Lemaitre Vascular Inc: Form 10-Q for the period ended Sep 30, 2023

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 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 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 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, 2022, as filed with the SEC on March 1, 2023. 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,” “LeMaitre,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to LeMaitre Vascular, Inc. and its subsidiaries.

LeMaitre, AlboGraft, AnastoClip, AnastoClip GC, Artegraft, Cardial, CardioCel, Dialine, Eze-Sit, Glow ‘N Tell, LeverEdge, LifeSpan, ProCol, Pruitt, Pruitt F3, Pruitt-Inahara, RestoreFlow, TufTex, VascuCel, VascuTape, Wovex and XenoSure are registered trademarks of LeMaitre Vascular or one of its subsidiaries, and Chevalier, DuraSure, Flexcel, Omniflow, PeriVu and Syntel are trademarks of LeMaitre Vascular. 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, 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 complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue 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.

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 and dialysis 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 Q3 2023, biologics represented 51% of our worldwide sales. We view our biologic device offerings favorably, as we believe they represent differentiated and in many 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:

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

We sell our products and services primarily through a direct sales force. As of September 30, 2023, our sales force was comprised of 136 sales representatives in North America, Europe and Asia Pacific, including three export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have North American sales offices in Chandler, Arizona and Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have sales offices in Milan, Italy; Madrid, Spain; Hereford, England; and Dublin, Ireland. Our Asia Pacific headquarters is located in Singapore, and we also have sales offices in Tokyo, Japan; Shanghai, China; Kensington, Australia; Seoul, Korea; and Bangkok, Thailand. During the current quarter, approximately 95% of our net sales were generated in countries 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 than in North America. 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, which can be difficult to identify, negotiate and purchase, and there can be no assurance that we will be able to do so in the future.

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

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 products totaled approximately $2.2 million in 2021 revenues.
• During 2022, we made the decision to wind down the ProCol graft, AlboSure polyester patch, LeverEdge and Latis graft cleaning catheter product lines. These products totaled approximately $0.7 million in 2022 revenues.
• During 2023, we made the decision to discontinue the sales of AlboGraft and LifeSpan synthetic graft product lines in the United States. These products totaled approximately $0.2 million and less than $0.1 million, respectively, in 2022 revenues.

From time to time we may undertake SKU reductions or transition sales to other SKUs or products with similar features. For example, in 2022, we initiated the transition of sales of our Syntel spring tip catheter to our legacy regular tip 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 Anteris in concluding agreements with, several former Anteris distributors in Europe and Canada, in order to terminate their distribution of the acquired bovine cardiac and vascular patch products, and we began selling direct-to-hospital in those geographies. The distribution 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 U.S.
• 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 have been selling direct-to-hospital in Korea since December 2022. The distribution termination fees totaled approximately $0.5 million.
• In March 2023, we entered into a distribution transition agreement with our Thailand distributor in order to sell products directly in Thailand and dissolve the existing distribution arrangement. The distribution termination fees will total approximately $0.7 million. We began selling direct-to-hospital in Thailand in Q3 2023.

We also rely, to a lesser extent, on internal development efforts to bring differentiated technology and next-generation products and services 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. We expect to launch this product in 2024.

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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 June 2014, we acquired the Omniflow II ovine graft business from BioNova, International. In June 2019, we initiated a project to transfer the production of these devices to our Burlington facilities. We received CE mark approval to sell these Burlington produced devices in Europe in June 2022. This transfer was completed in 2023.
• In October 2019, we acquired the CardioCel biologic patch business from Anteris. In July 2020, we initiated a project to transfer the production of these devices to our Burlington facilities. We expect these transfer activities to be substantially complete in 2023. In June 2023, the MDR CE mark application to market these Burlington produced devices was submitted, and we anticipate this application process to take 18-24 months.
• In June 2018, we acquired the Cardial business from Becton Dickinson. Cardial manufactured polyester vascular grafts, valvulotomes and surgical glue at its St. Etienne, France facility. In June 2022, we closed the St. Etienne factory in order to streamline manufacturing operations and to reduce expenses. We are transitioning Cardial graft sales to our Burlington-manufactured polyester vascular graft product (AlboGraft) for additional cost savings and improved margins.

Finally, from time to time we may enter into distribution agreements of complementary product lines with the option to acquire the product line in the future.

• In April 2023, we entered into an agreement with Aziyo Biologics, Inc. to become the exclusive U.S. distributor of their cardiovascular porcine patches. Under the agreement, we will distribute the products for three years with an option to acquire Aziyo’s worldwide cardiovascular patch business during the second and third year of the agreement. Sales for the nine months ended September 30, 2023 were $2.6 million.

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 expenses such as process engineering and other charges.

In 2024, we expect to implement a new Enterprise Resource Planning (“ERP”) system to replace our current software reporting and planning system. We expect that the new ERP system will be beneficial in a number of areas, including inventory management, pricing programs, financial operations and real time reporting. While we have been preparing for this transition since 2022, and have hired an experienced consulting team to assist us in this transition, there can be no assurances that the implementation will be successful or executed in a timely fashion. We expect to spend approximately $7.0 million on this implementation.

Fluctuations in the exchange rates between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the nine months ended September 30, 2023, approximately 39% of our sales took place outside of 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 nine months ended September 30, 2023, we estimate that the effects of changes in foreign exchange rates decreased our reported sales by approximately $0.3 million, as compared to rates in effect for the nine months ended September 30, 2022.

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 and cardiac 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

Comparison of the three- and nine-month periods ended September 30, 2023 to the three- and nine-month periods ended September 30, 2022:

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)

Net sales. Net sales increased by $8.4 million, or 21%, to $47.4 million for the three months ended September 30, 2023, compared to $39.0 million for the three months ended September 30, 2022. The increase was driven primarily by elevated hospital procedure volumes, higher average selling prices, additional sales representatives, and $1.3 million in sales related to our new porcine patch product line. Valvulotome sales increased $1.8 million, bovine vascular patch sales increased $1.2 million and bovine graft sales increased $1.0 million. We estimate that the weaker U.S. dollar increased net sales by $0.7 million during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Net sales increased by $23.9 million, or 20%, to $144.6 million for the nine months ended September 30, 2023, compared to $120.7 million for the nine months ended September 30, 2022. The increase was driven primarily by elevated hospital procedure volumes, higher average selling prices, additional sales representatives, and $2.6 million in sales related to our new porcine patch product line. Valvulotome sales increased $5.3 million, bovine graft sales increased $3.5 million, and bovine vascular patch sales increased $3.4 million. We estimate that the stronger U.S. dollar decreased net sales by $0.3 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Direct-to-hospital net sales were 96% of our total net sales for the nine months ended September 30, 2023 and 2022.

Net sales by geography. Net sales in the Americas increased $5.2 million, or 20%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was driven primarily by increased sales of valvulotomes of $1.3 million, porcine patches of $1.3 million, bovine grafts of $1.0 million, and bovine vascular patches of $0.5 million.

Net sales in the Americas increased $15.5 million, or 19%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was driven primarily by increased sales of valvulotomes of $4.4 million, bovine grafts of $3.5 million, porcine patches of $2.6 million, allograft preservation services of $1.6 million, and bovine vascular patches of $1.4 million.

EMEA net sales increased $2.4 million, or 24%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was driven primarily by increased sales of bovine vascular patches of $0.6 million, valvulotomes of $0.5 million, carotid shunts of $0.4 million, and bovine cardiac patches of $0.4 million.

EMEA net sales increased $7.0 million, or 23%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was driven primarily by increased sales of bovine vascular patches of $1.6 million, carotid shunts of $1.5 million, valvulotomes of $0.9 million, and bovine cardiac patches of $0.9 million.

Asia Pacific net sales increased $0.7 million, or 30%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was driven primarily by increased sales of over-the-wire embolectomy catheters of $0.2 million and occlusion catheters, bovine cardiac patches and bovine vascular patches of $0.1 million, respectively.

Asia Pacific net sales increased $1.4 million, or 19%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was driven primarily by increased sales of bovine vascular patches and occlusions catheters of $0.4 million, respectively, and over-the-wire embolectomy catheters and bovine cardiac patches of $0.2 million, respectively.

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

(unaudited)

($ in thousands)

($ in thousands)

*Not applicable

Gross Profit. Gross profit increased $5.7 million, or 23%, to $30.8 million for the three months ended September 30, 2023, and gross margin increased 80 basis points to 65% in the period. The increase in gross profit was driven primarily by increased sales, particularly from valvulotomes, porcine patches, bovine vascular patches and bovine grafts. The increase in gross margin was driven primarily by favorable product mix, including sales of comparatively higher margin valvulotomes, and manufacturing efficiencies, which were partially offset by increased scrap and excess and obsolescence charges.

Gross profit increased $14.9 million, or 19%, to $93.8 million for the nine months ended September 30, 2023, and gross margin decreased 50 basis points to 64.9% in the period. The increase in gross profit was driven primarily by increased sales, particularly from valvulotomes, bovine grafts and bovine vascular patches. The decrease in gross margin was driven primarily by increases in labor costs, unfavorable product mix, including sales of comparatively lower margin porcine patches and sales of our allograft preservation services, and increased scrap and excess and obsolescence charges.

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)

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* Not a meaningful percentage relationship.

Sales and marketing. For the three months ended September 30, 2023, sales and marketing expenses increased 18% to $9.7 million. The increase was driven primarily by higher sales rep headcount and higher sales commissions, which resulted in increased compensation and related expenses of $1.4 million. Travel, training and related expenses increased by $0.1 million. Sales rep headcount was 136 as of September 30, 2023, a 15% increase from September 30, 2022. As a percentage of net sales, sales and marketing expense decreased to 20% for the three months ended September 30, 2023, down from 21% in the prior period.

For the nine months ended September 30, 2023, sales and marketing expenses increased 27% to $30.8 million. The increase was driven primarily by higher sales rep headcount and higher sales commissions, which resulted in increased compensation and related expenses of $5.3 million. Travel, training and related expenses increased by $0.6 million. As a percentage of net sales, sales and marketing expense increased to 21% for the nine months ended September 30, 2023, up from 20% in the prior period.

General and administrative. For the three months ended September 30, 2023, general and administrative expenses increased 7% to $7.7 million. The increase was driven primarily by higher outside services and professional fees of $1.0 million, which were partially offset by lower compensation and related expenses of $0.2 million, facility fees of $0.1 million, and acquisition costs of $0.1 million. Lower acquisition costs were driven by gains related to the amendment of a contingent purchase obligation associated with our 2019 Anteris biologic patch acquisition. As a percentage of sales, general and administrative expense decreased to 16% for the three months ended September 30, 2023, down from 19% in the prior period.

For the nine months ended September 30, 2023, general and administrative expenses increased 7% to $23.4 million. The increase was driven primarily by higher compensation and related expenses of $1.1 million. Travel, training and related expenses increased by $0.2 million. As a percentage of sales, general and administrative expense decreased to 16% for the nine months ended September 30, 2023, down from 18% in the prior period.

Research and development. For the three months ended September 30, 2023, research and development expenses increased 22% to $4.2 million. The increase was driven by higher compensation and related expenses of $0.4 million. Outside services and testing increased by $0.3 million primarily due to higher consulting and third-party costs largely associated with European regulatory approvals. Our products are currently regulated in the European Union (EU) and the United Kingdom under the European Medical Devices Directive (MDD) and the EU Medical Device Regulation (MDR). In order to market our medical devices in the EU and the United Kingdom, we are required to obtain CE marks, which denote conformity to the essential requirements of the MDD or MDR. As a percentage of sales, research and development expense was unchanged at 9% for the three months ended September 30, 2023.

For the nine months ended September 30, 2023, research and development expense increased 30% to $12.6 million. The increase was driven by higher compensation and related expenses of $1.1 million. Outside services and testing increased by $1.5 million primarily due to higher consulting and third-party costs largely associated with European regulatory approvals. As a percentage of sales, research and development expense increased to 9% for the nine months ended September 30, 2023, up from 8% in the prior period.

Restructuring. For the nine months ended September 30, 2023, restructuring expenses were $0.5 million. On June 30, 2022, we ceased operations at our St. Etienne, France factory. The closure resulted in a restructuring charge of $3.1 million for the year ended December 31, 2022. These charges consisted primarily of employment termination costs, impairment of fixed assets and inventory, and third-party costs. For the nine months ended September 30, 2023 we recorded additional restructuring charges in conjunction with the St. Etienne, France factory closure of $0.5 million. The additional charges consisted primarily of employment termination, settlement, legal and other third-party costs. As a percentage of sales, restructuring expense was less than 1% for the nine months ended September 30, 2023. There was no restructuring charges for the three months ended September 30, 2023.

Income tax expense. We recorded a tax provision of $2.3 million on pre-tax income of $9.8 million for the three months ended September 30, 2023, compared to a $0.7 million tax provision on pre-tax income of $6.1 million for the three months ended September 30, 2022. We recorded a tax provision of $6.5 million on pre-tax income of $28.2 million for the nine months ended September 30, 2023, compared to a tax provision of $4.7 million on pre-tax income of $19.7 million for the nine months ended September 30, 2022. Our effective income tax rate was 23.6% and 23.1% for the three- and nine-month periods ended September 30, 2023. Our tax expense for the current period is based on an estimated annual effective tax rate of 24.9%, 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 the generation of 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 11.3% and 23.8% for the three- and nine-month periods ended September 30, 2022. Our 2022 provision was based on the estimated annual effective tax rate of 25.1%, adjusted in the applicable quarterly period for discrete stock option exercises and other discrete items. Our income tax expense for the three-and nine-month periods ended September 30, 2022 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 September 30, 2023, we have provided a valuation allowance of $1.6 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.

The Inflation Reduction Act ("IRA") was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on “adjusted financial statement income” for applicable corporations and a 1% excise tax on repurchases of stock. These provisions are effective for tax years beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position.

Liquidity and Capital Resources

As of September 30, 2023, our cash and cash equivalents were $18.1 million as compared to $19.1 million as of December 31, 2022. We had $79.0 million in short-term marketable securities as of September 30, 2023 and $63.6 million as of December 31, 2022. Our cash and cash equivalents are 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 September 30, 2023 our short-term marketable securities reflected an unrealized loss of $2.0 million as a result of increasing market interest rates.

On February 21, 2023, our Board of Directors authorized the repurchase of up to $25.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 21, 2024. The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program.

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 $26.5 million for the nine months ended September 30, 2023. For the year ended December 31, 2022, we had operating income of $26.8 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:

• 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;
• costs associated with expanding our manufacturing, marketing, sales, and distribution efforts;
• costs associated with our initiatives to sell direct-to-hospital in new countries;
• costs of obtaining and maintaining U.S. FDA and other regulatory clearances for our existing and future products;
• 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 and to meet our known long-term cash requirements. 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)

On October 24, 2023, our Board of Directors approved a quarterly cash dividend on our common stock of $0.14 per share payable on November 30, 2023, to stockholders of record at the close of business on November 16, 2023.

Cash Flows

(in thousands)

Net cash provided by operating activities. Net cash provided by operating activities was $26.0 million for the nine months ended September 30, 2023, consisting of $21.6 million in net income, adjustments for non-cash or non-operating items of $12.9 million (including primarily depreciation and amortization of $7.1 million, stock-based compensation of $3.9 million, provisions for inventory write-offs and doubtful accounts of $1.5 million and loss on divestiture of $0.5 million), and also a net use of working capital of $8.6 million. The net cash used for working capital was driven by an increase in accounts receivable of $2.1 million, an increase in inventory and other deferred costs of $7.6 million, and an increase in prepaid expenses and other assets of $1.2 million. These cash uses were offset by an increase in accounts payable and other liabilities of $2.3 million.

Net cash provided by operating activities was $21.3 million for the nine months ended September 30, 2022, consisting of $15.0 million in net income, adjustments for non-cash or non-operating items of $14.2 million (including primarily depreciation and amortization of $7.1 million, stock-based compensation of $3.5 million, provisions for inventory write-offs and doubtful accounts of $2.3 million, and loss on divestiture of $1.4 million), and also a net use of working capital of $7.9 million. The net cash used for working capital was driven by an increase in inventory and other deferred costs of $5.0 million, an increase in accounts receivable of $1.7 million, and an increase in prepaid expenses and other assets of $1.3 million. These cash uses were offset by an increase in accounts payable and other liabilities of $0.2 million.

Net cash used in investing activities. Net cash used in investing activities was $22.5 million for the nine months ended September 30, 2023, consisting of purchases of marketable securities of $15.6 million, expenditures on equipment and technology of $6.0 million, and acquisition related payments of $0.9 million.

Net cash used in investing activities was $10.0 million for the nine months ended September 30, 2022, consisting of purchases of marketable securities of $8.0 million and expenditures on equipment and technology of $2.0 million.

Net cash used in financing activities. Net cash used in financing activities was $4.4 million for the nine months ended September 30, 2023, consisting primarily of a dividend payment of $9.3 million. This use of cash was partly offset by proceeds from stock option exercises of $4.9 million, net of shares repurchased used to pay employee payroll taxes.

Net cash used in financing activities was $7.1 million for the nine months ended September 30, 2022, consisting primarily of a dividend payment of $8.2 million and deferred payments for acquisitions of $0.4 million. This use of cash was partly offset by proceeds from stock option exercises of $1.5 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, 2022. There have been no material changes in our critical accounting policies during the nine months ended September 30, 2023. 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.

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 2023 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, 2022.

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 September 30, 2023 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 nine months ended September 30, 2023 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.

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, 2022, 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, 2022.

We face intense competition from other companies, technologies, and alternative medical procedures and we may not be able to compete effectively.

The segments in which we operate are highly competitive, subject to change, and significantly affected by new product introductions and other activities of industry participants. Although no one company competes against us in all of our product lines or services, a number of manufacturers of peripheral vascular devices have substantially greater capital resources, larger customer bases, broader product lines, larger sales forces, greater marketing and management resources, larger research and development staffs, and larger facilities than ours; have established reputations with our target customers; and have developed worldwide distribution channels that are more effective than ours. Our competitors could elect to devote additional resources to the segments in which we currently enjoy less competition. Also, although we currently have leading positions in the segments for some of our products, this is not true for all of our products. From time to time, we have experienced difficulties competing against large companies.

Our competitors may be companies which are larger than us and have substantially greater financial, technological, research and development, regulatory, marketing, sales, and personnel resources than we do. Certain competitors are able to manufacture at lower costs and may offer comparable products at lower prices. Certain competitors may also have greater experience in developing and improving products, obtaining regulatory approvals, and manufacturing and marketing products. Certain competitors may obtain patent protection or regulatory approval or clearance, or achieve product commercialization, before us, any of which could materially adversely affect us. Further, if the trend towards endovascular procedures versus open vascular procedures continues or accelerates, our competitors may be better positioned to take advantage of that trend, since our main product lines are used primarily in open vascular procedures. New product developments that could compete with us more effectively are likely because the vascular disease market is characterized by extensive research efforts and technological progress. Competitors may develop technologies and products that are safer, more effective, easier to use, less expensive, or more readily accepted than ours. Their products could make our technology and products obsolete or noncompetitive. Our competitors may also be able to achieve more efficient manufacturing and distribution operations than we can. In addition, many of our products face competition from alternative procedures that utilize different kinds of medical devices than we currently sell. Increased competition could also result in price reductions and loss of market share, any of which could result in lower revenues and reduced gross profits.

Other companies that may not be deemed competitors in the peripheral vascular device space in which we operate may develop technologies, products or services that may adversely impact the use of our products and services. For example, certain therapeutic treatments, such as drugs used to treat diabetes or help with weight loss, may enhance patient health and lower the occurrence and severity of the vascular diseases that certain of our products and services are intended to treat. If we do not introduce new products, services and enhancements in a timely manner, there may be a decrease in the use of certain of our products and services by vascular surgeons, in which case our revenues and operating results would suffer.

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 U.S. 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 continue to 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 MDD and the 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 and have recently received our first CE mark under the MDR for our Pruitt F3 Carotid Shunt.

In April 2017, the EU adopted new regulations for medical devices, the MDR, which replace the MDD and which started to take effect as of May 26, 2021. The final deadline for compliance with MDR was initially set to May 26, 2024, and subsequently revised to December 31, 2027 and December 31, 2028 for certain classifications of medical devices. 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. Nearly all of our products have been submitted to our Notified Bodies for review under the MDR. If we fail to obtain new CE marks on these products or our other products 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 MDR CE mark issued in January 2023 for our Pruitt F3 Carotid Shunt, we were unable to secure the new CE marking for the polyurethane balloon models (F3-S). While the MDD CE mark remains valid for the F3-S, we will be required to incur more expenses to gain MDR CE marking for those models. The F3-S models accounted for approximately $53,000 of annual sales in Europe and the U.K. in 2022. Additionally, significant changes to our devices may trigger a requirement to file or obtain an MDR CE mark earlier than expected, which could result in supply chain delays.

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.

As a result of the U.K.’s exit from the EU, the U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”) announced that 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 until July 1, 2024. This deadline was subsequently revised by MHRA to coincide with the EU extensions ending in December 31, 2027 and December 31, 2028. Following such dates, all devices marketed in the U.K. will require U.K. Conformity Assessed (“UKCA”) marks certified by a U.K. Approved Body. If we fail to obtain UKCA marks by these deadlines, or at all, our sales in the U.K. could be negatively affected.

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.