Lemaitre Vascular Inc: Form 10-Q for the period ended Sep 30, 2024

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 companies that develop products or services that may impact the use of our products such as drugs to treat diabetes or weight loss; the risks from competition from other companies; the status of our global regulatory approvals and compliance with regulatory requirements to market and sell our products both in the U.S. and outside of the U.S.; risks related to product demand and market acceptance of the Company’s products and pricing; risks from implementing a new enterprise resource planning system; the risk of significant fluctuations in our quarterly and annual results due to numerous factors; the risk that we may not be able to maintain our recent levels of profitability; our reliance on sole source suppliers; disruptions or breaches of information technology systems; the risk that the Company may not realize the anticipated benefits of its strategic activities; the risk that assumptions about the market for the Company’s products and the productivity of the Company’s direct sales force and distributors may not be correct; the acceleration or deceleration of product growth rates; 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, 2023, as filed with the SEC on February 29, 2024. 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, DuraSure, Eze-Sit, Glow ‘N Tell, LeverEdge, LifeSpan, OmniFlow, PhasTipp, ProCol, Pruitt, Pruitt F3, RestoreFlow, Syntel, TufTex, VascuCel, VascuTape, and XenoSure are registered trademarks of LeMaitre Vascular or one of its subsidiaries, and Chevalier, Flexcel and PeriVu 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. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or TM symbols.

Overview

We are 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 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 U.S., 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 $800 million. We have grown our business using a three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of low-rivalry, niche products, and 3) expanding our worldwide direct sales force while acquiring 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. Recently we have also begun to explore adjacent market customers who can be served by our vascular device technologies, such as cardiac surgeons and interventional cardiologists.

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

Our principal biologic offerings include vascular and cardiac patches as well as vascular and dialysis grafts. In Q3 2024, biologics represented 52% of our worldwide sales. We believe our biologic devices represent differentiated and, in many cases, growing product segments.

To assist us in evaluating our business strategies, we 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 North America, Europe, the UK, and Asia Pacific, including replacing distributors with our direct sales personnel;
• increasing the average selling prices for our devices;
• introducing our products into new territories upon receipt of regulatory approvals or registrations;
• acquiring complementary products, and the transition of distributor sales to LeMaitre;
• updating existing products and introducing new products through research and development; and
• consolidating product manufacturing into our Burlington, Massachusetts facilities.

We sell our products and services primarily through a direct sales force. As of September 30, 2024, our sales force was comprised of 146 sales representatives in North America, Europe, the UK, and Asia Pacific, including four export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have a North American sales office in Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have European sales offices in Milan, Italy; Madrid, Spain; Hereford, England; Dublin, Ireland; and Maisons-Alfort, France. Our Asia Pacific headquarters is located in Singapore, and we also have Asia Pacific 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 territories in which we employ direct sales representatives. We 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 differentiated devices have historically allowed us to increase our selling prices without incurring significant unit share loss. In contrast, we have experienced less success in competitive markets such as the polyester vascular graft market, where we face competition from larger companies with greater resources and lower per unit costs.

We have also experienced success in international markets, such as Europe, where we have a significant sales force, and sometimes offer 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.

We obtain regulatory approvals for our devices and services in new segments and geographies in order to further access the broader peripheral device market and selected other markets. While much of our regulatory effort is focused on maintaining regulatory approvals in various geographies, we will continue to obtain new product approvals in new geographies in order to extend our geographic reach and increase sales. Recent approvals include the approval to sell the XenoSure patch for carotid indication in Japan in May 2023, the Pruitt Irrigation Occlusion Catheter in China in October 2023, and the Artegraft bovine graft in Thailand and Malaysia in August 2024 and in South Africa in October 2024.

Separately, in July 2024, we received MDR CE marks allowing for the continued sale of 10 devices into the European market. Previously we had obtained 4 MDR CE marks. In total, we expect to receive 22 MDR CE marks by the end of 2025. The European Commission has designated the end of 2028 as the final MDR CE mark deadline.

Our strategy for growing our business includes the acquisition of complementary product lines and companies, which can be difficult to identify, negotiate and purchase. There can be no assurance that we will be able to do so in the future.

• 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, contingent upon future unit sales.

Occasionally we discontinue or divest products that are no longer complementary to our business or 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.

From time to time we may undertake SKU reductions and attempt to 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 Syntel 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 country-specific distributors to transition their sales of our medical devices into our direct sales organization:

• In May 2022, we entered into a distribution transition agreement with our Korean distributor 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 Thai distributor to sell products directly in Thailand and dissolve the existing distribution arrangement. We have been selling direct-to-hospital in Thailand since August 2023. The distribution termination fees totaled approximately $0.7 million.

We also benefit, to a lesser extent, from internal product development efforts to bring differentiated technologies and next-generation products and services to market:

• 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. The device was launched in the U.S. in April 2024.

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

• In October 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 to streamline manufacturing operations and to reduce expenses. We are transitioning Cardial graft sales to our Burlington-manufactured AlboGraft product for additional cost savings and improved margins.
• In October 2019, we acquired the CardioCel and VascuCel biologic patch businesses from Anteris. In July 2020, we initiated a project to transfer production to our Burlington facilities. The transfer to Burlington was substantially completed in 2023. In June 2023, the MDR CE mark application for these Burlington-produced devices was submitted, and we anticipate this application process to take 18-30 months. We began distributing these Burlington-produced patches in the U.S. and select APAC markets in Q2 2024, and in Canada in July 2024.

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

• In April 2023, we entered into an agreement with Elutia Inc. to become the exclusive U.S. distributor of their cardiovascular porcine patches. Under the agreement, we can distribute the products for three years with an option to acquire Elutia Inc’s worldwide cardiovascular porcine patch business during the second and third year of the agreement. Sales through LeMaitre Vascular for the nine months ended December 31, 2023, were $4.1 million. Sales through LeMaitre Vascular for the nine months ended September 30, 2024 were $4.0 million.

Our execution of these initiatives may affect the comparability of our financial results and may cause fluctuations from period to period.

In February 2024, we began implementing a new enterprise resource planning system (ERP) to replace our financial 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. We have been preparing for this transition since 2022 and have hired an experienced consulting team to assist in this transition, and in the U.S., we transitioned from our legacy ERP system to our newly implemented Microsoft Dynamics D365 system in Q1 2024. We expect to implement this new system in selected countries in Europe in 2025, starting with the United Kingdom. As of September 30, 2024, we have capitalized costs on our balance sheet of approximately $4.0 million associated with this ERP system.

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, 2024, approximately 42% 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, 2024, we estimate that the effects of changes in foreign exchange rates decreased our reported sales by $0.3 million, as compared to rates in effect for the nine months ended September 30, 2023.

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 the 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, 2024 to the three- and nine-month periods ended September 30, 2023:

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 $7.4 million, or 16%, to $54.8 million for the three months ended September 30, 2024, compared to $47.4 million for the three months ended September 30, 2023. The increase was driven primarily by higher average selling prices, strong hospital procedure volumes, and additional sales representatives. Allograft preservation services increased $1.7 million, bovine graft sales increased $1.2 million, bovine vascular patch sales increased $1.2 million, and carotid shunt sales increased $0.8 million. We estimate that the weaker U.S. dollar increased net sales by less than $0.1 million during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Direct-to-hospital net sales were 95% of our total net sales for both the three months ended September 30, 2024 and 2023.

Net sales increased by $19.5 million, or 14%, to $164.1 million for the nine months ended September 30, 2024, compared to $144.6 million for the nine months ended September 30, 2023. The increase was driven primarily by higher average selling prices, strong hospital procedure volumes, and additional sales representatives. Allograft preservation services increased $4.2 million, bovine vascular patch sales increased $3.1 million, carotid shunt sales increased $3.0 million, and bovine graft sales increased $2.3 million. We estimate that the stronger U.S. dollar decreased net sales by $0.3 million during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Direct-to-hospital net sales were 95% and 96% of our total net sales for the nine months ended September 30, 2024 and 2023, respectively.

Net sales by geography. Net sales in the Americas increased $3.9 million, or 12%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was driven primarily by increased sales of allograft preservation services of $1.4 million, bovine grafts of $1.2 million, bovine vascular patches of $0.5 million, and valvulotomes of $0.4 million.

Net sales in the Americas increased $10.5 million, or 11%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The increase was driven primarily by increased sales of allograft preservation services of $3.5 million, bovine grafts of $2.2 million, bovine vascular patches and porcine patches of $1.5 million each, and valvulotomes of $1.0 million.

EMEA net sales increased $2.7 million, or 22%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was driven primarily by increased sales of carotid shunts of $0.6 million, bovine vascular patches of $0.5 million, and allograft preservation services, valvulotomes and embolectomy catheters of $0.3 million each.

EMEA net sales increased $6.5 million, or 17%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The increase was driven primarily by increased sales of carotid shunts of $2.2 million, bovine vascular patches of $1.2 million, allograft preservation services of $0.7 million, and embolectomy catheters, valvulotomes and polyester grafts of $0.6 million each.

Asia Pacific net sales increased $0.8 million, or 24%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was driven primarily by increased sales of ePTFE vascular grafts and bovine vascular patches of $0.2 million each, and embolectomy catheters, over-the-wire embolectomy catheters and valvulotomes of $0.1 million each.

Asia Pacific net sales increased $2.6 million, or 29%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The increase was driven primarily by increased sales of over-the-wire embolectomy catheters and ePTFE vascular grafts of $0.6 million each, and bovine vascular patches and embolectomy catheters of $0.3 million each.

Gross Profit. 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 increased $6.4 million, or 21%, to $37.2 million for the three months ended September 30, 2024, and gross margin increased 280 basis points to 67.8% in the period. The increase in gross profit was driven primarily by increased sales, particularly from allograft preservation services, bovine grafts, bovine vascular patches and carotid shunts. The increase in gross margin was driven primarily by greater manufacturing efficiencies and sales price increases, which was partially offset by unfavorable product mix.

Gross profit increased $18.5 million, or 20%, to $112.3 million for the nine months ended September 30, 2024, and gross margin increased 360 basis points to 68.4% in the period. The increase in gross profit was driven primarily by increased sales, particularly from allograft preservation services, bovine vascular patches, carotid shunts and bovine grafts. The increase in gross margin was driven primarily by greater manufacturing efficiencies and sales price increases, which was partially offset by unfavorable product mix, including sales of comparatively lower margin allograft preservation services, and increased 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)

(in thousands)

(in thousands)

* Not a meaningful percentage relationship.

Sales and marketing. For the three months ended September 30, 2024, sales and marketing expenses increased 18% to $11.4 million. The increase was driven primarily by higher sales representative headcount, which resulted in increased compensation and related expenses of $1.2 million. Additionally, travel and training expenses increased $0.5 million. Sales rep headcount was 146 as of September 30, 2024, a 7% increase from September 30, 2023. As a percentage of sales, sales and marketing expenses increased to 21% for the three months ended September 30, 2024, up from 20% in the prior period.

For the nine months ended September 30, 2024, sales and marketing expenses increased 11% to $34.1 million. The increase was driven primarily by higher sales representative headcount, which resulted in increased compensation and related expenses of $2.5 million. Additionally, travel, training and sales meeting expenses increased $1.0 million and outside services increased $0.1 million. The increase was partially offset by lower general supplies of $0.3 million. As a percentage of sales, sales and marketing expenses remained consistent at 21% for the nine months ended September 30, 2024 versus the prior year period.

General and administrative. For the three months ended September 30, 2024, general and administrative expenses increased 15% to $8.9 million. The increase was driven primarily by higher headcount and related recruiting fees, accrued bonus, and stock compensation expenses, which resulted in increased compensation and related expenses of $0.9 million. Additionally, facilities expenses increased $0.3 million. As a percentage of sales, general and administrative expenses remained consistent at 16% for the three months ended September 30, 2024 versus the prior year period.

For the nine months ended September 30, 2024, general and administrative expenses increased 14% to $26.8 million. The increase was driven primarily by higher compensation and related expenses of $1.4 million, outside services and professional fees of $1.1 million, and facilities expenses of $0.5 million. Additionally, bad debt expenses increased $0.3 million due to the increased uncertainty of accounts receivable collectability related to a small number of our customers. As a percentage of sales, general and administrative expenses remained consistent at 16% for the nine months ended September 30, 2024 versus the prior year period

Research and development. For the three months ended September 30, 2024, research and development expenses decreased 13% to $3.7 million. The decrease was driven by comparatively higher costs in the prior year period related to outside services, professional fees and testing costs related to MDD and MDR approvals of $0.4 million. Additionally, process engineering expenses decreased $0.4 million as CardioCel device manufacturing was initiated at our Burlington facility, and related expenses were allocated to cost of sales. The decrease was partially offset by higher compensation and related expenses of $0.2 million. As a percentage of sales, research and development expenses decreased to 7% for the three months ended September 30, 2024, down from 9% in the prior year period.

For the nine months ended September 30, 2024, research and development expenses decreased 5% to $12.0 million. Process engineering expenses decreased $0.5 million as CardioCel device manufacturing was initiated at our Burlington facility, and related expenses were allocated to cost of sales. As a percentage of sales, research and development expenses decreased to 7% for the nine months ended September 30, 2024, down from 9% in the prior year period.

Restructuring. For the three and nine months ended September 30, 2024, there were no restructuring expenses. 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 expenses of $0.5 million. The additional expenses consisted primarily of employment termination, settlement, legal and other third-party costs.

Income tax expense. We recorded a tax provision of $3.4 million on pre-tax income of $14.6 million for the three months ended September 30, 2024, compared to a $2.3 million tax provision on pre-tax income of $9.8 million for the three months ended September 30, 2023. We recorded a tax provision of $10.0 million on pre-tax income of $42.9 million for the nine months ended September 30, 2024, compared to a tax provision of $6.5 million on pre-tax income of $28.2 million for the nine months ended September 30, 2023.

Our effective income tax rate was 23.4% and 23.3% for the three- and nine-month periods ended September 30, 2024. Our tax expense for the current period is based on an estimated annual effective tax rate of 24.1%, 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 23.6% and 23.1% for the three- and nine-month periods ended September 30, 2023. Our 2023 provision was based on the estimated annual effective tax rate of 24.9%, 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, 2023 varied 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.

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, 2024, we have provided a valuation allowance of $1.7 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.

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 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, 2024, our cash and cash equivalents were $21.0 million as compared to $24.3 million as of December 31, 2023. We had $102.9 million in short-term marketable securities as of September 30, 2024, and $80.8 million as of December 31, 2023. 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, 2024, our short-term marketable securities reflected an unrealized loss of $0.4 million as a result of increasing market interest rates.

On February 21, 2024, our Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 21, 2025. 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 $39.4 million for the nine months ended September 30, 2024, compared to $26.5 million for the nine months ended September 30, 2023. For the year ended December 31, 2023, we had operating income of $36.7 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;
• costs associated with obtaining European MDR CE mark approvals;
• the number, timing, and nature of acquisitions, divestitures and other strategic transactions; and
• potential future share repurchases.

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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 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, 2024, our Board of Directors approved a quarterly cash dividend on our common stock of $0.16 per share payable on December 5, 2024, to stockholders of record at the close of business on November 21, 2024.

Cash Flows

(in thousands)

Net cash provided by operating activities. Net cash provided by operating activities was $28.9 million for the nine months ended September 30, 2024, consisting of $32.9 million in net income, adjustments for non-cash or non-operating items of $14.9 million (including primarily depreciation and amortization of $7.2 million, stock-based compensation of $4.8 million, provisions for inventory write-offs and credit losses of $2.6 million, and foreign currency effect on net income of $0.2 million), and a net use of working capital of $18.8 million. The net cash used for working capital was driven by an increase in accounts receivable of $7.4 million, an increase in inventory and other deferred costs of $8.9 million, and payments of accounts payable and other liabilities of $2.5 million. These cash uses were offset by a decrease in prepaid expenses and other assets of $0.1 million.

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 credit losses of $1.5 million, and loss on divestiture of $0.5 million), and 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 used in investing activities. Net cash used in investing activities was $26.2 million for the nine months ended September 30, 2024, consisting of expenditures on property and equipment of $4.9 million and purchases of marketable securities of $21.3 million.

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

Net cash used in financing activities. Net cash used in financing activities was $5.9 million for the nine months ended September 30, 2024, consisting of proceeds from stock option exercises of $4.8 million, net of shares repurchased used to pay employee payroll taxes. This proceed of cash was offset by dividend payments of $10.8 million.

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

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, 2023. There have been no material changes in our critical accounting policies during the nine months ended September 30, 2024. 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 2024 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, 2023.

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, 2024, 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

As previously disclosed, in February 2024 we began implementing a new ERP system. The ERP implementation requires the integration of new ERP software with multiple new and existing data flows and business processes. The new ERP is designed to accurately maintain our books and records and provide information to our management team which is important to the operations of the business. As the phased implementation of the new ERP system progresses, we expect to continue to change certain processes and procedures which, in turn, are expected to result in changes to our internal control over financial reporting. As such changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.

Other than the new ERP system implementation, there have been no changes to our internal control over financial reporting during the quarter ended September 30, 2024, 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.

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. However, we cannot provide any assurance that any risk factor will not materialize.