Source: http://ir.lemaitre.com/node/14441/html
Timestamp: 2018-10-21 01:54:32
Document Index: 154384536

Matched Legal Cases: ['art 1', '§1350', '§1350', '§1350', '§ 1350', '§1350']

63 Second Avenue, Burlington, Massachusetts 01803
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 Rule12b-2 of the Exchange Act.
The registrant had 19,461,986 shares of common stock, $.01 par value per share, outstanding as of July 31, 2018.
Unaudited Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2018 and 2017 4
Unaudited Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2018 and 2017 5
Unaudited Consolidated Statements of Cash Flows for the three-month and six-month periods ended June 30, 2018 and 2017 6
$ 19,638 $ 19,096
33,298 22,564
Accounts receivable, net of allowances of $494 at June 30, 2018, and $349 at December 31, 2017
15,230 15,000
21,669 21,046
2,529 2,605
92,364 80,311
12,235 12,378
23,602 23,844
7,358 8,234
1,347 1,378
$ 137,100 $ 126,323
$ 1,657 $ 1,543
11,286 9,770
13,115 13,189
2,175 2,176
1,066 1,188
16,356 16,553
Common stock, $0.01 par value; authorized 37,000,000 shares; issued 20,836,847 shares at June 30, 2018, and 20,745,041 shares at December 31, 2017
95,122 93,127
38,234 28,333
(3,207 ) (2,289 )
Treasury stock, at cost; 1,480,250 shares at June 30, 2018 and 1,480,101 shares at December 31, 2017
(9,613 ) (9,608 )
120,744 109,770
$ 27,020 $ 25,753 $ 53,014 $ 49,892
8,028 8,238 15,548 15,023
18,992 17,515 37,466 34,869
6,792 6,599 13,882 13,553
4,547 3,747 9,244 8,295
1,988 1,634 3,813 3,292
(5,876 )  (5,876 ) 
7,451 11,980 21,063 25,140
11,541 5,535 16,403 9,729
165 32 260 52
(159 ) (102 ) (200 ) (76 )
11,547 5,465 16,463 9,705
2,796 833 3,859 1,854
$ 8,751 $ 4,632 $ 12,604 $ 7,851
$ 0.45 $ 0.25 $ 0.65 $ 0.42
$ 0.43 $ 0.23 $ 0.62 $ 0.40
19,320 18,816 19,301 18,724
20,260 19,975 20,243 19,855
$ 0.070 $ 0.055 $ 0.140 $ 0.110
(1,223 ) 1,019 (895 ) 1,639
22  (23 ) 
(1,201 ) 1,019 (918 ) 1,639
$ 7,550 $ 5,651 $ 11,686 $ 9,490
$ 12,604 $ 7,851
2,102 1,962
(5,876 ) 
(552 ) (1,067 )
(1,306 ) (767 )
26 (756 )
(82 ) (550 )
8,627 7,900
(1,230 ) (2,444 )
(10,757 ) 
7,400 
(4,587 ) (2,444 )
(1,142 ) (388 )
738 2,301
(2,704 ) (2,065 )
(3,113 ) (152 )
(385 ) 528
542 5,832
19,096 24,288
$ 19,638 $ 30,120
Unless the context requires otherwise, references to LeMaitre Vascular, we, our, and us refer to LeMaitre Vascular, Inc. and our subsidiaries. We develop, manufacture, and market medical devices and implants used primarily in the field of vascular surgery. We also derive revenues from the processing and cryopreservation of human tissues for implantation into patients. We operate in a single segment in which our principal product lines include the following: anastomotic clips, angioscopes, balloon catheters, biologic vascular grafts, biologic vascular patches, carotid shunts, powered phlebectomy devices, radiopaque marking tape, remote endarterectomy devices, synthetic vascular grafts, and valvulotomes. Our offices are located in Burlington, Massachusetts; Fox River Grove, Illinois; Vaughan, Canada; Sulzbach, Germany; Milan, Italy; Madrid, Spain; North Melbourne, Australia; Tokyo, Japan; and Shanghai, China.
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 six months ended June 30, 2018 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, 2017, including the notes thereto, included in our Form 10-K filed with the Securities and Exchange Commission (SEC) on March 9, 2018.
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. We also occasionally enter into consigned inventory arrangements with either hospitals or distributors on a limited basis. Following our acquisition of the RestoreFlow allograft business, we also derive revenues from human tissue cryopreservation services. These service revenues are recognized when services have been provided and the tissue has been shipped to the customer, provided all other revenue recognition criteria discussed below have been met.
On January 1, 2018 we adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We used the modified retrospective method of adoption under which the comparative information was not restated and will continue to be reported under the standard in effect for those periods. The adoption of this standard was not material to our financial statements and there was no cumulative effect adjustment to the opening balance of retained earnings required. 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:
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).
We recognize revenue, net of allowances for returns and discounts, fees paid to group purchasing organizations, and any sales and value added taxes required to be invoiced, which we have elected to exclude from the measurement of the transaction price as allowed by the standard, at the time of shipment (taking into consideration contractual shipping terms), or in the case of consigned inventory, when it is consumed. Shipment is the point at which control of the product and title passes to our customers, and at which LeMaitre has a present right to receive payment for the goods. Our shipping and handling activities generally occur prior to the customer taking control of the goods, but in instances where part of these services occurs after the customer gains control, we have made a policy election as allowed under the standard to account for them as activities to fulfill the promise to transfer the goods as opposed to a performance obligation.
$ 31,942 $ 31,069
17,829 15,734
3,243 3,089
$ 53,014 $ 49,892
Except as discussed in Note 6, 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.
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement  Reporting Other Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and is expected to improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The new standard is effective for us beginning January 1, 2019, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-04, which, among other provisions, eliminates step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material impact on our financial statements.
In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be 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. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted. Entities have the option of using either a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, or else a transition option allowing lessees to not apply the new lease standard in comparative periods but instead recognize a cumulative-effect adjustment to retained earnings as of the date of adoption. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Our assessment of the impact of adopting this standard is underway, including identifying all of our leases, performing a preliminary analysis of the amounts of lease liabilities and right-of-use assets to be recorded and reviewing potential changes to our disclosures on leases. Based on this preliminary assessment we do not expect the adoption of this standard to have a significant impact on our consolidated statement of operations. However, we expect that the recognition of right-of-use assets and corresponding lease liabilities could have a significant impact on our consolidated balance sheet.
The Tax Cut and Jobs Act of 2017 (the Tax Act) changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system, and imposition of a tax on deemed repatriated earnings of foreign subsidiaries (the Transition Tax). We estimated the impact of the Tax Act in our financial statements as of December 31, 2017. We recorded $0.6 million in tax expense related to the Transition Tax and recognized $1.0 million in tax benefit related to the remeasurement of deferred taxes to the 21% tax rate. We may subsequently identify adjustments to our estimated Transition Tax and/or deferred tax remeasurement while preparing our 2017 U.S. tax return, finalizing foreign earnings and profits calculations, or taking into account additional guidance issued by the IRS. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
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 2018 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. Additionally, in the second quarter of 2018, we recognized certain discrete items primarily related to the exercise of stock options. Our 2017 income tax expense varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, 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 June 30, 2018, the gross amount of unrecognized tax benefits exclusive of interest and penalties was $578,000. 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:
Unrecognized tax benefits as of June 30, 2018
As of June 30, 2018, a summary of the tax years that remain subject to examination in our taxing jurisdictions is as follows:
$ 3,549 $ 3,200
4,253 3,745
12,668 12,278
1,199 1,823
$ 21,669 $ 21,046
We had inventory on consignment of $1.4 million at both June 30, 2018 and December 31, 2017.
Acquisitions are accounted for using the acquisition method, and the acquired companies results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In each case for the acquisitions disclosed below, pro forma information assuming the acquisition had occurred at the beginning of the earliest period presented is not included, as the impact is immaterial.
Our acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of synergies that will be realized by combining businesses. These synergies include the use of our existing sales channel to expand sales of the acquired businesses products and services, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure.
The fair market valuations associated with these transactions fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long range strategic plans and other estimates. Our assumptions associated with these Level 3 valuations are discussed below and in Note 13 to these financial statements.
RestoreFlow Allografts
On November 10, 2016, we entered into an agreement to acquire the assets of Restore Flow Allografts, LLC, a provider of human vascular tissue processing and cryopreservation services, for an initial purchase price of $12 million, with three additional payments of up to $2 million each ($6 million in total), depending upon the satisfaction of certain contingencies. One payment of $2 million was due not later than 15 days following the expiration of the 18 month period following the closing date, subject to reductions as specified in the agreement for each calendar month that certain retained employees were not employed by us due to resignation without good reason, or termination for cause, both as defined in the agreement. The portion of this payment that was to be paid to retained employees and that was contingent on their continued employment, estimated at $0.9 million, was being accounted for as post-combination compensation expense rather than purchase consideration. The remaining $1.1 million that was payable to non-employee investors but that was also contingent on the continued employment of the retained employees had been accounted for as contingent purchase consideration, at an acquisition-date fair value of $0.9 million. During the three months ended June 30, 2018 we paid this $2 million liability as the contingency was met.
There are also two potential earn-out payments under the agreement. The first earn-out was to be calculated at 50% of the amount by which net revenue in the first 12 months following the closing exceeded $6 million, with such payout not to exceed $2 million. This milestone was not met and accordingly no amount was paid out. The second earn-out is calculated at 50% of the amount by which net revenue in the second 12 months following the closing exceeds $9 million, with such payout not to exceed $2 million. These earn-outs were accounted for as contingent consideration, at an acquisition-date fair value of $0.1 million for the two earn-outs combined. This valuation was derived by utilizing an option pricing model technique incorporating, among other inputs, managements forecasts of future revenues, the expected volatility of revenues, and an estimated weighted average cost of capital of 14.1% to account for the risk of achievement of the revenue forecasts as well as the time value of money between acquisition date and the payment date.
The RestoreFlow business derives revenue from human tissue preservation services, in particular the processing and cryopreservation of veins and arteries. By federal law, human tissues cannot be bought or sold. Therefore, the tissues we obtain and preserve are not held as inventory, and the costs we incur to procure and process vascular tissues are instead accumulated and deferred. Revenues are recognized for the provision of cryopreservation services rather than product sales.
The acquired assets included intellectual property, permits and approvals, data and records, equipment and furnishings, accounts receivable, inventory, literature, and customer and supplier information. We also assumed certain accounts payable. We accounted for the acquisition as a business combination.
Deferred cryopreservation costs
The goodwill is deductible for tax purposes over 15 years.
$ 180 5.0 years
271 9.0 years
617 9.0 years
2,793 10.5 years
683 12.5 years
The weighted-average amortization period of the acquired intangible assets was 10.3 years.
ProCol Biologic Graft
On March 18, 2016, we acquired the ProCol biologic vascular graft (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, 50% of which was paid at closing, with the remainder paid at subsequent dates as specified in the agreement. Additional consideration is payable to HJL for a three-year period following the closing, calculated at 10% of ProCol revenues. This additional consideration was initially valued at $0.3 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations. To date since the acquisition there have been no material adjustments.
Assets acquired included 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. We accounted for the acquisition as a business combination. The purchase accounting is complete.
The following table summarizes the purchase price allocation as of the acquisition date:
$ 84 5.0 years
109 9.5 years
277 9.0 years
150 9.0 years
The weighted-average amortization period of the acquired intangible assets was 8.6 years.
On April 5, 2018, we entered into an asset purchase agreement with Specialty Surgical Instrumentation, Inc. to sell the inventory, intellectual property and other assets associated exclusively with our Reddick cholangiogram catheter and Reddick Saye-Screw product lines for $7.4 million. In connection with this divestiture we at the same time entered into a transition services agreement under which we will continue to manufacture and supply these products to the buyer for a period of up to two years unless extended by both parties, as well as a balloon supply agreement under which we will supply latex balloons, a component of the cholangiogram catheters, to the buyer for a period of up to six years unless extended by both parties. During the three months ending June 30, 2018 we recorded a gain in connection with these agreements of $5.9 million. The following table summarizes the allocation of consideration received:
Deferred revenuetransition services agreement
Under the terms of the transition services agreement, we have agreed to manufacture the Reddick products for the buyer at prices at or in some cases below our cost. We allocated a portion of the consideration received to this agreement to reflect it at fair value and recorded it as deferred revenue. As the products are sold to the buyer, we amortize a portion of the deferred revenue to adjust the gross margin on the sale to fair value on a specific identification basis. Additionally, as the Reddick product lines that were divested constituted a business, we allocated a portion of our goodwill to this divestiture based on the fair value of the business sold in relation to the fair value of the business that will be retained.
Goodwill consists of the following as of June 30, 2018:
Divestiture adjustment
$ 10,197 $ 5,295 $ 4,902 $ 10,267 $ 4,908 $ 5,359
1,943 1,511 432 1,948 1,468 480
5,317 3,535 1,782 5,383 3,299 2,084
1,567 1,325 242 1,575 1,264 311
$ 19,024 $ 11,666 $ 7,358 $ 19,173 $ 10,939 $ 8,234
These intangible assets are being amortized over their useful lives ranging from 3 to 13 years. The weighted-average amortization period for these intangibles as of June 30, 2018 is 8.0 years. Amortization expense is included in general and administrative expense and was as follows for the periods indicated.
$ 414 $ 456 $ 832 $ 910
We estimate that amortization expense for the remainder of 2018 and for each of the five succeeding fiscal years will be as follows:
$ 750 $ 1,377 $ 1,122 $ 923 $ 713 $ 680
6. Accrued Expenses and Other Long-term Liabilities
$ 5,618 $ 6,494
1,565 703
3,091 2,538
$ 11,286 $ 9,770
As discussed in Note 4 above, deferred revenue relates to our divestiture of the Reddick product line and an associated transition services agreement that we entered into contemporaneously with the divestiture under which we agreed to manufacture and sell product to the buyer at prices at or below our cost. We allocated a portion of the consideration received from the divestiture to this transition services agreement to reflect it at fair value and recorded it as deferred revenue. As the products are sold to the buyer, which we expect will occur over approximately the next twelve, months, we amortize a portion of the deferred revenue to adjust the gross margin on the sale to fair value on a specific identification basis. Additionally, as the Reddick product lines that were divested constituted a business, we allocated a portion of our goodwill to this divestiture based on the fair value of the business sold in relation to the fair value of the business that will be retained. The following table summarizes the changes in the deferred revenue balance during the three months ended June 30, 2018:
$ 1,066 $ 1,188
7. Segment and Enterprise-Wide Disclosures
$ 14,864 $ 14,932 $ 29,684 $ 28,979
3,257 2,854 6,364 5,739
8,899 7,967 16,966 15,174
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, unrestricted stock awards and deferred stock awards to our officers, employees, directors and consultants.
The components of share-based compensation expense were as follows:
$ 391 $ 310 $ 780 $ 624
245 161 477 335
$ 636 $ 471 $ 1,257 $ 959
$ 83 $ 41 $ 148 $ 94
136 114 273 230
351 271 702 546
66 45 134 89
We did not grant any options during the six months ended June 30, 2018. Option grants during the six months ended June 30, 2017 were not material. Awards of restricted stock during the six months ended June 30, 2018 were not material, and we did not issue awards of restricted stock during the six months ended June 30, 2017.
We issued approximately 92,000 and 318,000 shares of common stock following the exercise or vesting of underlying stock options or restricted stock units in the six months ended June 30, 2018 and 2017, respectively.
940 1,159 942 1,131
214 1 214 1
On July 25, 2017, our Board of Directors approved a stock repurchase program under which the Company was authorized to repurchase up to $7.5 million of its common stock through transactions on the open market, in privately negotiated purchases or otherwise. This program expired on July 25, 2018. We did not make any share repurchases under this program.
Payment Date Per Share Amount Dividend Payment
April 5, 2018 $ 0.070 $ 1,351
June 7, 2018 $ 0.070 $ 1,353
April 6, 2017 $ 0.055 $ 1,029
June 8, 2017 $ 0.055 $ 1,036
September 7, 2017 $ 0.055 $ 1,055
December 7, 2017 $ 0.055 $ 1,060
On July 23, 2018 our Board of Directors approved a quarterly cash dividend on our common stock of $0.07 per share payable on September 6, 2018 to stockholders of record at the close of business on August 22, 2018, which will total approximately $1.4 million.
$ 3,140 $ 2,825
Level 1 assets being measured at fair value on a recurring basis as of June 30, 2018 included our short-term investment mutual fund account.
We had no Level 2 assets being measured at fair value on a recurring basis as of June 30, 2018.
As discussed in Note 4, several of our acquisition-related assets and liabilities have been measured using Level 3 techniques. During 2016, we recorded contingent liabilities associated with our acquisitions of the RestoreFlow allograft and ProCol biologic graft businesses. In the case of the Restore Flow allograft acquisition, the agreement included the potential for us to pay up to $5.1 million of additional consideration, with $1.1 million contingent on the continued employment by LeMaitre of certain retained employees, and another $4.0 million contingent on the achievement of specified levels of revenues in the first 12 and 24 months following the acquisition date. This additional consideration was initially valued in total at $1.0 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations. The amount attributable to the first 12 months of revenue following the acquisition date was not paid as the associated revenue metric was not achieved. The amount that was contingent on the continued employment by LeMaitre of certain retained employees was paid in May 2018 as the contingency was met.
In the case of ProCol, additional consideration is payable to the former shareholders for a three-year period following the closing, calculated at 10% of ProCol revenues. This additional consideration was initially valued at $0.3 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations. These arrangements are described more fully in Note 4.
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 these acquired businesses, as well as, in the case of the Restore Flow allograft acquisition, managements estimate of the likelihood of continued employment of certain retained employees.
$ 1,300 $ 1,320
(1,142 ) (51 )
$ 200 $ 1,304
$ (2,289 ) $ (4,583 )
(918 ) 1,639
$ (3,207 ) $ (2,944 )
Changes to our accumulated other comprehensive loss consisted primarily of foreign currency translation for the six months ended June 30, 2018 and 2017.
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 of significant fluctuations in our quarterly and annual results due to numerous factors; 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; 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 the integration of acquisition targets; risks related to product demand and market acceptance of the Companys 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 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, 2017, as filed with the SEC on March 9, 2018. 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, AnastoClip, Omniflow, ProCol, RestoreFlow 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.
We are a medical device company that develops, manufactures, and markets medical devices and implants for the treatment of peripheral vascular disease. We also provide processing and cryopreservation services of human tissue for implantation into patients. Our principal product offerings are sold throughout the world, primarily in North America, Europe and, to a lesser extent, Asia and the Pacific Rim. We estimate that the annual worldwide market for all peripheral vascular devices exceeds $5 billion, within which our core product lines address roughly $900 million. We have grown our business by using a 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 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 continued our efforts to expand our vascular device offerings through research and development. We currently manufacture most of our product lines at our Burlington, Massachusetts headquarters.
Our principal product lines include the following: anastomotic clips, angioscopes, balloon catheters, biologic vascular grafts, biologic vascular patches, carotid shunts, powered phlebectomy devices, radiopaque marking tape, remote endarterectomy devices, synthetic vascular grafts, and valvulotomes. We also provide services related to the processing and cryopreservation of human vascular tissue in connection with our RestoreFlow allografts business.
Our biologic devices, which include vascular patches and vascular grafts (including allografts, ovine grafts and bovine grafts), have become a larger proportion of our total sales over time, and in the current quarter represented 36% of worldwide sales. We generally view the biologic device segment favorably, as we believe it contains differentiated and growing product segments.
We sell our products and services primarily through a direct sales force. As of June 30, 2018 our sales force was comprised of 102 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 European operations are headquartered in Sulzbach, Germany. We also have sales offices located in Tokyo, Japan; Vaughan, Canada; Madrid, Spain; Milan, Italy; Shanghai, China; and North Melbourne, Australia, and we have a processing facility in Fox River Grove, Illinois and a manufacturing facility in North Melbourne, Australia. During the six months ended June 30, 2018 and 2017, approximately 95% and 93%, respectively, of our net sales were generated in territories in which we employ direct sales representatives.
Historically we have experienced success in lower-rivalry niche product segments, for example the markets for biologic vascular patches and valvulotome devices. In the biologic vascular patch market the number of competitors has historically been limited, and we believe that we have been able to increase market share and increase selling prices, mainly due to the strength of our sales force. More recently we have experienced increased competition in this segment, which could inhibit our ability to increase market share. In the valvulotome market, our highly differentiated devices have allowed us to increase our selling prices while maintaining our unit market share. In contrast, we have experienced less success in highly competitive markets such as synthetic grafts, where we face stronger competition from larger companies with greater resources and lower production costs. While we believe that these challenging market dynamics can be mitigated by our relationships with vascular surgeons, there can be no assurance that we will be successful in these highly competitive markets.
In recent years we have also experienced success in international markets, such as Europe, where we 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.
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:
In December 2015, we signed a master distribution agreement with Meheco Yonstron Pharmaceutical Co. Ltd., a Chinese distribution and logistics company, and began selling our Chinese market products to Meheco in 2016. Meheco then sold our products to multiple sub-distributors who then sold to Chinese hospitals. This agreement expired in December 2017, and we are currently in the process of signing distribution agreements with sub-distributors and have begun selling our products directly to sub-distributors in China.
In March 2018 we terminated our master distribution agreement with Sinopharm United Medical Device Co., Ltd. under which we sold our powered phlebectomy device and related disposable devices to them for distribution in China. In April 2018 we began selling these products directly to sub-distributors in China.
We anticipate that the expansion of our sales organization in China will result in increased sales, marketing and regulatory expenses during 2018. As of June 30, 2018 we had seven employees in China.
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 vascular graft used for dialysis access and is approved for sale in the United States.
In November 2016, we acquired substantially all of the assets related to the peripheral vascular allograft operations of Restore Flow Allografts, LLC for $12.0 million plus additional consideration depending upon the satisfaction of certain contingencies.
In April 2018, we sold our Reddick cholangiogram catheter and Reddick Saye-Screw product lines to Specialty Surgical Instrumentation, Inc. for $7.4 million.
In addition to relying upon acquisitions to grow our business, we also rely on our product development efforts to bring differentiated and next-generation products to market. These efforts have led to the following recent product developments:
In October 2016, we launched additional sizes of our XenoSure patch.
In December 2016, we launched the 7.0mm diameter size Omniflow graft.
In October 2017, we launched XenoSure biologic pledgets.
In April 2018, we expanded the indications for our Anastoclip GC in the United States to include dura tissue repair.
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 production control as well as reduced costs over the long-term. Our most recent manufacturing transitions included:
In May 2015, we entered into an asset purchase agreement with UreSil, LLC to acquire the production and distribution rights of UreSils Tru-Incise valvulotome for sales outside the United States, and at the same time we initiated a project to begin manufacturing this product in our Burlington facility. The manufacturing transition was completed in 2017. In May 2018 our right to use the Tru-Incise name expired, and we re-branded this product as EZE-SIT.
In March 2016, we initiated a project to transfer the manufacturing of our ProCol biologic product line to our Burlington facility. This transition was completed in May 2018.
In 2017 we completed the renovation of a portion of our manufacturing facility in Burlington, in which we expect most of our biologic offerings, including the XenoSure patch as well as certain biologic grafts, to be produced or processed. The cost of the facility renovation was approximately $3.0 million.
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.
For the six months ended June 30, 2018, approximately 44% of our sales were to customers located outside the United States. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. Selling, marketing, and administrative costs related to these sales are largely denominated in the local currency, thereby partially mitigating our exposure to exchange rate fluctuations. However, as most of our foreign sales are denominated in local currency, 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. In such cases we will record less revenue in U.S. dollars than we did prior to the rate increase. For the six months ended June 30, 2018, the effects of changes in foreign exchange rates increased our reported sales by approximately $1.9 million as compared to the rates in effect in the year-earlier period.
Sales and marketing. Our sales and marketing expense consists primarily of salaries, commissions, stock based compensation, travel and entertainment, attendance at vascular congresses, training programs, advertising and product promotions, direct mail and other marketing costs.
The following tables set forth, for the periods indicated, our net sales by geography (based on where our customers reside), and the change between the specified periods expressed as a percentage increase or decrease:
(unaudited) 2018 2017 Percent
$ 27,020 $ 25,753 5 % $ 53,014 $ 49,892 6 %
$ 16,082 $ 16,088 (0 %) $ 31,942 $ 31,069 3 %
$ 9,074 $ 8,121 12 % $ 17,829 $ 15,734 13 %
1,864 1,544 21 % 3,243 3,089 5 %
Net sales. Net sales increased $1.3 million or 5% to $27.0 million for the three months ended June 30, 2018, compared to $25.8 million for the three months ended June 30, 2017. Net sales increased $3.1 million or 6% to $53.0 million for the six months ended June 30, 2018, compared to $49.9 million for the six months ended June 30, 2017. The sales increase for the three months ended June 30, 2018 occurred across multiple product lines including our biologic vascular patches which increased by $0.5 million, allografts $0.4 million, shunts $0.4 million, valvulotomes $0.2 million and embolectomy catheters $0.2 million. Partly offsetting these increases was the decrease in cholangiogram catheters in connection with our divestiture of the Reddick product line of $0.5 million, net of sales to the buyer of the product line under a transition services agreement. The sales increase for the six months ended June 30, 2018 also occurred across multiple product lines including our biologic vascular patches which increased by $1.2 million, allografts $1.0 million, shunts $0.7 million, valvulotomes $0.7 million and embolectomy catheters $0.4 million. Partly offsetting these increases was the decrease in cholangiogram catheters in connection with our divestiture of the Reddick product line of $0.6 million, net of sales to the buyer of the product line under a transition services agreement, as well as a decrease in vessel closure systems of $0.3 million.
Direct-to-hospital net sales were 95% and 93% of our total net sales for the six months ended June 30, 2018 and 2017, respectively.
Net sales by geography. Net sales in the Americas was unchanged for the three months ended June 30, 2018 as compared to June 30, 2017. We experienced increased sales across multiple product lines including allografts of $0.4 million, shunts of $0.3 million and biologic vascular patches and powered phlebectomy systems of $0.1 million each, but these increases were offset largely by the decrease in cholangiogram catheter sales related to our divestiture of the Reddick product line of $0.5 million, and decreased biologic vascular graft sales of $0.1 million. For the six months ended June 30, 2018, sales in the Americas increased $0.9 million or 3%. Increased sales of allografts of $1.0 million, shunts of $0.4 million, biologic vascular patches of $0.3 million and valvulotomes of $0.3 million were offset by the decrease in cholangiogram catheters, as well as decreased sales of vessel closure systems of $0.2 million, radiopaque tape of $0.3 million and remote endarterectomy systems of $0.1 million.
Europe, Middle East and Africa (or EMEA) net sales increased $1.0 million, or 12% for the three months ended June 30, 2018, and increased $2.1 million or 13% for the six months ended June 30, 2018. For both comparative periods the increase was primarily driven by the favorable effect of foreign exchange rate changes versus the comparative period, as well as by increased sales of biologic vascular patches and embolectomy catheters. The Reddick divestiture had little impact on EMEA sales as those divested products were sold primarily in the Unites States.
Asia/Pacific Rim net sales increased $0.3 million, or 21% for the three months ended June 30, 2018, and increased $0.2 million or 5% for the six months ended June 30, 2018. For the three month period the increases were primarily related to sales of occlusion catheters, shunts, powered phlebectomy systems and valvulotomes. For the six month period the increases were primarily related to sales of occlusion catheters shunts and valvulotomes, which were partly offset by decreased sales of powered phlebectomy systems and vessel closure systems to China.
The following table sets forth the change in our gross profit and gross margin for the periods indicated:
(unaudited) 2018 2017 Change Percent
change 2018 2017 Change Percent
$ 18,992 $ 17,515 $ 1,477 8 % $ 37,466 $ 34,869 $ 2,597 7 %
70.3 % 68.0 % 2.3 % * 70.7 % 69.9 % 0.8 % *
Gross Profit. Gross profit increased $1.5 million to $19.0 million for the three months ended June 30, 2018, while gross margin increased 230 basis points to 70.3% in the period. For the six months ended June 30, 2018, gross profit increased $2.6 million to $37.5 million, while gross margin increased 80 basis points to 70.7% in the period. The increases for both comparative periods were the result of more favorable currency exchange rates, favorable product mix and higher average selling prices across most products, offset slightly by manufacturing inefficiencies in the current quarter.
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:
(unaudited) 2018 2017 $ Change Percent
change 2018 2017 $ Change Percent
$ 6,792 $ 6,599 $ 193 3 % $ 13,882 $ 13,553 $ 329 2 %
4,547 3,747 800 21 % 9,244 8,295 949 11 %
1,988 1,634 354 22 % 3,813 3,292 521 16 %
(5,786 )  (5,786 ) * (5,876 )  (5,876 ) *
$ 7,541 $ 11,980 $ (4,439 ) (37 %) $ 21,063 $ 25,140 $ (4,077 ) (16 %)
Sales Change 2018
25 % 26 % (1 %) 26 % 27 % (1 %)
17 % 15 % 2 % 17 % 17 % 0 %
7 % 6 % 1 % 7 % 7 % 0 %
(21 %) 0 % (21 %) (11 %) 0 % (11 %)
Not a meaningful percentage relationship.
Sales and marketing. For the three months ended June 30, 2018, sales and marketing expense increased 3% to $6.8 million. The increase was driven mainly by higher personnel costs, including salaries recruiting and travel associated with expanding the sales force in the 2018 period. As a percentage of net sales, sales and marketing expense decreased to 25% in the three months ended June 30, 2018 from 26% in the prior period as sales growth outpaced spending growth. For the six months ended June 30, 2018, sales and marketing expense increased 2% to $13.9 million. The increase was driven mainly by increased spending in 2018 related to our annual sales meeting which occurs in January, recruiting costs and severance costs. These increases were partly offset by lower sales force commissions and travel. As a percentage of sales, sales and marketing expense decreased to 26% from 27%.
General and administrative. For the three months ended June 30, 2018, general and administrative expense increased 21% to $4.6 million. The increases were driven by compensation costs, professional fees and acquisition-related charges, partly offset by lower facilities costs. As a percentage of sales, general and administrative expense increased to 17% for the three months ended June 30, 2018 from 15% in the prior year. For the six months ended June 30, 2018, general and administrative expense increased 11% to $9.2 million. The general and administrative expense increases were driven by higher compensation costs, professional fees and travel expense, which were partly offset by lower facilities costs. As a percentage of sales, general and administrative expense was 17% for the six months ended June 30, 2018 and 2017.
Research and development. For the three months ended June 30, 2018, research and development expense increased 22% to $2.0 million. For the six months ended June 30, 2018, research and development expense increased 16% to $3.8 million. In both comparative periods the increase was primarily related to regulatory submissions for our products in China and Japan, as well as testing related to our biologic product offerings. As a percentage of sales, research and development expense was 7% for the three and six months ended June 30, 2018, as compared to 6% and 7% for the prior year comparative periods, respectively.
Gain on divestiture. On April 5, 2018, we entered into an asset purchase agreement with Specialty Surgical Instrumentation, Inc. to sell the inventory, intellectual property and other assets associated with our Reddick cholangiogram catheter and Reddick Saye-Screw product lines for $7.4 million. In connection with this divestiture we at the same time entered into a transition services agreement to manufacture and supply these products to the buyer for a period of up to two years unless extended by both parties. We also entered into an agreement to supply latex balloons to the buyer for the cholangiogram catheters for a period of up six years, unless extended by both parties. During the three months ended June 30, 2018 we recorded a gain in connection with these agreements of $5.9 million.
Income tax expense. We recorded a tax provision of $2.8 million on pre-tax income of $11.5 million for the three months ended June 30, 2018, compared to a $0.8 million tax provision on pre-tax income of $5.5 million for the three months ended June 30, 2017. We recorded a tax provision of $3.9 million on pre-tax income of $16.5 million for the six months ended June 30, 2018, compared to $1.9 million on pre-tax income of $9.7 million for the six months ended June 30, 2017. Our effective income tax rate was 24.2% and 23.4% for the three and six month periods ended June 30, 2018. Our tax expense for the current period is based on an estimated annual effective tax rate of 24.6%, 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, different statutory rates from our foreign entities, and a discrete item for stock option exercises.
Our effective income tax rate was 15.2% and 19.1% for the three and six month period ended June 30, 2017. Our 2017 provision was based on the estimated annual effective tax rate of 34.5%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for 2017 varied from the statutory rate mainly due to federal and state tax credits, permanent items, lower 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 we believe is more likely than not to be realized. As of June 30, 2018, we have provided a valuation allowance of $2.0 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.
At June 30, 2018, our cash and cash equivalents were $19.6 million as compared to $19.1 million at December 31, 2017. We also had $33.3 million in a short-term managed income mutual fund investment as of June 30, 2018 compared to $22.6 million as of December 31, 2017. 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. All of our cash held outside of the United States is available for corporate use, with the exception of $9.1 million held by subsidiaries in jurisdictions for which earnings are planned to be permanently reinvested.
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 $16.4 million for the six months ended June 30, 2018. For the year ended December 31, 2017, we had operating income of $21.1 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 FDA and other regulatory clearances of 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, make payments under our quarterly dividend program, make share repurchases 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.
2018 2017 Net Change
$ 19,638 $ 30,120 $ (10,482 )
$ 8,627 $ 7,900 $ 1,651
(4,587 ) (2,444 ) (2,143 )
(3,113 ) (152 ) (3,885 )
Net cash provided by operating activities. Net cash provided by operating activities was $8.6 million for the six months ended June 30, 2018, consisting of $12.6 million in net income, adjustments for non-cash or non-operating items of $2.1 million (including depreciation and amortization of $2.1 million, stock-based compensation of $1.3 million, provisions for inventory write-offs and doubtful accounts of $0.3 million and a gain on divestiture of $5.9 million) and also a net use of working capital of $1.9 million. The net cash used for working capital was driven by an increase in inventory and other deferred costs of $1.3 million and an increase in accounts receivable of $0.5 million, as well as a decrease in accounts payable and accrued expenses of $0.1 million.
Net cash provided by operating activities was $7.9 million for the six months ended June 30, 2017, consisting of $7.9 million in net income adjusted for non-cash items of $3.2 million (including depreciation and amortization of $2.0 million, stock-based compensation of $1.0 million, and provisions for inventory write-offs and doubtful accounts of $0.3 million) which were offset by changes in working capital of $3.2 million. The net cash used for working capital was driven by increases in accounts receivable of $1.1 million and inventory of $0.8 million, as well as an increase in prepaid expenses of $0.8 million and decreases in accounts payable and other liabilities of $0.5 million.
Net cash used in investing activities. Net cash used in investing activities was $4.6 million for six months ended June 30, 2018. This was primarily driven by purchases of marketable securities of $10.8 million and expenditures on equipment and technology of $1.2 million, which were partially offset by proceeds from a business divestiture of $7.4 million.
Net cash used in investing activities was $2.4 million for the six months ended June 30, 2017. This was primarily driven by expenditures on leasehold improvements and equipment associated with the expansion of our Burlington, Massachusetts manufacturing operations.
Net cash used in financing activities. Net cash used in financing activities was $3.1 million for the six months ended June 30, 2018, primarily driven by cash dividends paid of $2.7 million and payments related to prior acquisitions of $1.1 million. These were partially offset by proceeds from stock option exercises of $0.7 million.
Net cash provided by financing activities was $0.2 million for the six months ended June 30, 2017, consisting of proceeds from stock option exercises of $2.3 million, offset by dividend payments of $2.1 million as well as payments related to prior acquisitions of $0.4 million.
Contractual obligations. Our principal contractual obligations consist of operating leases and inventory purchase commitments, and have not changed significantly since December 31, 2017 as reported in our Annual Report on Form 10-K.
We did not have any off-balance sheet arrangements as of June 30, 2018. 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.
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, 2017. With the exception of the adoption, effective January 1, 2018, of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) discussed in Note 1 to this Quarterly Report on Form 10-Q, there have been no material changes in our critical accounting policies during the six months ended June 30, 2018. 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 sales returns and discounts, share-based compensation, inventories, intangible assets, bad debts, and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results may differ from those estimates.
A summary of recent accounting pronouncements that may impact our financial statements upon adoption in future periods can be found in Note 1 to our financial statements included under Part 1, Item 1 of this Quarterly Report on Form 10-Q.
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 2018 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, 2017.
Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. We design our disclosure controls and procedures to ensure, at reasonable assurance levels, that such information is timely recorded, processed, summarized and reported, and then accumulated and communicated appropriately.
Based on an evaluation of our disclosure controls and procedures as of June 30, 2018 our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at reasonable assurance levels.
There have been no changes in our internal control over financial reporting for the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Notwithstanding the foregoing, 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 based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any system will succeed in achieving its stated goals under all potential future conditions. Over time, 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.
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, contracts, intellectual property and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of July 31, 2018, that management believes would have a material adverse effect on our financial position, results of operations or cash flows.
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, 2017, 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, 2017, which was filed with the Securities and Exchange Commission on March 9, 2018.
Exhibit Description Form Date Number
Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15 d-14(a).
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).*
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).*
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.
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 August 6, 2018.
/s/ George W. LeMaitre
I, George W. LeMaitre, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of LeMaitre Vascular, Inc.;
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
I, Joseph P. Pellegrino, Jr., certify that:
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), George W. LeMaitre, Chairman and Chief Executive Officer of LeMaitre Vascular, Inc. (the Company), certifies to the best of his knowledge that:
(1) The Companys Quarterly Report on Form 10-Q for the period ended June 30, 2018 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
This certification is being provided pursuant to 18 U.S.C. § 1350 and is not deemed to be a part of the Report, nor is it to deemed to be filed for any purpose whatsoever.
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Joseph P. Pellegrino, Jr., Chief Financial Officer of LeMaitre Vascular, Inc. (the Company), certifies to the best of his knowledge that: