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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Related to the Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet.  The ASU simplifies the current guidance (ASC Topic 740-10-45-4), which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet.  The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.  The Board decided to allow all entities to early adopt the ASU for financial statements that had not been issued.  Therefore, the Company has adopted this ASU at December 31, 2015, and has reclassified all prior periods to be consistent with the requirements outlined in the ASU.  There was no impact to the balance sheet as presented.

In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined).  The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.  Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.  The Company is currently assessing the effect that adoption will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will reduce complexity in accounting standards related to share-based payment transactions, including, among others, (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, and (4) statutory tax withholding requirements.  The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.  The Board decided to allow all entities to early adopt the ASU for financial statements that had not been issued.  The Company adopted this ASU in the first quarter of 2016.  With respect to the Company, adoption was prospective.  There was no impact to prior period financial information.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Level Overview

Vascular Solutions, Inc. (we, us or Vascular) is an innovative medical device company focused on bringing clinically advanced solutions to the market for treating coronary and peripheral vascular disease.   As a vertically-integrated medical device company, we generate ideas, create new minimally invasive medical devices, and then deliver these products and related services to physicians who treat vascular disease.

During the past several years, the markets for diagnostic and therapeutic interventional cardiology products and procedures have undergone only modest growth.  We believe this low growth, in both product sales and procedure volumes, is due to a variety of factors, including the effects of weak economies on overall health care utilization rates, efforts by third-party payers to lower costs associated with medical procedures, an increased reliance on the medical management of heart disease, investigations by government agencies into potential over-utilization of procedures, the implementation by hospitals of policies designed to reduce the incidence of unnecessary procedures in the wake of these outside investigations, and heavy competition among the manufacturers of interventional devices. Although worldwide demographic factors, including the growing incidence of cardiovascular disease, seem to favor long-term growth in the number of interventional procedures, we believe that the structural pressures that have been building within the market during the past decade are likely to result in relatively flat catheterization volumes for the foreseeable future.  In the United States, in which Vascular Solutions typically generates approximately 80% of its revenues, according to data from Medtech Insight (“U.S. Markets for Interventional Cardiology Products”, April 2016), in 2015 there were approximately 3.8 million combined diagnostic and therapeutic interventional cardiology procedures – consisting of 2.6 million diagnostic and 1.2 million therapeutic catheterizations.  Medtech Insight projects that the number of U.S. diagnostic and therapeutic cardiac catheterization procedures will remain flat through 2020.

Vascular Solutions intends to continue to develop and market a vast array of products that serve the needs of interventional physicians.  While the overall interventional markets are mature, it has been our strategy to target the discrete pockets of growth within the catheterization labs.  Currently, we have a particular focus in our R&D and business development programs in three areas: complex interventions, radial artery catheterizations, and embolization procedures.  We believe these relatively new segments of the vascular interventions market have the greatest need for new specialized products and also represent some of the best opportunities for growth.

One of our highest priority R&D programs is a collaboration with the United States Army to develop freeze-dried plasma for the treatment of battlefield trauma.  The product we have developed, RePlas™ freeze-dried plasma, is the result of our long-standing expertise in the lyophilization (freeze-drying) of biologic materials.  The U.S. Army has agreed to sponsor, conduct, and fund the clinical development of RePlas, and we will retain the rights to market the product after FDA approval.  Subject to the completion of clinical studies, we believe RePlas will have broad applicability in both government and private sector first-responder markets.

 

Our product portfolio includes a broad spectrum of more than 90 products consisting of over 800 stock keeping units (SKUs) covering a wide array of hemostat devices, extraction catheters, vascular access devices, guide catheters, guidewires, retrieval devices and a reprocessing service for radiofrequency catheters used in the treatment of varicose veins.  Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations based on product sales into our four clinical target markets.  We have corporate infrastructure and direct sales capabilities in the United States and have established distribution relationships in most major international markets.  In order to drive sales growth, we have invested not only in the expansion of our global distribution system, but also in new product development and efforts to obtain additional regulatory approvals.  A significant portion of our net revenue historically has been, and we expect to continue to be, attributable to new and enhanced products and services.  We expect to continue to further validate the clinical and competitive benefits of our technology platforms to drive utilization of our current products and the development of new and enhanced products and services.

The interventional medical device industry is characterized by intense competition, rapidly evolving technology and a high degree of government regulation.  Looking ahead we expect our business may be impacted by the following trends and opportunities:

 

·

The future regulatory approval of newly-developed products.  Any new product that we develop must be approved by the Food and Drug Administration (FDA) in the United States and by similar regulatory bodies in other countries before it can be sold.  The requirements for obtaining product approval have undergone change, and the FDA frequently implements changes to the product approval process.  We monitor the changing regulatory landscape and modify our regulatory submissions as necessary to obtain product approvals.

 

·

Successfully integrating acquired and distributed products and services into our existing operations.  The acquisition of products, product distribution rights, and services complementary to our existing product portfolio and customer call points provides an additional business opportunity, but is dependent on the successful integration of the acquired or distributed products into our existing business structure.  Since 2010, we have acquired or licensed more than 10 products and services.

 

·

Managing intellectual property.  The interventional medical device industry is characterized by numerous patent filings and litigation claims made to protect new and evolving product ideas.  To maximize the profitability of new product ideas, we seek patent protection for those product design and method concepts which we believe have the potential to provide substantial product revenue.  Managing intellectual property assets and claims is a significant challenge for our business.

 

·

Managing greater government regulation and scrutiny.  Our products and business activities are subject to rigorous regulation, including by the U.S. FDA, Department of Justice, and numerous other federal, state, and foreign governmental authorities.  These authorities have been increasing scrutiny of our industry and enforcement actions related to companies in it.  Managing compliance with existing and future regulation of our industry and fulfilling regulatory disclosure requirements is a significant challenge for our business.

 

Results of Operations

The following table sets forth, for the periods indicated, certain items from our statements of earnings expressed as a percentage of net revenue:

Three and six months ended June 30, 2016, compared to three and six months ended June 30, 2015

Net revenue increased 10% to $41,187,000 for the quarter ended June 30, 2016 from $37,550,000 for the quarter ended June 30, 2015.  The increase in revenue is comprised of the following components:

Approximately 81% and 76% of our net revenue was earned in the United States and 19% and 24% of our net revenue was earned in international markets for the three months ended June 30, 2016 and June 30, 2015, respectively.

 

Net revenue increased 12% to $80,565,000 for the six months ended June 30, 2016 from $72,161,000 for the six months ended June 30, 2015.  The increase in revenue is comprised of the following components:

Approximately 80% and 77% of our net revenue was earned in the United States and 20% and 23% of our net revenue was earned in international markets for the six months ended June 30, 2016 and June 30, 2015, respectively.

          We recognized $124,000 and $152,000 of license, royalty and collaboration revenue during the three month periods ended June 30, 2016 and 2015, respectively, and $260,000 and $322,000 of license, royalty and collaboration revenue during the six month periods ended June 30, 2016 and 2015, respectively, due to our license and device supply agreements and our royalty agreement with a third party.  Collaboration expense of $13,000 and $46,000 was recognized during the three months ended June 30, 2016 and 2015, respectively, and $40,000 and $100,000 during the six months ended June 30, 2016 and 2015, respectively, as a result of an agreement we entered into in April 2013 to develop a new hemostatic device for a third party.  License, royalty and collaboration revenue is expected to be approximately $500,000 to $550,000 for the full year 2016.

Gross margin decreased to 65.3% for the quarter ended June 30, 2016, compared to 66.3% for the quarter ended June 30, 2015.  Gross margin decreased to 65.4% for the six month period ended June 30, 2016, compared to 66.8% for the six month period ended June 30, 2015.  The decrease in gross margin was primarily due to the write-off of $413,000 of raw material as a result of product discontinuations in our international markets.  We expect gross margin to be between 65.5% and 66.5% for the full year 2016 as we continue to improve manufacturing efficiencies of recently launched products, subject to variations in our selling mix between United States and international markets and between our lower margin products and our higher margin products such as the D-Stat Dry and GuideLiner products.

Research and development expense for the second quarter of 2016 totaled $5,031,000, or 12% of revenue, compared to $4,202,000, or 11% of revenue, for the second quarter of 2015.  Research and development expense for the six month period ended June 30, 2016 totaled $10,058,000 or 13% of revenue, compared to $8,270,000 or 12% of revenue, for the six month period ended June 30, 2015.  Research and development expenses have increased on both a percentage and dollar basis compared to the three and six months ended June 30, 2015, due to headcount additions as well as additional testing required to meet increasing regulatory requirements for new products.  We expect research and development expenses to be approximately 11.5% to 12.5% of revenue for the full year 2016.

Clinical and regulatory expense for the second quarter of 2016 totaled $2,153,000, or 5% of revenue, compared to $1,605,000, or 4% of revenue, for the second quarter of 2015.  Clinical and regulatory expense for the six month period ended June 30, 2016 totaled $4,150,000 or 5% of revenue, compared to $3,086,000 or 4% of revenue, for the six month period ended June 30, 2015.  Clinical and regulatory expenses have increased on both a percentage and dollar basis compared to the three and six months ended June 30, 2015, due to headcount additions in the second half of 2015 as a result of the increasing regulatory requirements.  We expect clinical and regulatory expenses to be approximately 5.0% for the full year 2016.

 

Sales and marketing expense for the second quarter of 2016 totaled $9,596,000, or 23% of revenue, compared to $8,461,000, or 23% of revenue, for the second quarter of 2015.  Sales and marketing expense for the six month period ended June 30, 2016 totaled $19,240,000 or 24% of revenue, compared to $17,193,000 or 24% of revenue, for the six month period ended June 30, 2015.  The increase in sales and marketing expense on a dollar basis for the three and six months ended June 30, 2016, was due to commissions paid on increasing sales in the U.S., combined with a minor increase in the size of our U.S. field sales organization.  We expect our sales and marketing expenses as a percentage of revenue to be approximately 22.0% to 23.0% of revenue for the full year 2016.

General and administrative expense for the second quarter of 2016 totaled $2,839,000, or 7% of revenue, compared to $4,129,000, or 11% of revenue, for the second quarter of 2015.  General and administrative expense for the six month period ended June 30, 2016 totaled $12,438,000 or 15% of revenue, compared to $8,907,000 or 12% of revenue, for the six month period ended June 30, 2015.  General and administrative expense decreased on both a dollar and percentage basis for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 as a result of reduced litigation expense due to the not guilty jury verdict on February 26, 2016 following our criminal trial in the United States District Court for the Western District of Texas regarding our Vari-Lase Short Kit.  General and administrative expense increased on both a dollar and percentage basis for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 as a result of a $2,700,000 increase in legal expenses related to the defense of the Short Kit litigation.  Total legal expenses related to the Short Kit litigation were $7,400,000 for the six months ended June 30, 2016.  As a result of the resolution of this matter, we expect general and administrative expense to return to a more normalized level and be approximately 5.5% to 6.5% of revenue in each quarter for the remainder of 2016.

Medical device excise taxes for the second quarter of 2016 totaled $0, compared to $395,000, or 1.1% of revenue, for the second quarter of 2015.  Medical device excise taxes for the six month period ended June 30, 2016 totaled $0, compared to $770,000, or 1.1% of revenue, for the six month period ended June 30, 2015.  In December 2015, the medical device excise tax was suspended for fiscal years 2016 and 2017.

Amortization of purchased technology and other intangibles was $404,000 for both three months ended June 30, 2016 and 2015.   Amortization of purchased technology and other intangibles was $808,000 for both six months ended June 30, 2016 and 2015.  The amortization resulted from our product and license acquisitions.  As part of these asset purchases and licensing agreements, we allocated an aggregate of $16,000,000 to purchased technology and other intangibles that are being amortized over a period of 9 to 11 years.  We expect amortization expense to be approximately $400,000 in each quarter for the remainder of 2016.

Income tax expense was $1,482,000 and $863,000 for the three and six months ended June 30, 2016, respectively, on earnings before tax of $6,885,000 and $6,010,000, respectively, resulting in an effective income tax rate of 22% and 14%, respectively.  The effective tax rates of 22% and 14% for the three and six month periods ended June 30, 2016, is lower than our expected effective tax rate of 33.5% due to the adoption in the first quarter of 2016 of Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  Upon adoption, we recognized first and second quarter excess tax benefits in our earnings.  Excess tax benefits totaled $801,000 in the second quarter and $1,127,000 for the six months ended June 30, 2016.  We expect our effective income tax rate to be approximately 33.5% to 34.5% of revenue in each quarter for the remainder of 2016, subject to variations if any, as a result of excess tax benefits recognized related to equity compensation.

 

Liquidity and Capital Resources

Our cash and cash equivalents totaled $35,008,000 at June 30, 2016 compared to $41,491,000 at December 31, 2015, a decrease of $6,483,000.  A small portion of our cash is maintained in operating accounts, with the majority invested in a highly liquid money market type Eurodollar account, which are bank deposited funds denominated in U.S. Dollars and held outside the United States.  The Eurodollar account is a direct obligation of a large bank in the U.S. and carries the same credit rating as all other deposits of the bank.

Cash used in operations.  We generated $2,899,000 of cash in operations during the six months ended June 30, 2016.  The primary sources and uses of cash from operations were:

·

$9,330,000 was generated primarily as a result of our net income of $5,147,000, increased by depreciation and amortization expense of $3,281,000 and stock-based compensation expense of $2,638,000; and reduced by non-cash tax uses of $1,736,000.

·

$6,416,000 was used as a result of the net change in operating assets and liabilities primarily due to:  an increase of $2,678,000 in accounts receivable; a decrease of $2,179,000 in accounts payable and accruals as a result of our payments of legal expense accruals relating to the Short Kit litigation; an increase of $1,981,000 in overall inventory; and a decrease of $422,000 in prepaid expenses, primarily due to the decrease in taxes receivable.

The table below presents the change in receivables and inventory in relative terms, through the presentation of financial ratios.  Days sales outstanding are calculated by dividing the ending accounts receivable balance, net of reserves for sales returns and doubtful accounts, by the average daily sales for the quarter.  The increase in days sales outstanding for the six months ended June 30, 2016 was primarily due to an increase in our receivables from slower-paying international distributors.  Days inventory on hand is calculated by dividing 365 by the annualized cost of sales for the quarter divided by inventory.  The decrease in days inventory on hand for the six months ended June 30, 2016 was due to sales demand increasing slightly more than our inventory balance and was relatively consistent with the December 31, 2015 days inventory on hand.

Cash used in investing activities.  We used $7,562,000 of cash in investing activities for the six months ended June 30, 2016, consisting of $7,062,000 of capital expenditures related to building renovations, and computer and research and development equipment.  The cash used in investing activities for building improvements is primarily due to ongoing renovation and expansion of our manufacturing facilities.  In addition, in the second quarter we acquired the licensing rights relating to a future product for $500,000.

Cash used in financing activities.  We used $1,642,000 of cash in financing activities for the six months ended June 30, 2016.  The cash usage consisted of:  $1,809,000 of cash used to repurchase 64,199 shares of our common stock as part of our share purchase program; and $1,718,000 of cash used to repurchase 62,050 shares of our common stock to satisfy income tax withholding obligations on restricted stock awards vesting and a stock options exercise, partially offset by the receipt of $1,885,000 upon the exercise of outstanding stock options and the sale of common stock pursuant to our Employee Stock Purchase Plan.

 

We currently anticipate that we will experience positive cash flow from our normal operating activities for the foreseeable future.  We believe that our working capital of $70.3 million at June 30, 2016 will be sufficient to meet all of our operating and capital requirements for the foreseeable future.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2016.

Contractual Obligations

The following table summarizes our contractual cash commitments as of June 30, 2016:

We do not have any other significant cash commitments related to supply agreements, nor do we have any other significant commitments for capital expenditures.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information.  The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, we evaluate these estimates and judgments.  We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The material accounting policies that we believe are most critical to an investor’s understanding of our financial results and condition and which require complex management judgment are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 under the caption “Critical Accounting Policies.”

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement.  We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will likely,” “is expected,” “will continue,” “is anticipated,” “believe,” “estimate,” “projected,” “forecast,” or similar expressions are intended to identify forward-looking statements within the meaning of the Act.  Forward-looking statements such as these are based on management’s current expectations as of the date of this report but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements.  We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: risks associated with adoption of our new products, exposure to governmental enforcement actions, exposure to potential patent infringement lawsuits, significant variability in quarterly results, exposure to possible product liability claims, the development of new products by others, dependence on third party distributors in international markets, doing business in international markets, the availability of third party reimbursement, actions by the FDA related to our products, the loss of key vendors, information technology risks and those factors set forth under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Annual Report on Form 10-Q.  This list is not exhaustive, and we may supplement this list in any future filing with the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement.  We undertake no obligation to, and do not intend to, revise or update publicly any forward-looking statement for any reason.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.  We maintain our accounts for cash and cash equivalents principally at one major bank in the United States and one major bank in Ireland.  We have a formal written investment policy that limits our investments to investments in issuers evaluated as creditworthy.  We have not experienced any losses on our deposits of our cash and cash equivalents.

With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivable.

In the United States, we sell our products directly to hospitals and clinics.  In international markets, we sell our products to independent distributors who, in turn, sell to hospitals and clinics.  We sell our products in these countries through independent distributors denominated in United States dollars, with the exception of sales from our subsidiary in Ireland and sales to our distributor in Germany, where sales are denominated in Euros.

We distribute certain products on behalf of certain U.S. and international manufacturers.  With the exception of one item, we pay for all distributed products in United States dollars.

We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.  A change of 0.1 in the Euro exchange rate would result in an increase or decrease of approximately $67,000 in the amount of United States dollars we receive in payment on the accounts receivable denominated in Euros by our subsidiary in Ireland and our German distributor, Nicolai GmbH.  Under our current policies, we do not use foreign currency derivative instruments to manage exposure to fluctuations in the Euro exchange rate.

We are exposed to declines in the interest rates paid on deposited funds.  A 0.1% decline in the current market interest rates paid on deposits would result in interest earnings being reduced by approximately $35,000 on an annual basis.

 

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

Changes in internal control over financial reporting.

      

During the fiscal quarter ended June 30, 2016, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

Item1.

Legal Proceedings

        From time to time, we are involved in additional legal proceedings arising in the normal course of business.  As of the date of this report we are not a party to any legal proceeding in which an adverse outcome would reasonably be expected to have a material adverse effect on our results of operations or financial condition.

Item 1A.

Risk Factors

The risks and uncertainties described below are not the only ones facing our company.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed.

We will not be successful if the interventional medical device community does not adopt our new products or services.

We have launched over 100 new products or services since 2003, and currently sell over 90 different medical devices.  Our success will depend on the continued launch of new products and services and the medical community’s acceptance of our new products and services.  We cannot predict how quickly, if at all, the medical community will accept our new products and services, or, if accepted, the continuation or extent of their use.  Our potential customers must:

·	believe that our products or services offer benefits compared to the methodologies and/or devices that they are currently using;

 

·	use our products or services and obtain acceptable clinical outcomes;

 

·	believe that our products or services are worth the price that they will be asked to pay; and

 

·	be willing to commit the time and resources required to change their current methodology.

 

Because we are often selling a new technology, we have limited ability to predict the level of growth or timing of sales of these products or services.  If we encounter difficulties in growing our sales of our new medical devices or services, our business will be seriously harmed.

 

We are subject to rigorous and costly U.S. and foreign laws and governmental regulation, and any governmental enforcement action may materially adversely affect our financial condition and business operations.

 

The products and business activities of medical device companies are subject to rigorous regulation by the FDA and other federal, state and international governmental authorities under statutes and regulations governing health care fraud.  The U.S. Attorney’s Offices have increased their scrutiny over the medical device industry in recent years.  The U.S. Congress, Department of Justice, Office of Inspector General of the Department of Health and Human Services, and Department of Defense have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, medical device manufacturers, primarily related to financial arrangements with health care providers, regulatory compliance and product promotional practices.  In addition, the U.S. False Claims Act has led to whistleblowers filing numerous qui tam civil lawsuits against medical device companies, in part, because a whistleblower can receive a portion of amounts obtained by the government through such a lawsuit.

Governmental enforcement action or qui tam civil litigation against us may result in material costs and occupy significant management resources, even if we ultimately prevail.  In addition, governmental enforcement action may result in substantial fines, penalties or administrative remedies, including exclusion from government reimbursement programs and entry into corporate integrity agreements with governmental agencies, which would entail significant obligations and costs.

We may face intellectual property litigation, which could prevent us from manufacturing and selling our products or services or result in us incurring substantial costs and liabilities.

The interventional medical device industry is characterized by numerous patent filings.  As a result, participants in the industry frequently experience substantial intellectual property litigation.  While we are not currently involved in any intellectual property litigation, in the recent past we have been involved in litigation concerning multiple products.

Some companies in the interventional medical device industry have employed intellectual property litigation in an attempt to gain a competitive advantage.  In addition, non-practicing patent assertion entities have accumulated patent rights related to the medical device industry and are asserting them against operating companies to attempt to collect settlements or licensing fees.  Intellectual property litigation has proven to be very complex and the outcome of such litigation is difficult to predict.  While we do not believe that any of our products or services infringe any existing patent or other intellectual property right, we previously have been involved in substantial intellectual property litigation and expect to continue to become subject to intellectual property claims with respect to our new or existing products or services.

An adverse determination in any intellectual property litigation or interference proceedings against us could prohibit us from selling a product or service, subject us to significant immediate payments to third parties and require us to seek licenses from third parties.  The costs associated with these license arrangements may be substantial and could include up-front payments and ongoing royalties.  Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all.  Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a product or service.

 

Our involvement in any future intellectual property claims, regardless of the merits of any asserted claim against us, could divert the attention of our technical and management personnel away from the development and marketing of our products and services for significant periods of time.  Furthermore, the penalties involved with an adverse outcome may be severe and the costs incurred related to defending such claims could have a material adverse effect on our results of operations or financial condition, even if we ultimately prevail in them.

 

Our future operating results are difficult to predict and may vary significantly from quarter to quarter, which may adversely affect the price of our common stock.

 

The ongoing introduction of new products and services that affect our overall product mix make the prediction of future operating results difficult.  You should not rely on our past revenue growth as any indication of future growth rates or operating results.  The price of our common stock will likely fall in the event that our operating results do not meet the expectations of analysts and investors.  Comparisons of our operating results between quarters are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including:

 

·

the level of sales of our products and services in our markets;

 

·

our ability to introduce new products or services and enhancements in a timely manner;

 

·

the demand for, and acceptance of, our products and services;

 

·

the success of our competition and the introduction of alternative products or services;

 

·

our ability to command favorable pricing for our products and services;

 

·

the growth of the market for our products and services;

 

·

the expansion and rate of success of our direct sales force in the United States and our independent distributors internationally;

 

·

actions relating to ongoing FDA compliance;

 

·

the effects of intellectual property disputes;

 

·

the effects of government investigations and enforcement actions;

 

·

the size and timing of orders from independent distributors or customers;

 

·

the attraction and retention of key personnel, particularly in sales and marketing, regulatory, manufacturing and research and development;

 

·

unanticipated delays or an inability to control costs;

 

·

general economic conditions, as well as those specific to our customers and markets; and

 

·

seasonal fluctuations in revenue due to the elective nature of some procedures.

 

We may face product liability claims that could result in costly litigation and significant liabilities.

The manufacture and sale of medical products entails significant risk of product liability claims.  Any product liability claims with or without merit, could result in costly litigation, reduced sales, cause us to incur significant liabilities and divert our management’s time, attention and resources.  We cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all.

 

The market for interventional medical devices and services is highly competitive and will likely become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products or services obsolete.

The existing market for interventional medical devices and services is intensely competitive.  We expect competition to increase further as companies develop new products and services or modify their existing products and services to compete directly with ours.  Each of our products and services encounters competition from several medical device companies, including Medtronic plc., Boston Scientific Corporation, Terumo Corporation, Cook Medical Inc., the Abbott Vascular division of Abbott Laboratories, and Asahi Intecc Co., Ltd.  Each of these companies has:

Ÿ

better name recognition;

Ÿ

broader product lines;

Ÿ

greater sales, marketing and distribution capabilities;

Ÿ

significantly greater financial resources;

Ÿ

larger research and development staffs and facilities; and

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existing relationships with some of our potential customers.

We may not be able to effectively compete with these companies.  In addition, broad product lines may allow our competitors to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products or services.  Broader product lines may also provide our competitors with a significant advantage in marketing competing products or services to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing.  Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products or services obsolete.

We rely on continued development and improvement of our products and services, which if not successful, may have an adverse effect on our financial condition and results of operations.

We are continually engaged in developing new products and services and improving our existing products and services.  New or improved products and services represent a significant component of our sales growth.  We dedicate significant financial and managerial resources to product and services development and improvement.  We may not achieve our development objectives within our schedule and budget, or at all, due to technical or operational challenges.  Failure to achieve our development objectives on schedule may increase our development expenses and adversely impact our revenues.  If we do achieve our development objectives, we may not be able to obtain regulatory approval for new or improved products or services and we may not be successful in marketing and selling such products or services.  Failure to obtain regulatory approval or successfully market and sell new or improved products and services could adversely impact our revenues and results of operations.

 

Constraints or interruption in production from any of our key suppliers may have a material adverse effect on our business, financial condition and results of operations.

In the interest of operational efficiency and due to quality considerations, we obtain some of the components for the products that we manufacture from a sole source.  If the availability of components from a sole source of supply is constrained or interrupted, there is no assurance that we could find an alternative source of supply quickly and cost effectively, if at all.  In addition, due to the stringent regulations and requirements of the FDA and equivalent regulatory entities regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for some components or materials.  Unavailability of components could have a material adverse effect on our ability to manufacture and sell products and our results of operations.

We also distribute finished products that are available only from their manufacturer.  In addition, the reprocessing services that we offer are performed by a single provider.  Operational, quality or regulatory issues of the manufacturers of the products we distribute, or the provider of our reprocessing services, could constrain or interrupt the availability of those products or services.  Any constraint or interruption in supply of finished products that we distribute, or the reprocessing services that we offer, could have a material adverse effect on our ability to sell products and services to customers, our financial condition and our results of operations.

Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our products and services in any international market.

Our international sales are subject to several risks, including:

 

·

the ability of our independent distributors to sell our products and services;

 

·

the impact of recessions or other disruptions in economies outside the United States, including from Great Britain’s exit from the European Union;

 

·

greater difficulty in collecting accounts receivable and longer collection periods;

 

·

unexpected changes in regulatory requirements, tariffs or other trade barriers;

 

·

weaker intellectual property rights protection in some countries;

 

·

potentially adverse tax consequences; and

 

·

political and economic instability.

 

The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our products and services in any international market.

 

We depend on information technology and communications systems to operate our business and unauthorized access to, or breaches or other failures of, these systems could have a material adverse effect on our business.

 

We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations and for communication with our direct domestic sales force.  Our information technology systems require an ongoing commitment of significant resources to maintain and protect the integrity and confidentiality of our proprietary data.  Third-party cyber-attacks against public companies are becoming more sophisticated and frequent.  Any successful cyber-attack against us could result in the theft of intellectual property, misappropriation of employee or customer information or our other assets or disruption of our communication with our direct domestic sales force, or otherwise compromise our confidential or proprietary information and disrupt our operations.  If we fail to maintain or protect our information technology systems and data integrity effectively or fail to anticipate, plan for or manage significant disruptions to these systems, we could have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach or theft of intellectual property, lose existing customers, have difficulty preventing, detecting, and controlling fraud, be subject to regulatory sanctions or penalties, or suffer other adverse consequences, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our business and results of operations may be seriously harmed by changes in third-party reimbursement policies.

We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any changes affect reimbursement for catheterization procedures in which our products or services are used.  Failure by physicians, hospitals and other users of our products or services to obtain sufficient reimbursement from healthcare payors for procedures in which our products or services are used, or adverse changes in governmental and private third-party payors’ policies toward reimbursement for such procedures, would seriously harm our business.

In the United States, healthcare providers, including hospitals and clinics that purchase medical devices or services such as our products and services, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all, or part of, the cost of catheterization procedures.  Any changes in this reimbursement system could seriously harm our business.

In international markets, acceptance of our products and services is dependent in part upon the availability of reimbursement within prevailing healthcare payment systems.  Reimbursement and healthcare payment systems in international markets vary significantly by country.  Our failure to receive international reimbursement approvals could have a negative impact on market acceptance of our products and services in the markets in which these approvals are sought.

Our products and services and our manufacturing activities are subject to extensive governmental regulation that could prevent us from selling our products or services in the United States or introducing new and improved products or services.

Our products and services and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies.  We are required to:

·	obtain the clearance of the FDA and international agencies before we can market and sell our products and services;

 

·	satisfy these agencies’ content requirements for all of our labeling, sales and promotional materials; and

 

·	undergo rigorous inspections by these agencies.

 

Compliance with the regulations of these agencies may delay or prevent us from introducing any new model of our existing products or other new products or services.  Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls, civil lawsuits, criminal indictments and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business.

We are also required to demonstrate compliance with the FDA’s quality system regulations.  The FDA enforces its quality system regulations through pre-approval and periodic post-approval inspections.  These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation.  If we are unable to conform to these regulations, the FDA may take actions which could seriously harm our business.  In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products or services.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Issuer and Affiliated Purchasers:

(1)  At the election of recipients and pursuant to the terms of their Stock Option and Restricted Stock Awards and the Stock Option and Stock Award Plan, we purchased 5,236 shares of common stock in May 2016 at the fair market value of the common stock on the day of purchase to satisfy income tax withholding obligations for the award recipients.

(2)  On November 13, 2014, we announced that our Board of Directors had approved a common stock repurchase plan, under which we may repurchase up to $20 million of our common stock on the open market at market prices through September 30, 2016.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

              Not applicable.

Item 5.

Other Information

 None.

 

Item 6.

Exhibits

 

SIGNATURES

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