# Lemaitre Vascular Inc: Form 10-Q for the period ended Jun 30, 2022

- Company: [Lemaitre Vascular Inc](/companies/lmat.md) (CIK 1158895)
- Form: 10-Q
- Filed: 2022-08-05
- Accepted by EDGAR: Aug 5, 2022, 06:10 ET
- Period: 2022-06-30
- Accession: 0001437749-22-019001
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1158895/000143774922019001/lmat20220630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1158895/000143774922019001/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $42.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $81.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $14.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $27.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $27.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $53.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-04-01 to 2022-06-30 | $3.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-01-01 to 2022-06-30 | $6.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $5.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $13.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $0 | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $0 | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $3.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $9.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 22,129,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 22,115,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $14.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $1.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $5.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $149.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-06-30 | $20.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $148.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $299.4m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $23.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $41.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-06-30 | $258.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,635 characters.

*This Quarterly Report on Form 10-Q contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve substantial risks and uncertainties, particularly risks related to the regulatory environment, our common stock, fluctuations in our quarterly and annual results, our ability to successfully integrate acquisitions into our business, and risks related to our business and industry generally, such as risks inherent in the process of developing and commercializing products and services that are safe and effective for use in the peripheral vascular disease market. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales, gross margin expectations, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections, or expectations prove incorrect, our actual results, performance, or financial condition may vary materially and adversely from those anticipated, estimated, or expected. No forward-looking statement can be guaranteed and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. These risks and uncertainties include, but are not limited to: the status of our global regulatory approvals and compliance with regulatory requirements to market and sell our products both in the US and outside of the US; the duration and severity of the impact of COVID-19 on the global economy, our customers, our suppliers and our company; the risk of significant fluctuations in our quarterly and annual results due to numerous factors; the risk that assumptions about the market for the Company’s products and the productivity of the Company’s direct sales force and distributors may not be correct; the risk that we may not be able to maintain our recent levels of profitability; the risk that the Company may not realize the anticipated benefits of its strategic activities; risks related to the integration of acquisition targets; the acceleration or deceleration of product growth rates; risks related to product demand and market acceptance of the 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, 2021, as filed with the SEC on February 28, 2022. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Unless the context indicates otherwise, references to “LeMaitre Vascular,” “we,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to LeMaitre Vascular, Inc. and its subsidiaries.*

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

### Overview

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

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

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

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

Our principal biologic offerings include vascular and cardiac patches as well as vascular and dialysis grafts. In Q2 2022, biologics represented 50% of worldwide sales. We view the biologic device offerings favorably, as we believe they represent differentiated and in some cases growing product segments.

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

Our business opportunities include the following:

- adding complementary products through acquisitions;
- growing our direct sales force in the United States, Europe, the United Kingdom, Canada and Asia Pacific, including replacing a distributor with our sales personnel;
- introducing our products into new territories upon receipt of regulatory approvals or registrations in these territories;
- consolidating and automating product manufacturing at our Burlington, Massachusetts facilities, and
- updating existing products and introducing new products through research and development.

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

We sell our products and services primarily through a direct sales force. As of June 30, 2022, our sales force was comprised of 111 sales representatives in North America, Europe, the United Kingdom and Asia Pacific, including two export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have sales offices in Chandler, Arizona and Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have sales offices in Milan, Italy; Madrid, Spain; and Hereford, England. Our Asia Pacific headquarters is located in Singapore, and we also have sales offices in Tokyo, Japan; Shanghai, China; Kensington, Australia; and Seoul, Korea. During the current quarter, approximately 95% of our net sales were generated in territories in which we employ direct sales representatives. We also sell our products in other countries through distributors.

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

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

Our strategy for growing our business includes the acquisition of complementary product lines and companies.

- In July 2019, we entered into an agreement with UreSil, LLC to purchase the remaining assets of their Eze-Sit valve cutter business, including U.S. distribution rights, for $8.0 million.
- In October 2019, we entered into an agreement with Admedus to purchase the assets of their CardioCel biologic patch business for $15.5 million plus additional payments of up to $7.8 million, depending upon the satisfaction of certain contingencies.
- In June 2020, we entered into an agreement with Artegraft to purchase the assets of their bovine graft business for $72.5 million plus additional payments of up to $17.5 million, depending upon 2021 – 2023 unit sales.

Occasionally we discontinue or divest products or product lines that are no longer complementary to our business or that are not commercially viable.

- During 2021, we made decisions to wind down or discontinue TRIVEX powered phlebectomy systems, remote endarterectomy devices and surgical glue. These product lines totaled approximately $2.2 million in 2021 revenues.
- During 2022, we made the decision to wind down the ProCol graft, AlboSure polyester patch and Latis graft cleaning catheter product lines. These products totaled approximately $0.9 million in 2021 revenues.

From time to time we may undertake SKU reductions and transition sales to other SKUs or products with similar features. For example, in 2022, we decided to initiate the transition of sales of our Syntel spring tip catheter to our NovaSil catheter. Any of these actions may result in inventory write-offs and temporary or permanent negative impacts to our sales, gross margin and customer relationships.

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

- During 2020, we entered into definitive agreements with, or participated with Admedus in concluding agreements with, several former Admedus distributors in Europe and Canada, in order to terminate their distribution of our acquired bovine cardiac and vascular patch products, and we began selling direct-to-hospital in those geographies. The termination fees totaled approximately $0.1 million.
- During 2020, we participated with Artegraft in concluding agreements with several of their former U.S. distributors in order to terminate their distribution of our bovine graft products. We now sell Artegraft products direct-to-hospital throughout the United States.
- In May 2022, we entered into a distribution transition agreement with our Korean distributor in order to sell products directly in Korea and dissolve the existing distribution arrangement. We expect to begin selling direct-to-hospital in Korea in January 2023. The distribution termination fees will total approximately $0.5 million.

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

- In 2020, we launched RestoreFlow cardiac allografts for use in cardiac repair and restoration.
- In March 2022, we received U.S. FDA clearance to market PhasTIPP, a portable powered phlebotomy device used to remove varicose veins in the leg.

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

- In October 2019, we acquired the biologic patch business assets from Admedus. In July 2020, we initiated a project to transfer the production of these devices to our Burlington facilities. We expect this transfer to be complete in 2023.
- In June 2022, we closed our St. Etienne, France factory in order to streamline manufacturing operations and to reduce expenses. The Cardial business consisted of the manufacturing of polyester vascular grafts, valvulotomes, surgical glue and select OEM devices. We expect to transition Cardial graft sales to our Burlington-manufactured AlboGraft product for additional cost savings and improved margins. We acquired the Cardial business in 2018.

24

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

Fluctuations in the exchange rates between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the six months ended June 30, 2022 approximately 38% of our sales took place outside the U.S., largely in currencies other than the U.S. dollar. We expect foreign currencies will represent a significant percentage of future sales. Selling, marketing, and administrative costs related to these sales are also denominated in foreign currencies, thereby partially mitigating our bottom-line exposure to exchange rate fluctuations. However, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases we will record less revenue in U.S. dollars than we did before the exchange rate changed. For the six months ended June 30, 2022, we estimate that the effects of changes in foreign exchange rates decreased our reported sales by approximately $2.5 million, as compared to rates in effect for the six months ended June 30, 2021.

### Net Sales and Expense Components

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

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

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

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

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

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

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

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

### Results of Operations

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

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

### Comparison of the three- and six-month periods ended June 30, 2022 to the three- and six-month periods ended June 30, 2021:

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

*(unaudited)*

*($ in thousands)*

*($ in thousands)*

|  | Three months ended June 30, 2022 | 2021 | Percent change | Six months ended June 30, 2022 | 2021 | Percent change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $42,108 | $40,670 | 4% | $81,669 | $76,553 | 7% |
| Net sales by geography: |  |  |  |  |  |  |
| Americas | $28,854 | $27,329 | 6% | $55,397 | $51,028 | 9% |
| Europe, Middle East and Africa | 10,749 | 10,803 | (0%) | 21,243 | 20,665 | 3% |
| Asia Pacific | 2,505 | 2,538 | (1%) | 5,029 | 4,860 | 3% |
| Total | $42,108 | $40,670 | 4% | $81,669 | $76,553 | 7% |

***Net sales.*** Net sales increased by $1.4 million, or 4%, to $42.1 million for the three months ended June 30, 2022, compared to $40.7 million for the three months ended June 30, 2021. The increase was driven primarily by an increase in carotid patch sales of $0.9 million, allograft preservation services of $0.7 million, and bovine graft sales of $0.6 million. Additionally, shunt and valvulotome sales increased by $0.2 million and $0.1 million, respectively. We estimate that the stronger U.S. dollar decreased net sales by $1.7 million during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Net sales increased by $5.1 million, or 7%, to $81.7 million for the six months ended June 30, 2022, compared to $76.6 million for the six months ended June 30, 2021. The increase was driven primarily by an increase in carotid patch sales of $1.6 million, bovine graft sales of $1.6 million and allograft preservation services of $1.4 million. Additionally, shunt and valvulotome sales increased by $0.9 million and $0.5 million, respectively. We estimate that the stronger U.S. dollar decreased net sales by $2.5 million during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Direct-to-hospital net sales were 95% of our total net sales for the six months ended June 30, 2022 and June 30, 2021.

***Net sales by geography.*** Net sales in the Americas increased $1.5 million, or 6%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was driven primarily by increased allograft preservation services of $0.6 million, increased bovine graft sales of $0.6 million, and increased shunt sales of $0.3 million.

Net sales in the Americas increased $4.4 million, or 9%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was driven primarily by increased bovine graft sales of $1.6 million, increased allograft preservation services of $1.2 million, and increased shunt sales of $0.5 million. Additionally, valvulotome and carotid patch sales both increased by $0.4 million, respectively.

EMEA net sales decreased $0.1 million, or 0.5%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The decrease was driven primarily by decreased ovine graft sales of $0.4 million largely due to the lack of a CE mark for Burlington produced devices, and decreased surgical glue sales of $0.2 million, as surgical glue sales were discontinued during the most recent period. The decreased sales were offset by increased carotid patch sales of $0.4 million, and increased valvulotome sales of $0.2 million.

EMEA net sales increased $0.6 million, or 3%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was driven primarily by increased carotid patch sales of $0.8 million, increased shunt sales of $0.5 million, and increased valvulotome sales of $0.3 million. The increased sales were partial offset by decreased ovine graft sales of $0.6 million largely due to the lack of a CE mark for Burlington-produced devices, and decreased surgical glue sales of $0.3 million.

Asia Pacific net sales decreased $33,000, or 1%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The decrease was driven primarily by decreased occlusion catheter sales of $0.1 million, decreased shunt sales of $0.1 million, and decreased valvulotome sales of $0.1 million. The decreased sales were offset by increased carotid patch sales of $0.2 million.

Asia Pacific net sales increased $0.2 million, or 3%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was driven primarily by increased carotid patch sales of $0.4 million offset by decreased shunt sales of $0.1 million.

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

*(unaudited)*

*($ in thousands)*

*($ in thousands)*

|  | Three months ended June 30, 2022 | 2021 | Change | Percent change | Six months ended June 30, 2022 | 2021 | Change | Percent change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $27,810 | $26,761 | $1,049 | 4% | $53,772 | $50,560 | $3,212 | 6% |
| Gross margin | 66.0% | 65.8% | 0.2% | \* | 65.8% | 66.0% | (0.2%) | \* |
| \*Not applicable |  |  |  |  |  |  |  |  |

***Gross Profit.*** Gross profit increased $1.0 million, or 4%, to $27.8 million for the three months ended June 30, 2022, and gross margin increased 20 basis points to 66.0% in the period. The increase in gross profit was driven primarily by increased sales from carotid patch, allograft, and bovine grafts. The increase in gross margin was driven primarily by increased manufacturing efficiencies, lower charges for excess and obsolete inventory, and increased bovine graft sales which carry comparatively higher gross margins, partially offset by unfavorable changes in foreign currency exchange rates.

Gross profit increased $3.2 million, or 6%, to $53.8 million for the six months ended June 30, 2022, and gross margin decreased 20 basis points to 65.8% in the period. The increase in gross profit was driven primarily by increased sales from carotid patch, bovine graft, and allografts. The decrease in the gross margin was driven primarily by an increase in labor costs, unfavorable product mix, including higher sales of comparatively low margin polyester grafts, unfavorable changes in foreign currency exchange rates and manufacturing inefficiencies largely related to bovine carotid patches.

### Operating Expenses

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

*(unaudited)*

|  | Three months ended June 30, 2022 | 2021 | $ Change | Percent change | Six months ended June 30, 2022 | 2021 | $ Change | Percent change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing | $8,242 | $6,803 | $1,439 | 21% | $16,092 | $13,269 | $2,823 | 21% |
| General and administrative | 7,331 | 6,200 | 1,131 | 18% | 14,583 | 12,744 | 1,839 | 14% |
| Research and development | 3,346 | 2,652 | 694 | 26% | 6,278 | 5,496 | 782 | 14% |
| Restructuring | 3,107 | - | 3,107 | \* | 3,107 | - | 3,107 | \* |
| Total | $22,026 | $15,655 | $6,371 | 41% | $40,060 | $31,509 | $8,551 | 27% |

|  | Three months ended June 30, 2022 % of Net Sales | 2021 % of Net Sales | Change | Six months ended June 30, 2022 % of Net Sales | 2021 % of Net Sales | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing | 20% | 17% | 3% | 20% | 17% | 3% |
| General and administrative | 17% | 15% | 2% | 18% | 17% | 1% |
| Research and development | 8% | 7% | 1% | 8% | 7% | 1% |
| Restructuring | 7% | 0% | 7% | 4% | 0% | 4% |
| \* Not a meaningful percentage relationship. |  |  |  |  |  |  |

***Sales and marketing.*** For the three months ended June 30, 2022, sales and marketing expense increased 21% to $8.2 million. The increase was driven primarily by higher salaries and related expenses of $1.1 million, including higher commissions of approximately $0.3 million. The number of sales reps increased from 88 to 111 from June 30, 2021 to June 30, 2022. We also added 2 additional regional sales managers during this time. Travel and related expenses were also higher by $0.2 million. Expense reduction programs implemented during the second quarter of 2020 through the fourth quarter of 2021 in response to the COVID-19 global pandemic, including a reduction in force, lowered expenses for the three months ended June 30, 2021. We have since rehired in many areas, including our sales force. As a percentage of net sales, sales and marketing expense increased to 20% for the three months ended June 30, 2022, up from 17% in the prior period.

For the six months ended June 30, 2022, sales and marketing expense increased 21% to $16.1 million. The increase was driven by higher salaries and related expenses of $2.2 million, including higher commissions of approximately $0.7 million. Travel and related expenses were also higher by $0.4 million. As a percentage of net sales, sales and marketing expense increased to 20% for the six months ended June 30, 2022, up from 17% in the prior period.

***General and administrative.*** For the three months ended June 30, 2022, general and administrative expenses increased 18% to $7.3 million. The increase was driven primarily by higher salaries and related expenses of $0.6 million, as well as an increase in personnel. Outside services expense also increased by $0.4 million. As a percentage of sales, general and administrative expense increased to 17% for the three months ended June 30, 2022, up from 15% in the prior period.

For the six months ended June 30, 2022, general and administrative expenses increased 14% to $14.6 million. The increase was driven primarily by higher salaries and related expenses of $1.3 million, as well as an increase in personnel. Outside services expense also increased by $0.4 million. As a percentage of net sales, general and administrative expense increased to 18% for the six months ended June 30, 2022, up from 17% in the prior period.

***Research and development.*** For the three months ended June 30, 2022, research and development expense increased 26% to $3.3 million. The increase was driven primarily by higher salaries and related expenses of $0.2 million, as well as an increase in personnel. Outside services and testing also increased by $0.5 million due to higher consulting and third-party costs associated with regulatory approvals, as well as testing related to our biologic products. As a percentage of sales, total research and development expense increased to 8% for the three months ended June 30, 2022, from 7% in the prior period.

For the six months ended June 30, 2022, research and development expenses increased 14% to $6.3 million. The increase was driven primarily by higher salaries and related expenses of $0.6 million, as well as an increase in personnel. Outside services and testing also increased by $0.2 million. As a percentage of net sales, total research and development expense increased to 8% for the six months ended June 30, 2022, from 7% in the prior period.

***Restructuring.*** For the three and six months ended June 30, 2022, restructuring expense was $3.1 million. On June 30, 2022 we ceased operations at the St. Etienne, France factory and terminated most of the personnel at the site. The closure resulted in a restructuring charge of $3.1 million for the three and six months ended June 30, 2022. Charges primarily consisted of employment termination costs, impairment of fixed assets and inventory, and third-party costs. Total costs associated with the closure are expected to be approximately $3.5 million.

***Income tax expense.*** We recorded a tax provision of $2.0 million on pre-tax income of $5.5 million for the three months ended June 30, 2022, compared to a $2.2 million tax provision on pre-tax income of $10.5 million for the three months ended June 30, 2021. We recorded a tax provision of $4.0 million on pre-tax income of $13.5 million for the six months ended June 30, 2022, compared to a tax provision of $3.7 million on pre-tax income of $17.9 million for the six months ended June 30, 2021. Our effective income tax rate was 36.7% and 29.5% for the three and six month periods ended June 30, 2022. Generally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items, with any changes affecting the estimated annual effective tax rate recorded in the interim period in which the change occurs. There is an exception to the estimated annual income tax rate calculation when there are losses in a jurisdiction that have a valuation allowance. The Company incurred losses in 2022 that are not benefitted in connection with the closure of the St. Etienne, France factory. Accordingly, the company has removed the pre-tax losses of its French subsidiary to calculate the annual effective tax rate. As such, 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 certain foreign losses not benefitted due to a valuation allowance. When the French subsidiary’s ordinary pre-tax loss is removed, our effective income tax rate is 23.7% and 24.1% for the three and six month periods ended June 30, 2022. As noted above, the effective income tax rate on unadjusted pre-tax income of $5.5 million and $13.5 million for the three and six month periods ended June 30, 2022, results in effective tax rates of 36.7% and 29.5% for the three and six month periods ended June 30, 2022, respectively. The primary factors affecting the Company’s recalculated effective tax rate for the three and six month periods ended June 30, 2022, were certain foreign losses not benefitted due to a valuation allowance.

Our effective income tax rate was 20.6% and 20.7% for the three and six month periods ended June 30, 2021. Our 2021 provision was based on the estimated annual effective tax rate of 24.1%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for the six month period ended June 30, 2021 varied from the statutory rate mainly due to federal and state tax credits, permanent items, different statutory rates from our foreign entities, and a discrete item for stock option exercises.

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

We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount that we believe is more likely than not to be realized. As of June 30, 2022, we have provided a valuation allowance of $2.5 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards, Massachusetts tax credit carry forwards, and France (Cardial) net operating loss carry forwards that are not expected to be realized.

### Liquidity and Capital Resources

At June 30, 2022, our cash and cash equivalents were $20.8 million as compared to $13.9 million at December 31, 2021. We also had $54.9 million in short-term marketable securities as of June 30, 2022 and $56.1 million as of December 31, 2021. Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, and consist primarily of operating bank accounts. Our short-term marketable securities consist of a managed income mutual fund investing mainly in short-term investment grade, U.S.-dollar denominated fixed and floating-rate debt, and a short-duration bond fund. As of June 30, 2022 our short-term marketable securities reflected an unrealized loss of $1.8 million as a result of increasing market interest rates.

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

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

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

In November 2021, we terminated the credit agreement, including the revolving line of credit, as permitted under the original agreement.

### Operating and Capital Expenditure Requirements

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

We recognized operating income of $13.7 million for the six months ended June 30, 2022. For the year ended December 31, 2021, we had operating income of $36.4 million. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

- the revenues generated by sales of our products and services;
- payments associated with potential future quarterly cash dividends to our common stockholders;
- future acquisition-related payments;
- payments associated with income and other taxes;
- the costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;
- the costs associated with our initiatives to sell direct-to-hospital in new countries;
- the costs of obtaining and maintaining U.S. FDA and other regulatory clearances for our existing and future products;
- the costs associated with obtaining European MDR clearances for our existing and future products;
- the number, timing, and nature of acquisitions, divestitures and other strategic transactions, and
- potential future share repurchases.

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

### Dividends

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

*(in thousands)*

| Record Date Fiscal Year 2022 | Payment Date | Per Share Amount | Dividend Payment |
| --- | --- | ---: | ---: |
| March 8, 2022 | March 24, 2022 | $0.125 | $2,743 |
| May 17, 2022 | June 2, 2022 | $0.125 | $2,745 |
| Fiscal Year 2021 |  |  |  |
| March 9, 2021 | March 25, 2021 | $0.110 | $2,262 |
| May 19, 2021 | June 3, 2021 | $0.110 | $2,267 |
| August 26, 2021 | September 9, 2021 | $0.110 | $2,401 |
| November 19, 2021 | December 2, 2021 | $0.110 | $2,405 |

On July 26, 2022 our Board of Directors approved a quarterly cash dividend on our common stock of $0.125 per share payable on September 8, 2022, to stockholders of record at the close of business on August 25, 2022.

### Cash Flows

*(in thousands)*

|  | Six months ended June 30, 2022 | 2021 | Net Change |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $20,788 | $21,541 | $(753) |
| Cash flows provided by (used in): |  |  |  |
| Operating activities | $13,959 | $15,971 | $(2,012) |
| Investing activities | (1,509) | (2,462) | 953 |
| Financing activities | (4,965) | (18,504) | 13,539 |

***Net cash provided by operating activities.*** Net cash provided by operating activities was $14.0 million for the six months ended June 30, 2022, consisting of $9.6 million in net income, adjustments for non-cash or non-operating items of $10.0 million (including primarily depreciation and amortization of $4.8 million, stock-based compensation of $2.3 million, provisions for inventory write-offs and doubtful accounts of $1.8 million, and loss on divestiture of $2.0 million), and also a net use of working capital of $5.6 million. The net cash used for working capital was driven by an increase in inventory and other deferred costs of $3.5 million and an increase in accounts receivable of $2.6 million. These cash uses were offset by a decrease in prepaid expenses and other assets of $0.4 million and increase of accounts payable of $0.1 million.

Net cash provided by operating activities was $16.0 million for the six months ended June 30, 2021, consisting of $14.2 million in net income, adjustments for non-cash or non-operating items of $9.4 million (including depreciation and amortization of $5.3 million, stock-based compensation of $1.8 million, provisions for inventory write-offs and doubtful accounts of $2.3 million), and also a net use of working capital of $7.6 million. The net cash used for working capital was driven by payments of accounts payable and accrued liabilities of $4.6 million, an increase in inventory and other deferred costs of $2.0 million and an increase in accounts receivable of $1.5 million. These cash uses were offset by a decrease in prepaid expenses and other assets of $0.5 million.

***Net cash used in investing activities.*** Net cash used in investing activities was $1.5 million for the six months ended June 30, 2022, consisting of expenditures on equipment and technology.

Net cash used in investing activities was $2.5 million for the six months ended June 30, 2021, consisting of expenditures on equipment and technology.

***Net cash used in financing activities.*** Net cash used in financing activities was $5.0 million for the six months ended June 30, 2022, consisting primarily of a dividend payment of $5.5 million. This use of cash was partly offset by proceeds from stock option exercises of $0.5 million, net of shares repurchased to cover employee payroll taxes.

Net cash used in financing activities was $18.5 million for the six months ended June 30, 2021, consisting primarily of payments made on our long-term debt of $16.0 million and dividend payments of $4.5 million. These uses of cash were partly offset by proceeds from stock option exercises of $2.0 million, net of shares repurchased to cover employee payroll taxes.

### 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, 2021. There have been no material changes in our critical accounting policies during the six months ended June 30, 2022. 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 revenue recognition, inventory valuation, valuation of intangible assets and goodwill, contingent consideration and income taxes are reviewed on an ongoing basis and updated as appropriate. Actual results may differ from those estimates.

### Recent Accounting Pronouncements

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.

## Market risk

As filed, 751 characters.

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 2022 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, 2021.

## Controls and procedures

As filed, 3,225 characters.

### Evaluation of Disclosure Controls and Procedures

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, 2022 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.

### Changes in Internal Control

There have been no changes in our internal control over financial reporting for the six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations of Internal Controls

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.

## Risk factors

As filed, 17,224 characters.

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, 2021, which could materially affect our business, financial condition, or future results. The risk factors below supplement and update the risk factors and information discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

***Our business is subject to complex, costly, and burdensome regulations. We could be subject to significant penalties if we fail to comply.***

The production and marketing of our products and services and our ongoing research and development are subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. U.S. and foreign regulations applicable to medical devices and human tissues are wide-ranging and govern, among other things, the testing, marketing, and premarket clearance or approval of new medical devices and services related to human tissue, as applicable, in addition to regulating manufacturing and processing practices, reporting, promotion and advertising, importing and exporting, labeling, and record-keeping procedures.

Our failure to comply with applicable regulatory requirements could result in governmental agencies or a court taking action, including any of the following:

- issuing public warning letters to us;
- imposing fines and penalties on us;
- issuing an injunction preventing us from manufacturing, processing, selling or distributing our products;
- bringing civil or criminal charges against us;
- delaying the introduction of our new products into the market;
- ordering a recall of, or detaining or seizing, our products or cryopreserved human tissue; or
- withdrawing or denying approvals or clearances for our products.

If any or all of the foregoing were to occur, our business, results of operations, and brand could be materially adversely affected.

***If we or some of our suppliers fail to comply with the FDA’s Quality System Regulation and other applicable requirements, our manufacturing or processing operations could be disrupted, our sales and profitability could suffer, and we may become subject to a wide variety of FDA enforcement actions.***

We are subject to inspection and marketing surveillance by the FDA to determine our compliance with all regulatory requirements. If the FDA finds that we have failed to comply with any regulatory requirements, it can institute a wide variety of enforcement actions, including, but not limited to, warning letters, fines and penalties, injunctions, civil or criminal charges, mandatory recalls, and withdrawal of clearances to sell products.

We and some of our suppliers must comply with the FDA’s Quality System Regulation, which governs the methods used in, and the facilities and controls used for, the design, testing, manufacture, control, quality assurance, installation, servicing, labeling, packaging, storage, and shipping of medical devices. Our Fox River Grove operations must comply with the FDA’s current Good Tissue Practices, which are the FDA regulatory requirements for the processing of human tissue. The FDA enforces its regulations through pre-announced and unannounced inspections. We have been, and anticipate in the future being, subject to such inspections by the FDA and other regulatory bodies. The timing and scope of future audits is unknown and it is possible, despite our efforts to ensure that our quality systems and the operation of our manufacturing facilities remain in compliance with U.S, and non-U.S. regulatory requirements, that audits may result in one or more unsatisfactory results. If we or one of our suppliers fails an inspection, or if a corrective action plan adopted by us or one of our suppliers is not sufficient, the FDA may bring an enforcement action against us, and our operations could be disrupted and our manufacturing delayed. For example, the FDA concluded a six week inspection of our Burlington facilities in June 2022. The inspection, which primarily focused on the manufacturing activities for our XenoSure biologic patch, yielded five FDA Form 483 observations with numerous examples cited by the FDA in support. Notwithstanding the FDA’s observations, based on our controls and empirical evidence, we believe that our products remain safe and effective for their intended use. We responded to the FDA with an extensive corrective action plan, and we have begun to address their findings. However, there can be no assurance that the FDA will be satisfied with our proposed actions or risk mitigation activities. As a result, the FDA may choose to take enforcement action against our firm, including by issuing a warning letter to us, requesting or mandating a recall of certain lots of our XenoSure patches or taking any of the other enforcement actions described above. If the FDA were to issue a warning letter to us, it could trigger additional audits by regulators from other geographies, consume additional internal and financial resources, interrupt our operations and have a material adverse impact on our business, results of operations and brand.

We participate in the Medical Device Single Audit (MDSAP) program, which allows manufacturers to undergo a universal quality system audit that is accepted in the United States, Japan, Australia, Canada and Brazil in lieu of individual routine audits by each regulator. Maintenance of this certification is a requirement to maintain sales in certain geographies including Canada. Failure to maintain this certification in good standing could result in suspension of our sales efforts in Canada or the other geographies.

We are also subject to the FDA’s general prohibition against promoting our products for unapproved or off-label uses and to the medical device reporting regulations that require us to report to the FDA if our products may have caused or contributed to a death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in a death or serious injury. We must also file reports with the FDA of some device corrections and removals, and we must adhere to the FDA’s rules on labeling and promotion. If we fail to comply with these or other FDA requirements or fail to take adequate corrective action in response to any significant compliance issue raised by the FDA, the FDA can take significant enforcement actions, which could harm our business, results of operations, and our reputation.

In addition, most other countries, such as Japan, require us to comply with manufacturing and quality assurance standards for medical devices that are similar to those in force in the U.S. before marketing and selling our products in those countries. If we fail to comply, we would lose our ability to market and sell our products in those foreign countries.

***If we do not comply with international regulatory requirements to market our products outside the United States or are required to modify our operations or products as a result of such requirements, our business will be harmed.***

Sales of medical devices outside the United States are subject to international regulatory requirements that vary from country to country. These requirements and the amount of time required for approval may differ from our experiences with the U.S. FDA. In some countries, we rely on our international distributors to obtain premarket approvals, complete product registrations, comply with clinical trial requirements, and complete those steps that are customarily taken in the applicable jurisdictions to comply with governmental and quasi-governmental regulation. In the future, we expect to continue to rely on distributors in this manner in those countries where we market and sell our products through them. Failure to satisfy these foreign regulations would impact our ability to sell our products in these countries and could cause our business to suffer. There can be no assurance that we will be able to obtain or maintain the required regulatory approvals in these countries.

Our products are currently regulated in the European Union (EU) and the United Kingdom under the European Medical Devices Directive (93/42/EC as amended by 2007/47/EC) (MDD) and the European Medical Device Regulation (2017/745) (MDR). In order to market our medical devices in the EU, we are required to obtain CE marks, which denote conformity to the essential requirements of the MDD or MDR, and manufacturers of higher-risk devices generally must use a “Notified Body”—an appointed independent third party to assess conformity. We currently use three Notified Bodies for our various products. We have received CE marks under the MDD to sell most of our products after managing a reinstatement process for those CE marks in 2020 and 2021.

In April 2017, the EU adopted new regulations for medical devices, the MDR, which replace the MDD and which took effect as of May 26, 2021. Our products will eventually be fully subject to the MDR, which requires all of our products, regardless of classification, to obtain a new CE mark in accordance with the new, more stringent standards under the MDR. As a condition to CE mark approval, clinical evidence will be required for Class III and implantable devices. As our Notified Bodies transition from MDD to MDR, they have begun to impose more rigorous requirements on us. Until recently, our preparation of filings under the MDR had been delayed due to our work on the MDD CE mark reinstatement referred to above. As a result, we may not receive CE marks under MDR on a timely basis, which could lead to backorders if we have not placed sufficient inventory on the EU market before our CE mark under MDD expires in order to bridge any gap between such CE mark and a new CE mark under MDR. For example, the arrangement under which Admedus agreed to manufacture and supply us with CardioCel and VascuCel inventory expires on July 11, 2023.and we may not receive a CE mark under MDR for such products until Q2 2024. If we are unable to procure sufficient inventory to cover such gap period, then we could encounter backorders in CardioCel and VascuCel until receipt of CE marks under MDR for such products in 2024. If we fail to obtain new CE marks under the MDR in a timely manner, or at all, future sales of our products in the EU could be adversely impacted.

There can be no assurance that we will be able to obtain or maintain MDR CE marks for our existing products, and obtaining CE marks may involve a significant amount of time and expense, stringent clinical and preclinical testing, or modification of our products and could result in limitations being placed on the use of our products in order to obtain approval. These types of more stringent restrictions on our products as they transition to MDR could impact sales of our products and/or their gross margins could be adversely impacted. For example, under the MDD CE mark issued for XenoSure in 2021, the indications for its use no longer include neuro or cardiac applications, indications for which the product was previously approved. Additionally, only XenoSure made from bovine pericardium sourced from certain of our suppliers is permitted to be sold under the new CE mark. While our existing suppliers are meeting our demand for tissue supply, there can be no assurance that they will meet or sustain higher levels of demand in the future. If they cannot meet our demand for tissue supply, our ability to supply conforming XenoSure devices to our EMEA customers may be impacted and our sales may suffer. Additionally, the tissue from the two approved tissue suppliers is significantly more expensive than that sourced from the third supplier. As a result, our EMEA gross margin for XenoSure has been negatively impacted. The Company is pursuing a path to reinstate the third supplier, although no assurances can be given.

Additionally, significant changes to our devices may trigger a requirement to file for an MDR CE mark earlier than expected, which could result in backorders. For example, in March 2020, we learned that a chemical used in our latex formulation was obsoleted. As a result, we submitted our new latex formulation to one of our Notified Bodies for review and acceptance under our Class III Pruitt F3 shunt MDD CE mark. Our Notified Body determined that the change is significant under the rules of the Class III MDD and as such we cannot implement that change under the Class III MDD rules. We filed for an MDR CE mark on that device in Q4 2021, and we currently await the results of our MDR review. We anticipate approval for that device in Q4 2022, though no assurance can be given as to timing or result. We believe inventory for our Pruitt F3 shunt will likely only be sufficient to supply customers until the end of Q3 2022, based on historical sales, and as a result, we may begin to experience backorders for the Pruitt F3 shunt while we await approval by our Notified Body. If we fail to obtain a new CE mark under MDR on this product in a timely manner, or at all, future sales of this product in the EU could be adversely impacted, though we could pursue mitigation strategies, including country-by-country derogations.

As a result of the United Kingdom’s exit from the EU, the U.K. Medicines and Healthcare Products Regulatory Agency (MHRA) has announced that devices marketed in the U.K. will require U.K. Conformity Assessed (UKCA) marks certified by a U.K. approved Notified Body following the expiration of a transition period. During the transition period, CE marking will continue to be recognized in the U.K. and certificates issued by EU-recognized Notified Bodies will continue to be valid in the U.K. market. The MHRA previously indicated that the transition period would remain in effect until June 30, 2023. On June 26, 2022, the MHRA announced its intention to establish a transitionary arrangement that would extend this deadline and allow medical devices with valid MDD CE marks to continue to be sold in the U.K. until the expiration of such CE marks. For all of our CE marked products except CardioCel and VascuCel, this would result in an extension of the transition period until May 25, 2024. Following such date (and in the case of CardioCel and VascuCel, following August 13, 2023), our devices marketed in the U.K. will require U.K. Conformity Assessed (UKCA) marks certified by a U.K. approved Notified Body. We intend to seek such marks for our products currently sold on the U.K. market. If we fail to obtain UKCA marks in a timely manner, or at all, future sales of our products in the U.K. could be adversely impacted.

Failure to receive or maintain CE mark approval would prohibit us from selling these products in the EU or the U.K., and would require significant delays in obtaining individual country approvals. If we do not receive or maintain these approvals, our business could be harmed. Maintaining a CE mark is contingent upon our continued compliance with applicable European medical device requirements, including limitations on advertising and promotion of medical devices and requirements governing the handling of adverse events. As highlighted above, there can be no assurance that we will be successful in obtaining, retaining or maintaining the CE mark for any of our current products. In particular, adverse event reporting requirements in the EU and the U.K. mandate that we report incidents which led or could have led to death or serious deterioration in health. Under certain circumstances, we could be required to or could voluntarily initiate a recall or removal of our product from the market in order to address product deficiencies or malfunctions. Any recall of our products may harm our reputation with customers and divert managerial and financial resources.

Our facilities are subject to periodic inspection by numerous regulatory authorities, including governmental agencies and Notified Bodies, and we must demonstrate compliance with the applicable medical devices regulations. Any failure by us to comply with regulatory requirements may entail our taking corrective action, such as modification of our policies and procedures. In addition, we may be required to cease all or part of our operations for some period of time until we can demonstrate that appropriate steps have been taken. There can be no assurance that we will be found in compliance with such standards in future audits.

We also pursue registrations in other jurisdictions in which we sell our devices directly, such as Japan and China. In 2015, the China Food and Drug Administration (NMPA) significantly increased the application fees for product registrations and imposed additional requirements for obtaining product approval, which includes requirements for conducting clinical trials to support the registration application process on newly introduced products in China. As a result, we may not seek registration for certain products where the cost is not justified. Any delay in product registrations could have a negative impact on our results of operations.

Filed Aug 5, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-019001. Last ingested by Listed: Nov 5, 2026, 11:35 ET. No prices; not investment advice.