of complementary products through acquisitions;

 

    the updating of existing products and introduction of new products through research and development;

 

    the introduction of our products in new territories upon receipt of regulatory approvals in these territories; and

 

    the consolidation of product manufacturing into our facilities in our Burlington, Massachusetts corporate headquarters.

We sell our products primarily through a direct sales force. As of March 31, 2016 our sales force was comprised of 92 sales representatives in North America, Europe, Japan, China and Australia. We also sell our products in other countries through distributors. Our worldwide headquarters is located in Burlington, Massachusetts. Our international headquarters is located in Sulzbach, Germany. We also have sales offices located in Tokyo, Japan; Mississauga, Canada; Madrid, Spain; Milan, Italy; Shanghai, China; and North Melbourne, Australia. In the three months ended March 31, 2016, approximately 92% of our net sales were generated in countries in which we employ direct sales representatives.

Historically we have experienced success in lower-rivalry niche product segments, for example the market segments for biologic vascular patches and valvulotome devices. In the biologic vascular patch market segment the number of competitors is limited and we believe that we have been able to increase segment share and to a lesser extent increase selling prices, mainly due to strong sales service. In the valvulotome market segment, we believe that we have been able to materially increase our selling prices without losing significant market segment share. In contrast, we have experienced less success in highly competitive product segments such as polyester grafts, where we face stronger competition from larger companies with greater resources and lower production costs. We have also experienced less success in segments such as radiopaque tape, where we face recently introduced competitive products. While we believe that these challenging market dynamics can be mitigated by our strong relationships with vascular surgeons, there can be no assurance that we will be successful in other highly competitive market segments.

In recent years we have also experienced comparatively greater success in geographic markets outside of the United States. Sales outside of the United States are generally at comparatively lower average selling prices. As a result, if we keep seeking growth opportunities outside of the United States, we will likely experience downward pressure on our gross margin.

 

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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 to our direct sales organization:

 

    During 2014, we entered into definitive agreements with eight former Xenotis distributors in Europe in order to terminate their distribution of our Omniflow II biosynthetic vascular grafts and we began selling directly to hospitals in those geographies. The agreements required us to pay approximately $1.3 million in exchange for the purchase of customer lists and inventory.

 

    During 2015, we entered into definitive agreements with seven UreSil, LLC distributors in Europe in order to terminate their distribution of our newly acquired Tru-Incise valvulotome and we began selling direct-to-hospital in those geographies. The termination fee was approximately $0.2 million

 

    In August 2015, we entered into a definitive agreement with Grex Medical Oy (Grex), our distributor in Finland, in order to terminate their distribution of our products and we began selling direct-to-hospital in Finland as of January 1, 2016. The termination fee was approximately $0.2 million.

We anticipate that the expansion of our direct sales organization in China will result in increased sales, marketing and regulatory expenses during 2016. As of March 31, 2016 we had four employees in China.

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 August 2014, we acquired all of the capital stock of Xenotis Pty Ltd (Xenotis) for $6.7 million plus the assumption of $1.1 million of debt. Xenotis is the parent company of Bio Nova International, the manufacturer and marketer of the Omniflow II biosynthetic vascular graft for lower extremity bypass and AV access.

 

    In September 2014, we acquired substantially all of the assets related to the angioscope product line from Applied Medical Resource Corporation (Applied Medical) for $0.4 million.

 

    In September 2014, we terminated our UnBalloon non-occlusive modeling catheter product line.

 

    In May 2015, we acquired the production and distribution rights of UreSil LLC’s Tru-Incise valvulotome for sales outside of the United States for $1.4 million.

 

    In July 2015, we entered into an asset sales agreement with Merit Medical Ireland Limited to sell our inventory, intellectual property and customer lists associated with The UnBalloon, our non-occlusive modeling catheter product line for $0.4 million.

 

    In December 2015, we terminated our InvisiGrip vein stripper product line, and wrote down $0.1 million of related inventory in the third quarter of 2015.

 

    In March 2016, we acquired substantially all of the assets as well as the production and distribution rights of the ProCol business from Hancock Jaffe Laboratories and CryoLife, Inc. for $2.7 million plus 10% of net sales for three years following the closing. ProCol is a biologic graft used for dialysis access, and is approved for sale in the United States.

In addition to relying upon acquisitions to grow our business, we also rely on our research and development efforts to bring differentiated technology and next-generation products to market. These efforts have led to the following recent product developments:

 

    In June 2014, we launched the 1.5mm HYDRO LeMaitre Valvulotome.

 

    In December 2014, we launched the LeMills valvulotome.

 

    In December 2015, we launched the long AnastoClip AC.

In addition to our sales growth strategies, we have also executed several operational initiatives designed to consolidate and streamline manufacturing within our Burlington, Massachusetts facilities. We expect that these plant consolidations will result in improved control over our production capacity as well as reduced costs over the long-term. Our most recent manufacturing transitions included:

 

    In January 2014, we initiated a project to transfer the manufacturing of the newly acquired Clinical Instruments devices to our facility in Burlington. We closed the Clinical Instruments facility in March 2014 and completed the manufacturing transfer during the second quarter of 2014.

 

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    In March 2015, we initiated the transfer of the manufacturing of our newly acquired angioscope product line to our facility in Burlington. We had been purchasing the devices from Applied Medical since the September 2014 acquisition and completed the transition of manufacturing to our Burlington facility in December 2015.

 

    In May 2015, we initiated plans to establish a production line for our newly acquired Tru-Incise valvulotome product line at our facility in Burlington. We have been purchasing the devices from UreSil, LLC since the acquisition. We expect the establishment of the production line and transition of manufacturing to be completed in the second quarter of 2016.

 

    In March 2016, we initiated plans to establish a production line for our newly acquired ProCol biologic product line at our facility in Burlington. We have an agreement to purchase the product from the seller, Hancock Jaffe Laboratories, for a period of up to three years following the closing. We currently expect the establishment of the production line and transition of manufacturing to be completed in 2017.

Our execution of these business opportunities may affect the comparability of our financial results from period to period and may cause substantial fluctuations from period to period, as we incur related process engineering and other charges, as well as longer term impacts to revenues and operating expenditures.

Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the three months ended March 31, 2016, approximately 45% of our sales were from outside the United States. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing, and administrative costs related to these sales are largely denominated in the same respective currency, thereby partially mitigating our transaction risk exposure. However, most of our foreign sales are denominated in local currency, and 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 receive less in U.S. dollars than we did before the rate increase went into effect. For the three months ended March 31, 2016, the negative effects of changes in foreign exchange rates reduced sales by approximately $0.2 million as compared to rates in effect for the three months ended March 31, 2015.

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, 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 generated by shipments 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 nearly all 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, attendance at medical society meetings, 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 expense, stock based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense, and insurance expense.

Research and development. Research and development expense includes costs associated with the design, development, testing, enhancement, and regulatory approval of our products, principally salaries, laboratory testing, and supply costs. It also includes costs associated with design and execution of clinical studies, regulatory submissions and costs to register, maintain, and defend our intellectual property, and royalty payments associated with licensed and acquired intellectual property.

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

 

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Income tax expense. We are subject to federal and state income taxes for earnings generated in the United States, which include operating losses 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 United States and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill for U.S tax reporting purposes.

Results of Operations

Comparison of the three months ended March 31, 2016 to the three months ended March 31, 2015.

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

 

     Three months ended March 31,  
(unaudited)    2016      2015      Percent
change
 
     ($ in thousands)  

Net sales

   $ 20,258       $ 18,947         7

Net sales by geography:

        

Americas

   $ 11,877       $ 11,583         3

International

     8,381         7,364         14
  

 

 

    

 

 

    

 

 

 

Total

   $ 20,258       $ 18,947         7
  

 

 

    

 

 

    

 

 

 

Net sales. Net sales increased 7% to $20.3 million for the three months ended March 31, 2016, compared to $18.9 million for the three months ended March 31, 2015. Sales increases for the three months ended March 31, 2016 occurred across multiple product lines including increased sales of our biologic vascular patches of $0.6 million, catheters of $0.3 million, valvulotomes of $0.3 million and vessel closure systems of $0.2 million, and were partially offset by decreased sales of radiopaque tape of $0.3 million.

Direct-to-hospital net sales were 92% and 93% of our total net sales for the three months ended March 31, 2016 and 2015, respectively.

Net sales by geography. Net sales in the Americas increased $0.3 million for the three months ended March 31, 2016. The increase was primarily driven by biologic vascular patches, vessel closure systems and catheters, and was partially offset by decreased sales of radiopaque tape. International net sales increased $1.0 million for the three months ended March 31, 2016. The increase was primarily driven by increased sales of our valvulotomes and biologic vascular patches. Recently, we have experienced stronger sales growth in these international markets.

 

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     Three months ended March 31,  
(unaudited)    2016     2015     $ Change      Percent
change
 
     ($ in thousands)  

Gross profit

   $ 14,356      $ 13,117      $ 1,239         9

Gross margin

     70.9     69.2     *         1.7

 

* Not applicable

Gross Profit. Gross profit increased $1.2 million to $14.4 million for the three months ended March 31, 2016, while gross margin increased 170 basis points to 70.9% in the period. The gross margin increase was largely driven by higher average selling prices across most product lines, as well as lower per unit manufacturing costs of our biologic patch products. These increases were partially offset by the impact of the shift toward higher international sales where we sometimes realize lower gross margins than in the United States. The gross profit increase was a result of higher sales and the improved gross margin.

 

     Three months ended March 31,  
(unaudited)    2016      2015      $ Change      Percent
change
 
     ($ in thousands)  

Sales and marketing

   $ 6,273       $ 5,858       $ 415         7

General and administrative

     3,337         3,617         (280      (8 %) 

Research and development

     1,446         1,152         294         26

Medical device excise tax

     —           181         (181      (100 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,056       $ 10,808       $ 248         2
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three months ended March 31,  
     2016    2015        
     % of Net    % of Net        
     Sales    Sales     Change  

Sales and marketing

   31%      31     0

General and administrative

   16%      19     (3 %) 

Research and development

   7%      6     1

Medical device excise tax

   0%      1     (1 %) 

Sales and marketing. For the three months ended March 31, 2016, sales and marketing expense increased 7% to $6.3 million. The increase was driven mainly by increased compensation costs and higher travel expense due to additional sales representatives in Q1 2016. As a percentage of net sales, sales and marketing expense was 31% in the three months ended March 31, 2016 and March 31, 2015. We plan to increase the size of our sales force in 2016, and we expect that selling and marketing expenses will increase commensurately.

General and administrative. For the three months ended March 31, 2016, general and administrative expense decreased 8% to $3.3 million. The general and administrative expense decreases were driven by lower professional fees and recruiting costs of $0.2 million each, which were partially offset by increased compensation related costs. As a percentage of net sales, general and administrative expense was 16% for the three months ended March 31, 2016.

Research and development. For the three months ended March 31, 2016, research and development expense increased 26% to $1.4 million. Product development expenses increased $0.2 million mainly due to increased compensation related expenses offset by lower product testing costs. Clinical and regulatory expenses increased $0.1

 

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million primarily due to compensation related costs and professional fees, including costs related to regulatory submissions for new products in geographies such as China. As a percentage of net sales, research and development expense was 7% for the three months ended March 31, 2016.

Medical device excise tax. The medical device excise tax was $0.2 million for the three months ended March 31, 2015. On December 18, 2015, the Consolidated Appropriations Act of 2016 was signed into law. The Consolidated Appropriations Act of 2016 suspends the medical device tax for the period beginning January 1, 2016 and ending December 31, 2017.

Income tax expense. We recorded a provision for taxes of $1.1 million on pre-tax income of $3.3 million for the three months ended March 31, 2016, compared to a provision for taxes of $1.0 million on pre-tax income of $2.3 million for the three months ended March 31, 2015. Our first quarter 2016 provision was based on the estimated annual effective tax rate of 34.4%, comprised of estimated federal and state income taxes of approximately $3.9 million, as well as foreign income taxes of $0.7 million. Our income tax expense for the current period varies from the statutory rate amounts mainly due to lower statutory rates from our foreign entities, research and development tax credits, offset by certain permanent items. Our first quarter 2015 provision was based on the estimated annual effective tax rate of 37.1%, comprised of estimated federal and state income taxes of approximately $3.1 million, as well as foreign income taxes of $0.4 million. Our 2015 income tax expense varied from the statutory rate amounts mainly due to certain permanent items, offset by lower statutory rates from our foreign entities. 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 that our tax reserves reflect the probable outcome of known contingencies.

We have assessed the need for a valuation allowance against our deferred tax assets and concluded that as of March 31, 2016, we require a valuation allowance against $2.2 million of deferred tax assets, principally foreign net operating loss and capital loss carry-forwards; based on the weight of available evidence, we believe it is more likely than not that such assets will not be realized.

We expect that our effective tax rate will remain fairly consistent for the remainder of 2016. We expect our full-year 2016 effective tax rate will be higher compared to our full-year effective tax rate in 2015 due to the release of certain valuation allowances in 2015.

Liquidity and Capital Resources

At March 31, 2016, our cash and cash equivalents were $25.9 million as compared to $27.5 million at December 31, 2015. Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, consist of operating bank accounts and money market funds, and are stated at cost, which approximates fair value. All of our cash held outside of the United States is available for corporate use, with the exception of $2.4 million held by subsidiaries in jurisdictions for which earnings are planned to be permanently reinvested.

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 borrowings, and funds generated from our operations.

We recognized operating income of $3.3 million for the three months ended March 31, 2016. For the year ended December 31, 2015, we recognized operating income of $11.5 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;

 

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

 

    future acquisition related payments;

 

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    payments associated with U.S 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 FDA and other regulatory clearances of our existing and future products; and

 

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

Our cash balances may decrease as we continue to use cash to fund our operations, make acquisitions, make payments under our quarterly dividend program, 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 borrow funds from, or establish a revolving credit facility with, a financial institution. The sale of additional equity and debt securities may result in dilution to our stockholders. 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 2016

        

March 21, 2016

     April 4, 2016       $ 0.045       $ 825   

Fiscal Year 2015

        

March 20, 2015

     April 3,2015       $ 0.040       $ 700   

May 22, 2015

     June 5, 2015       $ 0.040       $ 705   

August 20, 2015

     September 3, 2015       $ 0.040       $ 715   

November 20, 2015

     December 4, 2015       $ 0.040       $ 725   

On April 25, 2016 our Board of Directors approved a quarterly cash dividend on our common stock of $0.045 per share payable on June 8, 2016 to stockholders of record at the close of business on May 25, 2016, which will total approximately $0.8 million.

Cash Flows

 

     Three months ended March 31,  
     (in thousands)  
     2016      2015      Net Change  

Cash and cash equivalents

   $ 25,941       $ 17,025       $ 8,916   

Cash flows provided by (used in):

        

Operating activities

   $ 1,258       $ (600    $ 1,858   

Investing activities

     (3,102      (461      (2,641

Financing activities

     141         (381      522   

 

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Net cash provided by (used in) operating activities. Net cash provided by operating activities was $1.3 million for the three months ended March 31, 2016, and consisted of $2.2 million net income, adjusted for non-cash items of $1.3 million (including depreciation and amortization of $0.9 million, stock-based compensation of $0.3 million, and provision for inventory write-offs and doubtful accounts of $0.1 million) and offset by changes in working capital of $2.2 million. The net cash used for working capital was driven by increases in accounts receivable of $0.8 million and inventory of $0.4 million, and decreases in accounts payable and other liabilities of $1.8 million, primarily due to annual compensation payments.

Net cash used in operating activities was $0.6 million for the three months ended March 31, 2015, and consisted of $1.4 million net income, adjusted for non-cash items of $1.4 million (including depreciation and amortization of $0.8 million, stock-based compensation of $0.3 million, and provision for inventory write-offs of $0.1 million) and was offset by changes in working capital of $3.3 million. The net cash used by changes in working capital was driven by increases in accounts receivable of $1.7 million and inventory of $0.4 million, and decreases in accounts payable and other liabilities of $1.3 million, primarily due to annual compensation payments.

Net cash used in investing activities. Net cash used in investing activities was $3.1 million for three months ended March 31, 2016. This was primarily driven by $2.4 million of cash paid in connection with our acquisition of the ProCol line of bovine vascular grafts. We also had purchases of property and equipment of $0.7 million primarily associated with the expansion of our headquarter offices.

Net cash used in investing activities was $0.5 million for three months ended March 31, 2015. This was driven by the purchase of property and equipment of $0.3 million and acquisition related payments of $0.1 million, primarily consisting of distributor termination payments associated with our recently acquired biologic vascular graft.

Net cash provided by (used in) financing activities. Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2016, consisting of proceeds from stock option exercises.

Net cash used in financing activities was $0.4 million for the three months ended March 31, 2015, driven primarily by payments of common stock dividends of $0.7 million and partially offset by proceeds from stock option exercises of $0.3 million.

Contractual obligations. Our principal contractual obligations consist of operating leases and inventory purchase commitments, and have not changed significantly since December 31, 2015 as reported in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2016. We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies and Estimates

We have adopted various accounting policies to prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our most significant accounting policies are described in note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There has been no material changes in our critical accounting policies during the three months ended March 31, 2016. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, sales returns and discounts, share-based compensation, and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results may differ from those estimates.

 

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Recent Accounting Pronouncements

In March 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 which simplifies several aspects of the accounting for share-based payment award transactions, including a) income tax consequences, b) classification of awards as either equity or liabilities and c) classification on the statement of cash flows. This standard will be effective for us on January 1, 2017, with early adoption permitted. We have not yet determined the impact of adopting this ASU.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These market risks include changes in currency exchange rates and interest rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, if considered appropriate, we may enter into derivative financial instruments such as forward currency exchange contracts, although we have not done so in 2016 or in recent years. There have been no material changes in our quantitative and qualitative market risks since the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is reported, processed, and summarized within the time periods specified in the SEC’s rules and forms. As of March 31, 2016, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, and as described below, our disclosure controls and procedures were not effective as of March 31, 2016.

Previously Reported Material Weakness

As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015, our management concluded that our internal control over financial reporting was not effective as of that date because of a material weakness in our internal controls over financial reporting. We concluded that we had a material weakness because we did not have control activities in revenue recognition that were designed and operating effectively, including controls to validate pricing terms and conditions in our revenue contracts such that the price of a sale is fixed or determinable at the time of shipment for all sales made by the Company. Control activities that were historically in place (i) did not always address relevant risks and (ii) were not performed on all relevant transactions. In addition, the level of precision of the management review controls was not sufficient to identify all potential errors.

Management’s Plan for Remediation

Management is in the process of designing and implementing a remediation plan intended to address the control deficiencies which resulted in the material weakness described above. These remediation efforts are expected to include enhancement of automated and management oversight controls to validate pricing terms and conditions. Management will report regularly to the Audit Committee regarding the status of the implementation activities.

 

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Changes in Internal Control

There have been no changes in our internal control over financial reporting for the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. Other Information

 

Item 1. Legal Proceedings.

In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to employment, product liability, commercial arrangements, intellectual property and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of May 6, 2016, that management believes would have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

In addition to the information set forth in this report, you should consider the risks and uncertainties discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition, or future results. There have been no substantive changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission on March 10, 2016.

 

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

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

None.

 

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Item 6. Exhibits

 

          Incorporated by Reference       

Exhibit

Number

   Exhibit Description    Form    Date    Number   

Filed

Herewith

 
  31.1    Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).               X   
  31.2    Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).               X   
  32.1    Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*               X   
  32.2    Certification by the Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*               X   
101.INS    XBRL Instance Document.               X   
101.SCH    XBRL Taxonomy Extension Schema Document.               X   
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.               X   
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document               X   
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.               X   
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.               X   

 

* The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the SEC and are not to be incorporated by reference into any filing of LeMaitre Vascular, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 6, 2016.

 

LEMAITRE VASCULAR, INC.

/s/ George W. LeMaitre

George W. LeMaitre
Chairman and Chief Executive Officer

/s/ Joseph P. Pellegrino, Jr.

Joseph P. Pellegrino, Jr.
Chief Financial Officer

 

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EXHIBIT INDEX

 

          Incorporated by Reference       

Exhibit

Number

   Exhibit Description    Form    Date    Number   

Filed

Herewith

 
  31.1    Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).               X   
  31.2    Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).               X   
  32.1    Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*               X   
  32.2    Certification by the Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*               X   
101.INS    XBRL Instance Document.               X   
101.SCH    XBRL Taxonomy Extension Schema Document.               X   
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.               X   
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document               X   
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.               X   
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.               X   

 

* The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the SEC and are not to be incorporated by reference into any filing of LeMaitre Vascular, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.