LIVANOVA PLC AND ~~SUBSIDIARIES’~~SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net (loss) income	$	(14,772)	$	32,118	$	(65,182)	$	(11,946)
Other comprehensive income (loss):
Net change in unrealized gain (loss) on derivatives	1,640		(870)		1,313		(665)
Tax effect	(393)		209		(314)		159
Net of tax	1,247		(661)		999		(506)
Foreign currency translation adjustment	23,457		(27,775)		8,008		(16,628)
Total other comprehensive income (loss)	24,704		(28,436)		9,007		(17,134)
Total comprehensive income (loss)	$	9,932	$	3,682	$	(56,175)	$	(29,080)

See accompanying notes to the condensed consolidated financial statements

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income (loss) $ 27,830
$ (1,569 ) $ 86,599
$ (32,990 )
Other comprehensive income (loss):
Net change in unrealized gain (loss) on derivatives (1,980 ) 2,042
(5,923 ) (5,224 )
Tax effect 473
(673 ) 1,756
1,513
Net of tax (1,507 ) 1,369
(4,167 ) (3,711 )
Foreign currency translation adjustment, net of tax 39,106
(1,805 ) 111,123
32,598
Total other comprehensive income (loss) 37,599
(436 ) 106,956
28,887
Total comprehensive income (loss) $ 65,429
$ (2,005 ) $ 193,555
$ (4,103 )

LIVANOVA PLC AND ~~SUBSIDIARIES’~~SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(UNAUDITED)

(In thousands, except share amounts)


	September 30, 2020		December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	227,811	$	61,137
Accounts receivable, net of allowance of $16,241 at September 30, 2020 and $13,105 at December 31, 2019	191,892		257,769
Inventories	178,091		164,154
Prepaid and refundable taxes	43,316		37,779
Prepaid expenses and other current assets	32,026		28,604
Total Current Assets	673,136		549,443
Property, plant and equipment, net	190,509		181,354
Goodwill	918,478		915,794
Intangible assets, net	583,818		607,546
Operating lease assets	52,834		54,372
Investments	30,358		27,256
Deferred tax assets	22,673		68,676
Other assets	49,942		7,356
Total Assets	$	2,521,748	$	2,411,797
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations	$	13,953	$	77,396
Accounts payable	71,596		85,892
Accrued liabilities and other	98,308		120,100
Current litigation provision liability	34,790		146,026
Taxes payable	10,118		12,719
Accrued employee compensation and related benefits	52,994		70,420
Total Current Liabilities	281,759		512,553
Long-term debt obligations	637,109		260,330
Contingent consideration	79,603		114,396
Litigation provision liability	11,510		24,378
Deferred tax liabilities	28,362		32,219
Long-term operating lease liabilities	43,124		46,027
Long-term employee compensation and related benefits	23,109		22,797
Long-term derivative liabilities	59,588		61
Other long-term liabilities	6,792		15,319
Total Liabilities	1,170,956		1,028,080
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 49,402,628 shares issued and 48,596,417 shares outstanding at September 30, 2020; 49,411,016 shares issued and 48,443,830 shares outstanding at December 31, 2019	76,338		76,257
Additional paid-in capital	1,758,468		1,734,870
Accumulated other comprehensive loss	(10,385)		(19,392)
Accumulated deficit	(472,576)		(406,755)
Treasury stock at cost, 806,211 ordinary shares at September 30, 2020; 967,186 ordinary shares at December 31, 2019	(1,053)		(1,263)
Total Stockholders’ Equity	1,350,792		1,383,717
Total Liabilities and Stockholders’ Equity	$	2,521,748	$	2,411,797

See accompanying notes to the condensed consolidated financial statements

September 30, 2017 December 31, 2016
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 65,158
$ 39,789
Accounts receivable, net 314,041
275,730
Inventories 214,593
183,489
Prepaid and refundable taxes 58,969
60,615
Assets held for sale 14,117
4,477
Prepaid expenses and other current assets 55,176
55,973
Total Current Assets 722,054
620,073
Property, plant and equipment, net 213,769
223,842
Goodwill 781,070
691,712
Intangible assets, net 717,646
609,197
Investments 46,380
61,092
Deferred tax assets, net 4,356
6,017
Other assets 117,855
130,698
Total Assets $ 2,603,130
$ 2,342,631
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations $ 52,074
$ 47,650
Accounts payable 102,651
92,952
Accrued liabilities and other 92,212
75,567
Taxes payable 28,954
22,340
Accrued employee compensation and related benefits 80,466
78,302
Total Current Liabilities 356,357
316,811
Long-term debt obligations 71,853
75,215
Deferred income taxes liability 152,133
172,541
Long-term employee compensation and related benefits 33,957
31,668
Other long-term liabilities 74,404
39,487
Total Liabilities 688,704
635,722
Commitments and contingencies (Note 9)

Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,250,361 shares issued and 48,200,257 shares outstanding at September 30, 2017; 48,156,690 shares issued and 48,028,413 shares outstanding at December 31, 2016 74,697
74,578
Additional paid-in capital 1,731,565
1,719,893
Accumulated other comprehensive income (loss) 38,469
(68,487 )
Retained earnings (deficit) 72,024
(14,575 )
Treasury stock at cost, 50,104 shares at September 30, 2017 and 128,277 shares at December 31, 2016 (2,329 ) (4,500 )
Total Stockholders’ Equity 1,914,426
1,706,909
Total Liabilities and Stockholders’ Equity $ 2,603,130
$ 2,342,631

LIVANOVA PLC AND ~~SUBSIDIARIES’~~SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS

(UNAUDITED)

(In thousands)


	Nine Months Ended September 30,
	2020		2019
Operating Activities:
Net loss	$	(65,182)	$	(11,946)
Non-cash items included in net loss:
Deferred tax expense (benefit)	41,133		(26,422)
Remeasurement of contingent consideration to fair value	(31,176)		(2,425)
Amortization	29,346		29,690
Stock-based compensation	26,845		24,127
Depreciation	22,206		23,115
Remeasurement of derivative instruments	(17,654)		(2,948)
Amortization of operating lease assets	9,813		8,961

Impairment of intangible assets	0		50,295

Other	5,876		7,638
Changes in operating assets and liabilities:
Accounts receivable, net	65,401		5,433
Inventories	(12,141)		(18,181)
Other current and non-current assets	(15,360)		9,575
Accounts payable and accrued current and non-current liabilities	(49,547)		(28,964)
Taxes payable	(615)		(14,367)
Litigation provision liability	(124,158)		(140,823)
Restructuring reserve	(1,194)		(6,766)
Net cash used in operating activities	(116,407)		(94,008)
Investing Activities:
Purchases of property, plant and equipment	(28,445)		(16,801)
Purchase of investments	(3,175)		(287)
Loans to investees	(2,250)		0
Acquisitions, net of cash acquired	0		(10,750)
Purchases of intangible assets	0		(3,186)

Other	533		505
Net cash used in investing activities	(33,337)		(30,519)
Financing Activities:
Proceeds from long-term debt obligations	886,899		193,490
Repayment of long-term debt obligations	(481,360)		(12,330)
Proceeds from short term borrowings (maturities greater than 90 days)	46,717		0
Repayments of short term borrowings (maturities greater than 90 days)	(44,838)		0
Purchase of capped call	(43,096)		0
Debt issuance costs	(20,412)		(3,795)
Closing adjustment payment for sale of CRM business	(14,891)		0
Payment of contingent consideration	(8,860)		(17,989)
Shares repurchased from employees for minimum tax withholding	(5,277)		(6,183)
Proceeds from share issuances under ESPP	2,063		2,574
Change in short-term borrowing, net	(1,043)		(2,173)

Other	25		147
Net cash provided by financing activities	315,927		153,741
Effect of exchange rate changes on cash and cash equivalents	491		(1,105)
Net increase in cash and cash equivalents	166,674		28,109
Cash and cash equivalents at beginning of period	61,137		47,204
Cash and cash equivalents at end of period	$	227,811	$	75,313

See accompanying notes to the condensed consolidated financial statements

Nine Months Ended September 30,
2017 2016
Operating Activities:

Net income (loss) $ 86,599
$ (32,990 )
Non-cash items included in net income (loss):
Depreciation 27,880
30,193
Amortization 35,445
33,959
Stock-based compensation 14,261
15,575
Deferred income tax benefit (27,270 ) (10,224 )
Losses from equity method investments 20,072
19,382
Gain on acquisition of Caisson Interventional, LLC (39,428 ) —
Impairment of property, plant and equipment 4,581
—
Amortization of income taxes payable on inter-company transfers of property 23,831
17,114
Other 3,364
8,765
Changes in operating assets and liabilities:
Accounts receivable, net (19,107 ) (11,040 )
Inventories (11,006 ) 20,607
Other current and non-current assets (17,846 ) (25,845 )
Restructuring reserve (12,753 ) 14,961
Accounts payable and accrued current and non-current liabilities (14,958 ) (31,109 )
Net cash provided by operating activities 73,665
49,348
Investing Activities:

Purchases of property, plant and equipment and other (24,004 ) (28,928 )
Acquisition of Caisson Interventional, LLC, net of cash acquired (14,194 ) —
Proceeds from sale of cost method investment 3,192
—
Proceeds from asset sales 5,346
222
Purchases of cost and equity method investments (5,209 ) (8,059 )
Loans to cost and equity method investees (6,928 ) (6,595 )
Purchases of short-term investments —
(7,054 )
Maturities of short-term investments —
14,051
Net cash used in investing activities (41,797 ) (36,363 )
Financing Activities:
Change in short-term borrowing, net (18,054 ) (33,831 )
Proceeds from short-term borrowing (maturities greater than 90 days) 20,000
—
Repayment of long-term debt obligations (11,615 ) (11,354 )
Proceeds from exercise of stock options 3,221
7,888
Repayment of trade receivable advances —
(23,848 )
Proceeds from long-term debt obligations —
7,994
Share repurchases —
(11,053 )
Other (3,552 ) 1,208
Net cash used in financing activities (10,000 ) (62,996 )
Effect of exchange rate changes on cash and cash equivalents 3,501
1,030
Net increase (decrease) in cash and cash equivalents 25,369
(48,981 )
Cash and cash equivalents at beginning of period 39,789
112,613
Cash and cash equivalents at end of period $ 65,158
$ 63,632

LIVANOVA PLC AND SUBSIDIARIES

NOTESTO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Unaudited Condensed Consolidated Financial Statements

Basis of Presentation

The accompanying condensed consolidated financial statements of LivaNova as of, and for the three and nine months ended September 30, ~~2017~~2020 and ~~September 30, 2016,~~2019, have been prepared in accordance with ~~generally accepted accounting principles in the United States of America (“~~U.S.~~” and such principles, “U.S. GAAP”)~~ GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated balance sheet of LivaNova at December 31, ~~2016~~2019 has been derived from audited financial statements contained in our ~~2016~~2019 Form 10-K, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair ~~presentation~~statement of the operating results of LivaNova and its subsidiaries, for the three and nine months ended September 30, ~~2017,~~2020, and are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2020. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our ~~2016~~2019 Form 10-K.

~~Description~~Recent Developments Regarding COVID-19

Due to the COVID-19 pandemic (“COVID-19”), we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers have diverted medical resources and priorities towards the treatment of COVID-19. In addition, public health bodies have delayed elective procedures during the ~~Mergers~~COVID-19 pandemic, which has negatively impacted the usage of our products, including the number of Neuromodulation procedures. Further, some people are avoiding seeking treatment for non-COVID-19 emergency procedures, which has also negatively impacted the demand for our products.

~~On October 19, 2015 LivaNova became~~We are seeing signs of stabilization in certain geographies as elective surgeries resume and expect this trend to continue on a global basis during the ~~holding company~~fourth quarter of ~~the combined businesses of Cyberonics, Inc. (“Cyberonics”)~~2020. We expect elective procedure recovery rates to vary by country, and ~~Sorin S.p.A. (“Sorin”) (the “Mergers”). Based on the structure of the Mergers, management determined that Cyberonics was considered~~ to be ~~the accounting acquirer~~impacted by COVID-19 case volumes, hospital occupancy and ~~predecessor~~staffing levels, patient’s willingness to re-book previously deferred procedures, travel restrictions, transportation limitations, quarantine restrictions, economic uncertainty and potential COVID-19 resurgence.

Reclassifications

We have reclassified certain prior period amounts for ~~accounting~~comparative purposes.

~~Reclassification~~ These reclassifications did not have a material effect on our financial condition, results of ~~Prior-Year Comparative Period Presentation~~

To conform the condensed consolidated statement of income (loss) for the three and nine months ended September 30, 2016, to the current period presentation, we reclassified $0.7 million and $2.2 million, respectively, of Litigation Related Expenses to the Product Remediation line, and $1.7 million and $2.5 million, respectively, of Litigation Related Expenses to Selling, General and Administrative Expenses.

To conform the condensed consolidated balance sheet as of December 31, 2016 to the current period presentation, we reclassified $4.5 million of Assets Held for Sale, relating to our plan to exit the Costa Rica manufacturing operation, to a separate line item in the condensed consolidated balance sheet from Prepaid Expenses and Other Current Assets. We received $4.9 million in proceeds from the sale of our Costa Rica manufacturing operation during the nine months ended September 30, 2017.

~~To conform the condensed consolidated statement of~~operations or cash flows for the nine months ended September 30, 2016 to the current period presentation, certain amounts were reclassified within Operating Activities. Commencing with nine months ended September 30, 2017, Loans to Equity and Cost Method Investees of 6.9 million were presented as Investing Activities. To conform the condensed consolidated statement of cash flows for the nine months ended September 30, 2016 to the current period presentation, Loans to Equity and Cost Method Investees of $6.6 million were reclassified from Financing Activities to Investing Activities.flows.

Significant Accounting Policies

Our significant accounting policies are detailed in ~~"Note 2:~~“Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting ~~Policies"~~Policies” and “Note 3. Revenue Recognition” of our ~~2016~~2019 Form 10-K. ~~A further explanation of our Foreign Currency accounting policy is discussed below:~~

~~Foreign Currency~~

Our functional currency is the U.S. dollar, however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. We determine the functional currency of our subsidiaries that exist and operate in different economic and currency environments based on the primary economic environment in which the subsidiary operates, that is, the currency of the environment in which an entity primarily generates and expends cash. Our significant foreign subsidiaries are located in Europe and the U.S. The functional currency of our significant European subsidiaries is the Euro and the functional currency of our significant U.S. subsidiaries is the U.S. dollar.

Assets and liabilities for subsidiaries whose functional currency is not the U.S. dollar are translated into U.S. dollars based on a combination of both current and historical exchange rates, while their revenues earned and expenses incurred are translated into U.S. dollars at average period exchange rates. Translation adjustments are included as ‘Accumulated other comprehensive income (loss)’ (“AOCI”) in the condensed consolidated balance sheets. Gains and losses arising from transactions denominated in a currency different from an entity’s functional currency are included in ‘Foreign exchange and other (losses) gains’ in our condensed consolidated statements of income (loss).

Note 2. ~~Acquisitions~~Business Combinations

~~In support of our strategic growth initiatives, on May 2, 2017,~~Miami Instruments

On June 12, 2019, we acquired the ~~remaining 51% equity interests in Caisson Interventional,~~minimally invasive cardiac surgery instruments business from Miami Instruments, LLC (“~~Caisson”~~Miami Instruments”) for ~~a purchase price of up to $72.0 million, net of $6.3 million of debt forgiveness, consisting of $18.0 million paid at closing, $14.4 million to be paid after 12 months, and contingent~~cash consideration of up to ~~$39.6 million to be paid on~~$17.0 million. The related operations have been integrated into our Cardiovascular segment as a ~~schedule driven primarily by regulatory approvals and a sales-based earnout.~~

Caisson, a clinical-stage medical device company based in Maple Grove, Minnesota, is focused on the design, development and clinical evaluation of a novel transcatheter mitral valve replacement (“TMVR”) implant device with a fully transvenous delivery system.

~~The following table presents the acquisition date fair-value of the consideration transferred and the fair value~~part of our ~~interest~~Heart Valves business. Cash of $10.8 million was paid at closing with up to $6.0 million in ~~Caisson prior to the acquisition (in thousands):~~

Cash ⁽¹⁾
$ 15,660
Debt forgiven ⁽²⁾
6,309
Deferred consideration ⁽¹⁾
12,994
Contingent consideration ⁽¹⁾
29,303
Fair value of consideration transferred 64,266
Fair value of our interest prior to the acquisition ⁽²⁾
52,505
Fair value of total consideration $ 116,771

~~(1)~~

Concurrent with the acquisition, we recognized $5.8 million of post-combination compensation expense. Of this amount, $2.4 million is reflected as a reduction of $18.0 million in cash paid at closing of the acquisition, while $3.4 million increased the deferred consideration and contingent consideration liabilities recognized at the date of the acquisition to a total of $14.1 million and $31.7 million, respectively.


~~(2)~~	On the acquisition date, we remeasured the notes receivable from Caisson and our existing investment in Caisson at fair value and recognized a pre-tax non-cash gain of $1.3 million and $38.1 million, respectively, which are included in ‘Gain on acquisition of Caisson Interventional, LLC’ in the condensed consolidated statements of income (loss).

contingent consideration based on achieving certain milestones. The ~~following table presents the preliminary~~ purchase price allocation ~~at fair value~~ for the ~~Caisson~~Miami Instruments acquisition ~~(in thousands):~~

Cash and cash equivalents $ 1,468
In-process research and development 89,000
Goodwill 42,417
Other assets 918
Current liabilities 1,023
Deferred income tax liabilities, net 16,009
Net assets acquired $ 116,771

~~Acquired goodwill of $9.6 million is expected to be deductible for tax purposes. Additionally, $3.0 million of the initial cash payment~~ was deposited in escrow for future claims indemnification. Of this amount, $2.0 million is included in ‘Prepaid expenses and other current assets’ and the remaining $1.0 million is included in ‘Other long-term assets’ on the condensed consolidated balance sheet as of September 30, 2017.

~~We recognized acquisition-related expenses of approximately $1.0 million for legal and valuation expenses~~finalized during the ~~nine months ended September 30, 2017. These expenses are included within ‘Selling, general~~second quarter of 2020 and ~~administrative’ expenses~~resulted in ~~the condensed consolidated statements of income (loss). Additionally, the results of Caisson for the~~no measurement period ~~of May 2, 2017 through September 30, 2017 added no revenue and $16.9~~adjustments. In connection with this acquisition, we recognized $14.7 million in ~~expenses~~developed technology and in-process research and development (“IPR&D”) intangible assets and $1.5 million in ~~our condensed consolidated statement of income (loss).~~goodwill.

The contingent consideration arrangements are composed of potential cash payments upon the achievement of certain regulatory milestones and a sales-based earnout associated with sales of products covered by the purchase agreement. The sales-based earnout was valued using projected sales from our internal strategic plans. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs (in thousands):

Caisson Acquisition Fair value at May 2, 2017 Valuation Technique Unobservable Input Ranges
Regulatory milestone-based payments $ 14,883
Discounted cash flow Discount rate 2.6% - 3.4%
Probability of payment 90-95%
Projected payment years 2018-2023

Sales-based earnout 16,805
Monte Carlo simulation Discount rate 11.5-12.7%
Sales volatility 36.9%
Projected years of sales 2019-2033
$ 31,688

The following table provides a reconciliation of the beginning and ending balance of the contingent consideration liability, which consisted of arrangements that arose from the Caisson acquisition and other previous acquisitions that also included contingent consideration (in thousands):

Balance at December 31, 2016 $ 3,890
Purchase price - Caisson contingent consideration 31,688
Payments (1,841 )
Changes in fair value 231
Effect of changes in foreign currency exchange rates 249
Balance at September 30, 2017 ⁽¹⁾
$ 34,217

~~(1)~~

The contingent consideration liability represents contingent payments related to three acquisitions: the first and second acquisitions, in September 2015, were Cellplex PTY Ltd. in Australia and the commercial activities of a local distributor in Colombia. The contingent payments for the first acquisition are based on achievement of sales targets by the acquiree through June 30, 2018 and the contingent payments for the second acquisition are based on sales of cardiopulmonary disposable products and heart lung machines of the acquiree through December 2019. The third acquisition, Caisson, occurred in May 2017 and is discussed above. Refer to “Note 6. Fair Value Measurements.”

Note 3. Discontinued Operations

On April 30, 2018, we completed the sale of our Cardiac Rhythm Management (“CRM”) business to MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation (“MicroPort”) for total cash proceeds of $195.9 million, less cash transferred of $9.2 million, subject to a closing working capital adjustment. In March 2020, we finalized the working capital adjustment and as a result, made a $16.4 million payment to MicroPort during the first quarter of 2020 and incurred an additional $1.0 million loss on sale, net of a $0.1 million tax benefit.

Note 4. Restructuring

~~Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the Mergers.~~ We ~~initiated these~~initiate restructuring plans to leverage economies of scale, streamline distribution and logistics, and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these plans were reported as ~~‘Restructuring expenses’~~restructuring expenses in ~~our~~the operating results ~~in the~~of our condensed consolidated statements of income (loss). ~~We estimate that the Plans will result in~~

The following table provides a ~~net reduction of 326 personnel of which 292 have occurred as of September 30, 2017.~~

~~In March 2017, we committed to a plan to sell our Suzhou Industrial Park facility in Shanghai, China. As a result of this exit plan we recorded an impairment~~reconciliation of the ~~building~~beginning and equipment of $4.6 million and accrued $0.5 million of additional costs, primarily related to employee severance, during the nine months ended September 30, 2017. In addition, the remaining carrying valueending balance of the ~~land, building~~accruals and ~~equipment was reclassified to ‘Assets held for sale’~~other reserves recorded in ~~March 2017,~~connection with ~~a balance of $14.1 million as of September 30, 2017,~~our restructuring plans included within accrued liabilities and other and other long-term liabilities on the condensed consolidated balance ~~sheet.~~

~~The following table presents restructuring expense accrual detail~~sheet (in thousands):


	Employee Severance and Other Termination Costs		Other		Total
Balance at December 31, 2019	$	4,097	$	1,400	$	5,497
Charges	2,025		0		2,025
Cash payments and other	(4,880)		(792)		(5,672)
Balance at September 30, 2020	$	1,242	$	608	$	1,850

Employee Severance and Other Termination Costs Other Total
Balance at December 31, 2016 $ 21,092
$ 3,056
$ 24,148
Charges 7,126
4,934
12,060
Cash payments and adjustments (23,804 ) (5,480 ) (29,284 )
Balance at September 30, 2017 $ 4,414
$ 2,510
$ 6,924

The following table presents restructuring expense by reportable segment (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cardiovascular	$	9	$	783	$	1,265	$	1,521
Neuromodulation	43		(171)		851		314
Other	(401)		86		(91)		2,728
Total	$	(349)	$	698	$	2,025	$	4,563

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Cardiac Surgery $ 441
$ 916
$ 6,944
$ 5,878
Cardiac Rhythm Management (391 ) 571
(1,750 ) 16,592
Neuromodulation 14
2,882
513
7,017
Other 728
12
6,353
7,732
Total $ 792
$ 4,381
$ 12,060
$ 37,219

Note 4.5. Product Remediation Liability

On December 29, 2015, we received an FDA Warning Letter (the “Warning Letter”) alleging certain violations of FDA regulations applicable to medical device manufacturing at our Munich, Germany and Arvada, Colorado facilities. On October 13, 2016, the CDC and FDA separately released safety notifications regarding 3T Heater-Cooler devices in response to which we issued a Field Safety Notice Update for U.S. users of our 3T Heater-Cooler devices to proactively and voluntarily contact facilities to facilitate implementation of the CDC and FDA recommendations.

At December 31, 2016, we recognized a liability for a product remediation plan related to our 3T Heater-Cooler device (“3T device”). The remediation plan ~~we developed~~ consists primarily of a modification of the 3T device design to include internal sealing and the addition of a vacuum system to new and existing devices. These changes are intended to address regulatory actions and to reduce further the risk of possible dispersion of aerosols from 3T devices in the operating room. We concluded that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated with the plan was reasonably estimable. The deployment of this solution for commercially distributed devices has been dependent upon final validation and verification of the design changes and approval or clearance by regulatory authorities ~~worldwide, including FDA~~worldwide. It is reasonably possible that our estimate of the remediation liability could materially change in future periods due to the various significant assumptions involved such as customer behavior, market reaction and the timing of approvals or clearance ~~in the U.S.~~ by regulatory authorities worldwide.

In April 2017, we obtained CE Mark in Europe for the design change, ~~of the 3T device~~ and in May 2017 we completed our first vacuum canister and internal sealing upgrade on a customer-owned device. ~~We are currently implementing~~In October 2018, the FDA concluded that we could commence the vacuum canister and internal sealing upgrade program in the U.S., and on February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues contained in the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization. Concurrent with this clearance, (1) 3T devices manufactured in accordance with K191402 will not be subjected to the import alert previously issued by the FDA and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared under K191402. We continue to implement the vacuum canister and internal sealing upgrade program in as many countries as possible ~~throughout the remainder of 2017.~~ until all devices are upgraded.

As a second part of the remediation plan, we ~~also intend~~continue to ~~perform~~offer a no-charge deep disinfection service (deep cleaning service) for 3T device users who have reported confirmed M. chimaera mycobacterium contamination. Although the deep disinfection service is not yet available in the U.S., it is currently offered in many countries around the world and will be expanded to additional geographies as we receive the required regulatory approvals. The deep disinfection service was rolled out in Europe in the second half of 2015, and in April 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S., thereby adding to the growing list of countries around the world in which we offer this service. Finally, we ~~are continuing~~continue to offer the loaner program for 3T devices, initiated in the fourth quarter of 2016, to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of the vacuum system addition and deep disinfection service worldwide. ~~This loaner program began in~~

The following table provides a reconciliation of the ~~U.S.~~beginning and ~~is being made available progressively on a global basis, prioritizing and allocating devices to 3T device users based on pre-established criteria.~~

~~Changes in the carrying amount~~ending balance of the product remediation liability ~~are as follows~~included within accrued liabilities and other on the condensed consolidated balance sheet (in thousands):

Balance at December 31, 2016 $ 33,487
Adjustments (15 )
Remediation activity (5,672 )
Effect of changes in foreign currency exchange rates 2,446
Balance at September 30, 2017 ⁽¹⁾
$ 30,246


~~(1)~~ Balance at December 31, 2019	At	$	3,251
Adjustments		2,301
Remediation activity		(3,982)
Effect of changes in foreign currency exchange rates		145
Balance at September 30, 2017, the product remediation liability balance is held within ‘Accrued liabilities and other’ and ‘Other long-term liabilities’ on the condensed consolidated balance sheet. Refer to “Note 15. Supplemental Financial Information.”2020		$	1,715

~~It is reasonably possible that~~We recognized product remediation expenses of $1.1 million and $3.1 million during the three months ended September 30, 2020 and 2019, respectively, and $6.9 million and $11.1 million during the nine months ended September 30, 2020 and 2019, respectively. Product remediation expenses include internal labor costs, costs to remediate certain inspectional observations made by the FDA at our ~~estimate~~Munich facility and costs associated with the incorporation of the ~~remediation liability could materially change in future periods due to the various significant assumptions involved, such as customer behavior, market reaction and the timing~~modification of ~~approvals or clearance by regulatory authorities worldwide. We recognize changes in estimates on a prospective basis. At this stage, no liability has~~

~~been recognized with respect to any lawsuits involving us related to~~ the 3T device ~~while~~design into the next generation 3T device. These costs and related legal costs are expensed as ~~incurred.~~incurred and are not included within the product remediation liability presented above. At September 30, 2020, our balance sheet includes a $46.3 million provision related to litigation involving our 3T device. For further information, please refer to “Note 9.10. Commitments and ~~Contingencies - 3T Heater-Cooler Devices.~~Contingencies.”

Note 5.6. Investments

~~Cost-Method Investments~~

~~Our cost-method~~The following table details the carrying value of our investments in equity securities of non-consolidated affiliates without readily determinable fair values for which we do not exert significant influence over the investee. These equity investments are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The below equity investments are included in ~~‘Investments’ in~~investments on the condensed consolidated balance sheets ~~and consist of our equity positions in the following privately-held companies~~ (in thousands):


Equity Investments Without Readily Determinable Fair Values	September 30, 2020		December 31, 2019
Respicardia Inc. (1)	$	17,706	$	17,706
ALung Technologies, Inc. (2)	3,000		0
Ceribell, Inc.	3,000		3,000
ShiraTronics, Inc.	2,045		2,045
MD Start II	1,169		1,121
Rainbow Medical Ltd.	1,145		1,099
Highlife S.A.S.	1,109		1,064
Other	770		770
	29,944		26,805
Equity method investment	414		451
	$	30,358	$	27,256

September 30, 2017 December 31, 2016
Respicardia Inc. ⁽¹⁾
$ 21,129
$ 17,518
ImThera Medical, Inc. ⁽²⁾
12,000
12,000
Rainbow Medical Ltd. ⁽³⁾
4,178
3,733
MD Start II 1,179
526
Other ⁽⁴⁾
150
—
$ 38,636
$ 33,777

~~(1)~~

Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea ("CSA") by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia with a carrying amount of $1.5(1)Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia, with a carrying amount of $0.8 million and $0.6 million as of ~~September 30, 2017, which is included in ‘Prepaid expenses and other current assets’ on the condensed consolidated balance sheet.~~


~~(2)~~	ImThera Medical Inc. (“ImThera”) is a privately funded U.S. company developing a neurostimulation device system for the treatment of obstructive sleep apnea. We have a loan outstanding to ImThera as of September 30, 2017, with a carrying amount of $1.0 million, which is included in ‘Other assets’ on the condensed consolidated balance sheet.


~~(3)~~	~~Rainbow Medical Ltd. is a private Israeli venture capital company that seeds and grows companies developing medical devices in a diverse range of medical fields.~~


~~(4)~~	During the nine months ended September 30, 2017, we sold our investment in Istituto Europeo di Oncologia S.R.L, for a gain of $3.2 million. This gain is included in ‘Foreign exchange and other gains (losses)’ in the condensed consolidated statement of income (loss).

~~Equity Method Investments~~

Our equity-method investments are included in ‘Investments’ in the condensed consolidated balance sheets and consist of our equity position in the following entities (in thousands, except for percent ownership):

% Ownership ⁽¹⁾
September 30, 2017 December 31, 2016
MicroPort Sorin CRM (Shanghai) Co. Ltd. ⁽²⁾
49.0% $ 6,948
$ 4,867
Highlife S.A.S. ⁽³⁾
38.0% 779
6,009
Caisson Interventional LLC ⁽⁴⁾

—
16,423
Other 17
16
Total $ 7,744
$ 27,315


~~(1)~~	~~Ownership percentages as of September 30, 2017.~~


~~(2)~~	~~During the three months ended September 30, 2017 we invested an additional $4.5 million in MicroPort Sorin CRM (Shanghai) Co. Ltd.~~

~~(3)~~

Highlife S.A.S is a privately held clinical-stage medical device company located in France and is focused on the development of a unique transcatheter mitral valve replacement system to treat patients with mitral regurgitation. During the three months ended September 30, 2017, we recognized an impairment of our investment in, and notes receivable from, Highlife. See the paragraph below for further details.


~~(4)~~	On May 2, 2017, we acquired the 51% remaining equity interests in Caisson Interventional LLC (“Caisson”), and we began consolidating the results of Caisson as of the acquisition date. Refer to “Note 2. Acquisitions” and to “Note 6. Fair Value Measurements” for further information.

~~Highlife Impairment~~

~~We recognized an impairment of our equity-method investment in, and notes receivable from, Highlife S.A.S. (“Highlife”) during the nine months ended~~ September 30, ~~2017. Certain factors, including a revision in our investment strategy, indicated that the carrying value of our aggregate investment might not be recoverable~~2020 and ~~that the decrease in value of our aggregate investment was other than temporary. We, therefore, estimated the fair value of our investment and notes receivable using the~~

market approach. The estimated fair value of our aggregate investment was below our carrying value by $13.0 million. This aggregate impairment was included in ‘Losses from equity method investments’ in the condensed consolidated statements of income (loss). The updated carrying value of our notes receivable from Highlife at September 30, 2017 was $0.8 million andDecember 31, 2019, respectively, which is included in ~~‘Other assets’~~prepaid expenses and other current assets on the condensed consolidated balance sheet.

(2)During the first quarter of 2020, we invested in ALung Technologies, Inc. (“ALung”). ALung is a privately held medical device company focused on creating advanced medical devices for treating respiratory failure. ALung’s Hemolung Respiratory Assist System is a dialysis-like alternative or supplement to mechanical ventilation which removes carbon dioxide directly from the blood in patients with acute respiratory failure. During the second quarter of 2020, we provided a convertible loan to ALung for $2.0 million, due July 10, 2021. As of September 30, 2020, the carrying amount of the loan was $2.0 million, which is included in prepaid expenses and other current assets on the condensed consolidated balance sheet.

Note 6.7. Fair Value Measurements

We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2020 and 2019.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following ~~table provides~~tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	Fair Value as of September 30, 2020		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (foreign currency exchange rate “FX”)	$	1,787	$	0	$	1,787	$	0
Derivative assets - freestanding instruments (FX)	4,052		0		4,052		0
Derivative assets - capped call derivatives	38,999		0		0		38,999
Convertible notes receivable	2,301		0		0		2,301
	$	47,139	$	0	$	5,839	$	41,300

Liabilities:

Derivative liabilities - freestanding instruments (interest rate swaps)	$	139	$	0	$	139	$	0
Derivative liabilities - freestanding instruments (FX)	85		0		85		0
Derivative liabilities - embedded exchange feature	59,398		0		0		59,398
Derivative liabilities - other	1,350		0		0		1,350
Contingent consideration arrangements	96,174		0		0		96,174
	$	157,146	$	0	$	224	$	156,922


	Fair Value as of December 31, 2019		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (FX)	$	535	$	0	$	535	$	0
Derivative assets - freestanding instruments (FX)	26		0		26		0
	$	561	$	0	$	561	$	0

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	169	$	0	$	169	$	0
Derivative liabilities - designated as cash flow hedges (interest rate swaps)	374		0		374		0
Derivative liabilities - freestanding instruments (FX)	3,137		0		3,137		0
Contingent consideration arrangements	137,349		0		0		137,349
	$	141,029	$	0	$	3,680	$	137,349

Fair Value
as of Fair Value Measurements Using Inputs Considered as:
September 30, 2017 Level 1 Level 2 Level 3
Liabilities:
Derivative liabilities - designated as cash flow hedges (foreign currency exchange rate "FX") $ 724
$ —
$ 724
$ —
Derivative liabilities - designated as cash flow hedges (interest rate swaps) 1,807
—
1,807
$ —
Derivative liabilities - freestanding instruments (FX) 1,456
—
1,456
—
Contingent consideration 34,217
—
—
34,217
$ 38,204
$ —
$ 3,987
$ 34,217

Fair Value
as of Fair Value Measurements Using Inputs Considered as:
December 31, 2016 Level 1 Level 2 Level 3
Assets:
Derivative assets - designated as cash flow hedges (FX) $ 4,911
$ —
$ 4,911
$ —
Derivative assets - freestanding instruments (FX) 3,358
—
3,358
—
$ 8,269
$ —
$ 8,269
$ —

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX) $ 942
$ —
$ 942
$ —
Derivative liabilities - designated as cash flow hedges (interest rate swaps) 1,392
—
1,392
—
Contingent consideration 3,890
—
—
3,890

$ 6,224
$ —
$ 2,334
$ 3,890

~~Our~~The following table provides a reconciliation of the beginning and ending balances of our recurring fair value measurements, using significant unobservable inputs ~~(level~~(Level 3)~~, relate solely to our~~ (in thousands):


	Capped Call Derivative Asset		Embedded Exchange Feature Derivative Liability		Other Derivative Liabilities		Contingent Consideration Liability Arrangements		Convertible Notes Receivable
As of December 31, 2019	$	0	$	0	$	0	$	137,349	$	0
Additions	43,096		74,951		0		0		2,267
Payments (1)	0		0		0		(9,868)		0
Changes in fair value (2) (3) (4)	(4,097)		(15,553)		1,350		(31,176)		34
Effect of changes in foreign currency exchange rates	0		0		0		(131)		0
Total at September 30, 2020	38,999		59,398		1,350		96,174		2,301
Less current portion at September 30, 2020	0		0		1,160		16,571		2,044
Long-term portion at September 30, 2020	$	38,999	$	59,398	$	190	$	79,603	$	257

(1)During the nine months ended September 30, 2020, we paid $8.8 million under the contingent consideration ~~liability.~~arrangement for the acquisition of CardiacAssist, Inc., doing business as TandemLife (“TandemLife”). Additionally, we made final payments under contingent consideration arrangements resulting from the acquisitions of 2 distributors.

(2)The contingent consideration change in fair value during the nine months ended September 30, 2020 is primarily due to a one-year delay in the projected achievement of a certain regulatory milestone and timing of sales-based earnout payments for ImThera Medical Inc. (“ImThera”), and the impact of an increase in discount rates utilized in the valuation of contingent consideration. Refer to ~~“Note 2. Acquisitions”~~the tables below for further information regarding the fair value measurements of contingent consideration.

(3)During the nine months ended September 30, 2020, the contingent consideration change in fair value resulted in a ~~discussion~~decrease of ~~the changes~~$19.2 million and $12.0 million recorded to cost of sales - exclusive of amortization and research and development, respectively.

(4)Changes in the fair value of the embedded exchange feature derivative and capped call derivatives are recognized in foreign exchange and other gains (losses) in the condensed consolidated statements of income (loss).

Embedded Exchange Feature and Capped Call Derivatives

In June 2020, the Company issued $287.5 million in cash exchangeable senior notes and entered into related capped call transactions. The cash exchangeable senior notes include an embedded exchange feature that is bifurcated from the cash exchangeable senior notes. Please refer to “Note 8. Financing Arrangements” for further details. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value using the Black-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable.

The embedded exchange feature and capped call derivatives are classified as Level 3 as the Company uses historical volatility and implied volatility from options traded to determine expected stock price volatility which is an unobservable input that is significant to the valuation. In general, an increase in our stock price or stock price volatility would increase the fair value of the embedded exchange feature and capped call derivatives which would result in an increase in expense. As time to the expiration of the derivatives decreases with passage of time, the fair value of the derivatives would decrease. The future impact on net income depends on how significant inputs such as stock price, stock price volatility and time to the expiration of the derivatives change in relation to other inputs.

The stock price volatility as of September 30, 2020 was 37%. As of September 30, 2020, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the embedded exchange feature derivative of $42.4 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $76.4 million. As of September 30, 2020, a 10% lower volatility, holding other inputs constant would result in approximate fair value for the capped call derivatives of $29.3 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $42.3 million.

Contingent Consideration Arrangements

The following table provides the fair value of our Level 3 contingent consideration ~~liability.~~

arrangements by acquisition (in thousands):


	September 30, 2020		December 31, 2019
ImThera	$	79,603	$	113,503
TandemLife	11,672		17,311
Miami Instruments	4,899		5,338
Drilltex	0		294
Other	0		903
	$	96,174	$	137,349

The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products. The sales-based earnout is valued using projected sales from our internal strategic plan. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of September 30, 2020:


ImThera Acquisition	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payment	Discounted cash flow	Discount rate	8.3%
		Probability of payment	85%
		Projected payment year	2024

Sales-based earnout	Monte Carlo simulation	Risk-adjusted discount rate	12.2	%	-	12.5%
		Credit risk discount rate	8.5	%	-	9.2%
		Revenue volatility	32.5%
		Probability of payment	85%
		Projected years of earnout	2025		-	2028

The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:


TandemLife Acquisition	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payment	Discounted cash flow	Discount rate	7.6	%	-	7.7%
		Probability of payments	70	%	-	100%
		Projected payment years	2020		-	2021

The Miami Instruments business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of September 30, 2020:


Miami Instruments	Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payments	Discounted cash flow	Discount rate	7.6	%	-	7.7%
		Probability of payments	80	%	-	95%
		Projected payment years	2020		-	2021

Note 7.8. Financing Arrangements

The ~~outstanding principal~~carrying amount of our long-term debt as of September 30, 2020 and December 31, 2019 was as follows (in thousands, except interest rates):


	September 30, 2020		December 31, 2019		Maturity	Interest Rate
2020 Senior Secured Term Loan	$	422,960	$	0	June 2025	LIBOR (1% Floor)		+	6.50%
2020 Cash Exchangeable Senior Notes	208,954		0		December 2025	3.00%
Bank of America Merrill Lynch Banco Múltiplo S.A.	6,000		8,422		July 2021	5.61%
Mediocredito Italiano	5,835		6,222		December 2023	0.50	%	-	2.77%
Bank of America, U.S.	2,011		2,004		January 2021	2.08%
2019 Debt Facility	0		184,275
2017 European Investment Bank	0		103,570
2014 European Investment Bank	0		28,053
Other	1,041		965
Total long-term facilities	646,801		333,511
Less current portion of long-term debt	9,692		73,181
Total long-term debt	$	637,109	$	260,330

September 30, 2017 December 31, 2016 Maturity Interest Rate
European Investment Bank ⁽¹⁾
$ 78,590
$ 78,987
June 2021 0.95 %
Mediocredito Italiano ⁽³⁾
7,719
7,276
December 2023 0.50% - 3.07%
Banca del Mezzogiorno ⁽²⁾
6,490
6,747
December 2019 0.50% - 3.15%
Bpifrance (ex-Oséo) 1,603
1,909
October 2019 2.58 %
Region Wallonne 831
798
December 2023 and June 2033 0.00% - 2.45%
Mediocredito Italiano - mortgages and other 742
799
September 2021 and September 2026 0.40% - 0.65%
Total debt 95,975
96,516

Less current portion of long-term debt 24,122
21,301

Total long-term debt $ 71,853
$ 75,215


~~(1)~~	The European Investment Bank (“EIB”) loan was obtained in July 2014 to support product development projects. The interest rate for the EIB loan is reset by the lender each quarter based on the Euribor. Interest payments are paid quarterly and principal payments are paid semi-annually.


~~(2)~~	~~The Banca del Mezzogiorno loan was obtained in January 2015 to support R&D projects as a part of the Large Strategic Project program of the Italian Ministry of Education.~~


~~(3)~~	~~We obtained the Mediocredito Italiano Bank loan in July 2016 as part of the Fondo Innovazione Teconologica program implemented by the Italian Ministry of Education.~~

Revolving Credit

The outstanding principal amount of our short-term unsecured revolving credit agreements and other agreements with various banks was ~~$28.0~~$4.3 million and ~~$26.4~~$4.2 million, at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, with interest rates ranging from ~~0.2%~~3.21% to ~~10.5%~~7.20% and loan terms ranging from ~~one day~~overnight to ~~365 days.~~10 months, as of September 30, 2020.

~~European Investment Bank Financing Agreement~~2020 Senior Secured Term Loan

On June ~~29, 2017,~~10, 2020, we entered into a ~~new finance contract~~$450.0 million five-year senior secured term loan (the ~~“Finance Contract”~~“Term Loan”) through our wholly owned subsidiary LivaNova USA Inc., with funds managed by affiliates of Ares Management Corporation, as administrative agent and collateral agent, resulting in cash proceeds of approximately $421.7 million, net of discounts and issuance costs. The obligations under the ~~EIB~~Term Loan are guaranteed on a senior secured basis by each of LivaNova’s existing and future wholly owned material subsidiaries, and are secured by a perfected first priority security interest in substantially all tangible and intangible assets of LivaNova and certain U.S. and UK subsidiaries of LivaNova, subject in each case to ~~support financing~~certain exceptions contained in the Term Loan. Borrowings under the Term Loan bear interest at a variable annual rate equal to the three-month LIBOR rate (subject to a 1% floor), plus an applicable margin of 6.5% per annum. The effective interest rate of the Term Loan at September 30, 2020 was 9.0%. The Term Loan will mature on June 30, 2025 and includes certain affirmative, negative and financial covenants. The financial covenants under the Term Loan state (i) the net revenue of LivaNova PLC, LivaNova USA, Inc. and any restricted subsidiaries on a consolidated basis shall not be lower than $700 million for each trailing 12 month period, such threshold to decrease pro rata (not below $550 million) upon prepayments of the Term Loan made by LivaNova USA, Inc. out of the proceeds of certain ~~R&D projects. The Finance Contract has~~asset sales, and (ii) the total secured leverage ratio (as defined in the debt agreement) for LivaNova PLC, LivaNova USA, Inc. and any restricted subsidiaries on a ~~borrowing base~~consolidated basis shall not be greater than the applicable ratio set forth below:


Test Period	Total Secured Leverage Ratio
4 Quarters ending June 30, 2020 through each fiscal quarter thereafter until (and including) the fiscal quarter ending June 30, 2021	5.625	:	1.00
4 Quarters ending September 30, 2021 and ending each fiscal quarter thereafter	4.5	:	1.00

Debt discounts and issuance costs related to the Term Loan were approximately $28.3 million and included various legal, bank and accounting fees. Amortization of ~~€100~~debt discount and issuance costs was $1.1 million ~~(or approximately $118~~and $1.3 million ~~USD equivalent)~~for the three and ~~can be drawn~~nine months ended September 30, 2020, respectively, and was included in ~~up to two tranches, each in a minimum~~interest expense on the condensed consolidated statement of income (loss).

2020 Cash Exchangeable Senior Notes

On June 17, 2020, our wholly-owned subsidiary, LivaNova USA, Inc., issued $287.5 million aggregate principal amount of ~~€50~~3.00% cash exchangeable senior notes (the “Notes”) by private placement to qualified institutional buyers pursuant to Rule

144A under the Securities Act of 1933, as amended. The sale of the Notes resulted in approximately $278.0 million ~~(or~~in net proceeds to the Company after deducting issuance costs. Interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The effective interest rate of the Notes at September 30, 2020 was 9.9%. The Notes mature on December 15, 2025 unless earlier exchanged, repurchased, or redeemed.

Debt discounts and issuance costs related to the Notes were approximately ~~$59~~$82.0 million ~~USD equivalent)~~and included $75.0 million of discount attributable to the embedded exchange feature, discussed below, and $7.0 million of allocated issuance costs to the Notes related to legal, bank and accounting fees. Amortization of debt discount and issuance costs was $3.0 million and $3.4 million for the three and nine months ended September 30, 2020 and is included in interest expense on the condensed consolidated statement of income (loss).

The Notes are exchangeable at the option of the holders only under certain circumstances and solely into cash in an amount based on the trading prices of LivaNova’s ordinary shares during a related observation period. The Notes are not exchangeable into ordinary shares of LivaNova or any other security under any circumstances. The initial exchange rate for the Notes is 16.3980 ordinary shares per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $60.98 per share). ~~Drawdowns must occur by December 30, 2018, and~~The exchange rate is subject to adjustment in certain circumstances, as set forth in the indenture governing the Notes.

The Company may redeem the Notes at its option, on or after June 20, 2023, in whole or in part, if the last ~~repayment date of any tranche will be no earlier than four years and no later than eight years after the disbursement~~reported sale price per ordinary share has been at least 130% of the ~~relevant tranche. Loans under~~exchange price then in effect for at least 20 trading days (whether or not consecutive), including the ~~Finance Contract are subject~~trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Additionally, the Company may redeem the Notes at its option, prior to December 15, 2025, in whole but not in part, in connection with certain ~~covenants~~tax-related events.

Embedded Exchange Feature

The embedded exchange feature of the Notes requires bifurcation from the Notes and ~~other terms~~is accounted for as a derivative liability. The fair value of the Notes’ embedded exchange feature derivative at the time of issuance was $75.0 million and ~~conditions. No loan drawdowns have occurred~~was recorded as debt discount on the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. The Notes’ embedded exchange feature derivative is carried on the condensed consolidated balance sheets at its estimated fair value and is adjusted at the end of each reporting period, with unrealized gain or loss reflected in the consolidated statements of income (loss). The fair value of the embedded exchange feature derivative liability was $59.4 million as of September 30, ~~2017.~~2020.

Capped Call Transactions

In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers of the Notes or their respective affiliates. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of LivaNova’s ordinary shares underlying the Notes and are expected generally to offset any cash payments the Company is required to make upon exchange of the Notes in excess of the principal amount thereof in the event that the market value per ordinary share, as measured under the capped call transactions, is greater than the strike price of the capped call transactions, with such offset being subject to an initial cap price of $100.00 per share. The aggregate cost of the capped calls derivative assets was $43.1 million. The capped call transactions expire on December 15, 2025 and must be settled in cash. The capped calls are carried on the condensed consolidated balance sheets as a derivative asset at their estimated fair value and are adjusted at the end of each reporting period, with unrealized gain or loss reflected in the condensed consolidated statement of income (loss). The fair value of capped call derivative assets was $39.0 million as of September 30, 2020.

The current and non-current classification is evaluated at each balance sheet date and may change depending on whether any exchange conditions are met. As of September 30, 2020, no exchange conditions have been met and the Notes, embedded exchange feature derivative liability, and the capped call derivative assets are classified as non-current. Please refer to “Note 7. Fair Value Measurements” for details on the valuation of the embedded exchange feature derivative liability and capped call derivative assets.

Extinguishment of Debt

The Company used the net proceeds from the Term Loan, together with a portion of the net proceeds of the Notes, after fees, discounts, commissions and other expenses, to repay outstanding indebtedness under the Company’s 2017 European Investment Bank loan, 2014 European Investment Bank loan, Banca Nazionale del Lavoro S.p.A loan, and 2019 Debt Facility and related

expenses. The Company repaid approximately $528.0 million in aggregate outstanding principal, accrued interest and associated fees, including breakage fees and legal fees. The Company recognized a loss on debt extinguishment of $1.4 million during the nine months ended September 30, 2020. The loss on debt extinguishment was recognized in foreign exchange and other losses in the condensed consolidated statements of income (loss).

The remainder of the proceeds from the concurrent financing transactions were used to pay the cost of capped call transactions and for general corporate purposes.

Note 8.9. Derivatives and Risk Management

Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. ~~In addition, due to certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments.~~ We enter into ~~foreign currency exchange rate (“FX”)~~FX derivative ~~contracts and interest rate swap~~ contracts to reduce the impact of foreign currency ~~rate and interest~~exchange rate fluctuations on earnings and cash flow. We are also exposed to equity price risk in connection with our Notes, including exchange and settlement provisions based on the price of our ordinary shares at exchange or maturity of the Notes. In addition, the capped call transactions associated with the Notes also include settlement provisions that are based on the price of our ordinary shares, subject to a capped price per share.

We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities inon the condensed consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings.

If the derivative qualifies for hedge accounting, ~~depending on the nature of the hedge and hedge effectiveness,~~ changes in the fair value of the derivative will ~~either~~ be ~~recognized immediately in earnings or~~ recorded in accumulated other ~~AOCI~~comprehensive income (“AOCI”) until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to ~~the~~our condensed consolidated ~~statement~~statements of income (loss) as shown in the tables ~~below and interest rate swap gains and losses in AOCI are reclassified to interest expense in the consolidated statement of income (loss).~~below. We evaluate hedge effectiveness at ~~inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if~~

~~any, is recorded in earnings.~~inception. Cash flows from derivative contracts are reported as operating activities ~~in the~~on our condensed consolidated statements of cash flows.

Freestanding FX Derivative FX Contracts

The gross notional amount of ~~freestanding derivatives~~FX derivative contracts not designated as hedging instruments outstanding at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 was ~~$239.0~~$332.2 million and ~~$489.1~~$338.0 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans ~~our EIB loan,~~ and trade receivables. We recorded net ~~losses~~(losses) gains for these freestanding derivatives of ~~$0.7~~$(11.7) million and ~~$7.9~~$3.1 million for the three months ended September 30, 2020 and 2019, respectively, and $(4.8) million and $6.8 million for the nine months ended September 30, ~~2017, respectively,~~2020 and ~~net gains (losses) of $(1.8) million and $0.4 million for the three and nine months ended September 30, 2016,~~2019, respectively. These ~~gains~~(losses) and ~~losses~~gains are included in ~~‘Foreign~~foreign exchange and other gains (losses)~~’ in the~~ on our condensed consolidated ~~statements~~statement of income (loss).

Counterparty Credit Risk

We are exposed to credit risk in the event of non-performance by the counterparties to our derivatives at maturity.

The two counterparties to the capped call transactions are financial institutions. To limit our credit risk, we selected financial institutions with a minimum long-term investment grade credit rating. Our exposure to the credit risk of the counterparties is not secured by any collateral. If a counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under the capped call transactions with that counterparty.

To manage credit risk with respect to our other derivatives, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market positions. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any transactions with the counterparty could be subject to early termination, which could result in substantial losses for the Company.

Cash Flow Hedges

~~Notional~~The gross notional amounts of open derivative contracts designated as cash flow hedges at September 30, 2020 and December 31, 2019 were as follows (in thousands):


Description of Derivative Contract	September 30, 2020		December 31, 2019
FX derivative contracts to be exchanged for British Pounds	$	7,610	$	10,128
FX derivative contracts to be exchanged for Japanese Yen	16,023		25,342
FX derivative contracts to be exchanged for Euros	36,553		48,838
Interest rate swap contracts (1)	0		22,442
	$	60,186	$	106,750

Description of Contract September 30, 2017 December 31, 2016
FX derivative contracts to be exchanged for British Pounds $ 16,928
$ 6,663
FX derivative contracts to be exchanged for Japanese Yen 44,618
57,840
FX derivative contracts to be exchanged for Canadian Dollars 13,341
—
Interest rate swap contracts 62,917
63,246
$ 137,804
$ 127,749
(1)Interest rate swap contracts were de-designated upon the repayment of the 2014 European Investment Bank loan. Refer to “Note 8. Financing Arrangements.”

After-tax net loss associated with derivatives designated as cash flow hedges recorded in the ending balance of AOCI and the amount expected to be reclassified to earnings in the next 12twelve months are as follows (in thousands):

Description of Contract September 30, 2017 Net Amount Expected to be Reclassified to Earnings in the Next 12 Months
FX derivative contracts $ (287 ) $ (287 )
Interest rate swap contracts (261 ) (69 )
$ (548 ) $ (356 )


Description of Derivative Contract	After-Tax Net Gain in AOCI as of September 30, 2020		After-Tax Net Gain in AOCI as of Amount Expected to be Reclassified to Earnings in Next 12 Months
FX derivative contracts	$	1,512	$	1,512

Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in ~~Other Comprehensive Income (Loss)~~other comprehensive income (loss) (“OCI”) and the amount reclassified to earnings from AOCI were as follows (in thousands):


		Three Months Ended September 30,
		2020				2019
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Gains Recognized in OCI		(Losses) Gains Reclassified from AOCI to Earnings		Losses Recognized in OCI		Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	1,482	$	(692)	$	(689)	$	963
FX derivative contracts	SG&A	0		534		0		(742)
Interest rate swap contracts	Interest expense	—		—		0		(40)
		$	1,482	$	(158)	$	(689)	$	181


		Nine Months Ended September 30,
		2020				2019
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Gains Recognized in OCI		(Losses) Gains Reclassified from AOCI to Earnings		Gains Recognized in OCI		Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	632	$	(777)	$	933	$	3,094
FX derivative contracts	SG&A	0		209		0		(1,470)
Interest rate swap contracts	Interest expense	0		(113)		0		(26)
		$	632	$	(681)	$	933	$	1,598

Three Months Ended September 30,
2017 2016
Description of Contract Location in Earnings of Reclassified Gain or Loss Losses Recognized in OCI (Losses) Gains Reclassified from AOCI to Earnings (Losses) Gains Recognized in OCI Losses Reclassified from AOCI to Earnings
FX derivative contracts Foreign exchange and other (losses) gains $ (2,537 ) $ (1,623 ) $ 2,535
$ 2,795
FX derivative contracts SG&A —
269
—
(1,876 )
Interest rate swap contracts Interest expense —
797
263
(163 )
$ (2,537 ) $ (557 ) $ 2,798
$ 756

Nine Months Ended September 30,
2017 2016
Description of Contract Location in Earnings of Reclassified Gain or Loss Losses Recognized in OCI (Losses) Gains Reclassified from AOCI to Earnings Losses Recognized in OCI Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts Foreign exchange and other (losses) gains $ (10,124 ) $ (6,833 ) $ (5,932 ) $ 2,943
FX derivative contracts SG&A —
1,623
—
(3,437 )
Interest rate swap contracts Interest expense —
1,009
(38 ) (252 )
$ (10,124 ) $ (4,201 ) $ (5,970 ) $ (746 )
We offset fair value amounts associated with our derivative instruments on our condensed consolidated balance sheets that are executed with the same counterparty under master netting arrangements. Our netting arrangements include a right to set off or net together purchases and sales of similar products in the settlement process.

The following tables present the fair value ~~on a gross basis,~~ and the location of derivative contracts reported inon the condensed consolidated balance sheets (in thousands):

September 30, 2020

Asset Derivatives

Liability Derivatives

Derivatives Designated as Hedging Instruments

Balance Sheet Location

Fair Value (1)

Balance Sheet Location

Fair Value (1)

FX derivative contracts

Prepaid expenses and other current assets

1,775

FX derivative contracts

Accrued liabilities

Total derivatives designated as hedging instruments

1,787

Derivatives Not Designated as Hedging Instruments

Interest rate swap contracts

Accrued liabilities

139

FX derivative contracts

Prepaid expenses and other current assets

4,052

Accrued liabilities

FX derivative contracts

Prepaid expense and other current assets

Capped call derivatives

Other assets

38,999

Embedded exchange feature

Long-term derivative liability

59,398

Other derivatives

Accrued liabilities

1,160

Other derivatives

Long-term derivative liability

190

Total derivatives not designated as hedging instruments

43,051

60,972

Total derivatives

44,838

60,972


December 31, 2019	Asset Derivatives			Liability Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value (1)		Balance Sheet Location	Fair Value (1)
Interest rate swap contracts				Accrued liabilities	$	313
Interest rate swap contracts				Long-term derivative liability	61
FX derivative contracts	Prepaid expenses and other current assets	$	148	Accrued liabilities	169
FX derivative contracts	Accrued liabilities	387
Total derivatives designated as hedging instruments		535			543
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Accrued liabilities	26		Accrued liabilities	3,104
FX derivative contracts				Prepaid expenses and other current assets	33
Total derivatives not designated as hedging instruments		26			3,137
Total derivatives		$	561		$	3,680

(1)For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 7. Fair Value Measurements.”

September 30, 2017 Liability Derivatives
Derivatives Designated as Hedging Instruments Balance Sheet Location
Fair Value ₍₁₎
Interest rate swap contracts Accrued liabilities $ 875
Interest rate swap contracts Other long-term liabilities 932
FX derivative contracts Accrued liabilities 724
Total derivatives designated as hedging instruments
2,531
Derivatives Not Designated as Hedging Instruments

FX derivative contracts Accrued liabilities 1,456
Total derivatives not designated as hedging instruments
1,456

$ 3,987

December 31, 2016 Asset Derivatives Liability Derivatives
Derivatives Designated as Hedging Instruments Balance Sheet Location
Fair Value ₍₁₎
Balance Sheet Location
Fair Value ₍₁₎
Interest rate swap contracts Prepaid expenses and other current assets $ —
Accrued liabilities $ 942
Interest rate swap contracts Other assets —
Other long-term liabilities 1,392
FX derivative contracts Prepaid expenses and other current assets 4,911
Accrued liabilities —
Total derivatives designated as hedging instruments 4,911
2,334
Derivatives Not Designated as Hedging Instruments
FX derivative contracts Prepaid expenses and other current assets 3,358
Accrued liabilities —
Total derivatives not designated as hedging instruments 3,358
—
$ 8,269
$ 2,334


~~(1)~~	~~For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 6. Fair Value Measurements.”~~

Note 9.10. Commitments and Contingencies

~~3T Heater-Cooler Devices~~

FDA Warning Letter.

On December 29, 2015, the FDA issued ~~LivaNova~~ a Warning Letter ~~(the “Warning Letter”)~~ alleging certain violations of FDA regulations applicable to medical device manufacturers at our Munich, Germany and Arvada, Colorado facilities.

The FDA inspected the Munich facility from August 24, 2015 to August 27, 2015 and the Arvada facility from August 24, 2015 to September 1, 2015. On August 27, 2015, the FDA issued a Form 483 identifying ~~two~~2 observed non-conformities with certain regulatory requirements at the Munich facility. We did not receive a Form 483 in connection with the FDA’s inspection of the Arvada facility. Following the receipt of the Form 483, we provided written responses to the FDA describing corrective and preventive actions that were underway or to be taken to address the FDA’s observations at the Munich facility. The Warning Letter responded in part to our responses and identified other alleged violations related to the manufacture of our 3T Heater-Cooler device that were not previously included in the Form 483.

The Warning Letter further stated that our 3T devices and other devices we manufactured at our Munich facility ~~are~~were subject to refusal of admission into the U.S. until resolution of the issues set forth by the FDA in the Warning Letter. The FDA ~~has~~had informed us that the import alert iswas limited to the 3T devices, but that the agency ~~reserves~~reserved the right to expand the scope of the import alert if future circumstances ~~warrant~~warranted such action. The Warning Letter did not request that existing users cease using the 3T device, and manufacturing and shipment of all of our products other than the 3T device ~~remain~~were unaffected by the import limitation. To help clarify these issues for current customers, we issued an informational Customer Letter in January 2016 and that same month agreed with the FDA on a process for shipping 3T devices to existing U.S. users pursuant to a certificate of medical necessity program.

Finally, the Warning Letter stated that premarket approval applications for Class III devices to which certain Quality System regulation deviations identified in the Warning Letter ~~are~~were reasonably related ~~will~~would not be approved until the violations ~~have~~had been ~~corrected. However,~~corrected; however, this restriction ~~applies~~applied only to the Munich and Arvada facilities, which do not manufacture or design devices subject to Class III premarket approval.

On February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues contained in the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization. Concurrent with this clearance, (1) 3T devices manufactured in accordance with K191402 will not be subjected to the import alert and (2) LivaNova initiated a correction to distribute the updated Operating Instructions cleared under K191402.

We continue to work diligently to remediate the FDA’s inspectional observations for the Munich facility, as well as the additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the FDA’s requests.

CDC and FDA Safety Communications and Company Field Safety Notice ~~Update~~

On October 13, 2016, the ~~Centers for Disease Control~~CDC and ~~Prevention (“CDC”) and~~the FDA separately released safety notifications regarding the 3T devices. The CDC’s Morbidity and Mortality Weekly Report (“MMWR”) and Health Advisory Notice (“HAN”) reported that tests conducted by the CDC and its affiliates indicate that there appears to be genetic similarity between both patient and 3T device strains of the non-tuberculous mycobacterium (“NTM”) bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the geographic separation between the two hospitals referenced in the investigation, the report asserts that 3T devices manufactured prior to August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with 3T devices and provide guidance for providers and patients. The CDC notification states that the decision to use the 3T device during a surgical operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s communications confirm that 3T devices are critical medical devices and enable doctors to perform life-saving cardiac surgery procedures.

Also on October 13, 2016, concurrent with the CDC’s HAN and FDA’s Safety Communication, we issued a Field Safety Notice Update for U.S. users of 3T devices to proactively and voluntarily contact facilities to aid in implementation of the CDC and FDA recommendations. In the fourth quarter of 2016, we initiated a program to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of additional risk mitigation strategies ~~worldwide.~~worldwide, including a vacuum canister and internal sealing upgrade program and a deep disinfection service. This loaner program ~~began in the U.S. and~~ is ~~being made~~ available ~~progressively~~ on a global ~~basis, prioritizing and allocating devices to 3T device users based on pre-established criteria.~~basis. We anticipate that this program will continue until we are able to address customer needs through a broader solution that includes implementation of ~~one or more of~~ the risk mitigation strategies described above. We are currently ~~under~~implementing the vacuum and sealing upgrade program in as many countries as possible until all devices are upgraded. On October 11, 2018, after review of information provided by us, the FDA concluded that we could commence the vacuum and

sealing upgrade program in the U.S., and on February 25, 2020, LivaNova received clearance for K191402, a 510(k) for the 3T devices that addressed issues contained in the 2015 Warning Letter along with design changes that further mitigate the potential risk of aerosolization. Furthermore, we continue to offer a no-charge deep disinfection service (deep cleaning service) for 3T device users as we receive the required regulatory ~~agencies.~~approvals. The deep disinfection service was rolled out in Europe in the second half of 2015, and on April 12, 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S. thereby adding to the growing list of countries around the world in which we offer this service.

On December 31, 2016, we recognized a liability for our product remediation plan related to our 3T device. We concluded that it was probable that a liability had been incurred upon management’s approval of the plan and the commitments made by management to various regulatory authorities globally in November and December 2016, and furthermore, the cost associated with the plan was reasonably estimable. At September 30, ~~2017,~~2020, the product remediation liability was ~~$30.2~~$1.7 million. Refer to “Note 4.5. Product Remediation Liability” for additional information.

Litigation

~~On February 12, 2016, LivaNova was alerted that~~Product Liability

The Company is currently involved in litigation involving our 3T device. The litigation includes a class action complaint ~~had been filed~~ in the U.S. District Court for the Middle District of Pennsylvania, ~~with respect to our 3T devices. The plaintiffs named~~federal multi-district litigation in the ~~complaint underwent open heart surgeries at WellSpan York Hospital~~U.S. District Court for the Middle District of Pennsylvania, various U.S. state court cases and ~~Penn State Milton S. Hershey Medical Center~~cases in ~~2015, and~~jurisdictions outside the complaint alleges that: (i) patients were exposed to a harmful form of bacteria, known as nontuberculous mycobacterium (“NTM”), from our 3T devices; and (ii) we knew or should have known that design or manufacturing defects in 3T devices can lead to NTM bacterial colonization, regardless of the cleaning and disinfection procedures used (and recommended by us).U.S. The class ~~of plaintiffs~~action, filed in ~~the complaint~~February 2016, consists of all Pennsylvania residents who underwent open heart surgery at WellSpan York Hospital and Penn State Milton S. Hershey Medical Center between 2011 and 2015 and who currently are asymptomatic for NTM infection.

~~On October 23, 2017,~~ Members of the ~~U.S. District Court for the Middle District of Pennsylvania issued an order certifying a~~ class ~~with respect to the named plaintiffs. The class action, which is currently against Sorin Group Deutschland GmbH and Sorin Group USA, Inc. seeks: (i)~~seek declaratory relief ~~finding~~that the 3T devices are defective and unsafe for intended ~~uses; (ii)~~uses, medical ~~monitoring; (iii) general damages;~~monitoring, damages, and ~~(iv)~~ attorneys’ fees. ~~Other lawsuits related to surgeries in which~~

On March 29, 2019, we announced a ~~3T device allegedly was used have been filed elsewhere~~settlement framework that provides for a comprehensive resolution of the personal injury cases pending in the multi-district litigation in U.S., federal court, the related class action pending in federal court, as well as certain cases in ~~Canada,~~state courts across the United States. The agreement, which makes no admission of liability, is subject to certain conditions, including acceptance of the settlement by individual claimants and ~~Europe, against~~provides for a total payment of up to $225 million to resolve the claims covered by the settlement. Per the agreed-upon terms, the first payment of $135 million was paid into a qualified settlement fund in July 2019 and the second payment of $90 million was paid in January 2020. Cases covered by the settlement are being dismissed as amounts are disbursed to individual plaintiffs from the qualified settlement fund.

Cases in state courts in the U.S. and in jurisdictions outside the U.S. continue to progress. As of October 29, 2020, including the cases encompassed in the settlement framework described above that have not yet been dismissed, we are aware of approximately 85 filed and unfiled claims worldwide, with the majority of the claims in various ~~LivaNova entities.~~federal or state courts throughout the United States. This includes cases that have settled but have not yet been dismissed. The complaints generally seek damages and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and manufacturing defect, fraudulent and negligent misrepresentation or concealment, unjust enrichment, and violations of various state consumer protection statutes.

~~We are defending each of~~At September 30, 2020, the provision for these ~~claims vigorously. Given~~matters was $46.3 million. While the ~~relatively early stage~~amount accrued represents our best estimate, the actual liability for resolution of these matters ~~we cannot give any assurances that additional legal proceedings making~~may vary from our estimate.

The changes in the ~~same or similar allegations will not be filed against us or one of our subsidiaries, nor that~~litigation provision liability during the resolution of these complaints or other related litigation will not have a material adverse effect on our business, results of operations, financial condition or liquidity. We have not recognized an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable. In addition we cannot reasonably estimate a range of potential loss, if any, that may result from these matters.nine months ended September 30, 2020 are as follows (in thousands):

~~Other~~


	Litigation Provision Liability
Total litigation provision liability at December 31, 2019	$	170,404
Payments	(128,128)
Adjustments	3,970
FX and other	54
Total litigation provision liability at September 30, 2020	46,300
Less current portion of litigation liability at September 30, 2020	34,790
Long-term portion of litigation provision liability at September 30, 2020	$	11,510

~~SNIA Litigation~~

Environmental Liability

Our subsidiary, Sorin S.p.A. (“Sorin”) was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”)~~. The Sorin spin-off, which involved SNIA’s medical technology division,~~ in January 2004. SNIA subsequently became ~~effective on January 2, 2004. Pursuant to the Italian Civil Code, in a spin-off transaction, the parent~~insolvent and the spun-off company can be held jointly liable, up to the actual value of the shareholders’ equity conveyed or received, for certain indebtedness or liabilities of the pre-spin-off company. We estimate that the value of the shareholders’ equity received by Sorin was approximately €573 million (approximately $676 million).

We believe and have argued before the relevant fora that Sorin is not jointly liable with SNIA for its alleged SNIA debts and liabilities. Specifically, between 1906 and 2010, SNIA’s subsidiaries Caffaro Chimica S.r.l. and Caffaro S.r.l. and their predecessors (the “SNIA Subsidiaries”), conducted certain chemical operations (the “Caffaro Chemical Operations”), at sites in Torviscosa, Brescia and Colleferro, Italy (the “Caffaro Chemical Sites”). These activities allegedly resulted in substantial and widely dispersed contamination of soil, water and ground water. In connection with SNIA’s Italian insolvency proceedings, the Italian Ministry of the Environment and the Protection of Land and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA ~~in an aggregate amount of €3.4 billion (approximately $4.0 billion)~~ for remediation costs relating to the environmental damage at ~~the Caffaro Chemical Sites.~~chemical sites previously operated by SNIA’s other subsidiaries.

In September 2011 and July 2014, the Bankruptcy Court of Udine and ~~in July 2014,~~ the Bankruptcy Court of Milan, ~~each~~respectively, held (in proceedings to which we are not parties) that the Italian Ministry of the Environment and other Italian government agencies (the “Public Administrations”) were not creditors of either SNIA ~~Subsidiaries~~ or ~~SNIA~~its subsidiaries in connection with their claims in the ~~context of their~~ Italian insolvency proceedings. InThe Public Administrations appealed and in January 2016, the Court of Udine rejected the ~~appeal brought by the Italian Public Administrations.~~appeal. The Public Administrations ~~have~~has appealed that ~~second loss in pending proceedings before~~decision to the ~~Italian~~ Supreme Court. ~~The appeal by~~Meanwhile, the ~~Public Administrations before the~~Bankruptcy Court of ~~Milan remains pending.~~Milan’s decision has been appealed.

In January 2012, SNIA filed a civil action against Sorin in the Civil Court of Milan asserting joint liability of a parent and a spun-off company. ~~SNIA’s civil action against Sorin also named the~~The Public Administrations intervened in the ~~Italian Ministry~~proceeding, with a claim for environmental damages of ~~the Environment and other Italian government agencies, as defendants, in order to have them bound to the final ruling.~~

approximately $4 billion. On April 1, 2016, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations ~~against Sorin,~~ further requiring the Public Administrations to pay Sorin ~~€300,000 (or~~ approximately ~~$353,910),~~€292,000 (approximately $342,000 as of September 30, 2020) for legal ~~fees (of which SNIA is jointly liable for €50,000) (the “2016 Decision”).~~

~~On June 21, 2016, the~~fees. The Public Administrations appealed the 2016 Decision to the Court of Appeal of ~~Milan. The first hearing~~Milan, and on March 5, 2019, the Court of Appeal issued a partial decision on the merits declaring Sorin/LivaNova jointly liable with SNIA for SNIA’s environmental liabilities in an amount up to the fair value of the ~~appeal proceedings was held in December 2016,~~net worth received by Sorin because of the Sorin spin-off, an estimated €572.1 million (approximately $669.1 million as of September 30, 2020). Additionally the Court issued a separate order, staying the proceeding until a panel of three experts can assess the environmental damages, the costs of clean-up, and the ~~final hearing is now scheduled~~costs that the Public Administrations has already borne for ~~November 22, 2017. After~~ the ~~hearing,~~clean-up of the ~~parties will file their final briefs,~~sites to allow the Court to decide on the second claim of the Public Administration against LivaNova, (i.e., to refund the Public Administrations for the SNIA environmental liabilities). Both LivaNova and the ~~Court is expected to render its~~Public Administrations have appealed the decision ~~in mid-2018. SNIA did not file an appeal.~~

We (as successor to Sorin in the litigation) continue to believe that the risk of material loss relating to the SNIA litigation is not probable as a result of the reasoning contained in, and legal conclusions reached in, the recent court decisions described above. We also believe that the amount of potential losses relating to the SNIA litigation is, in any event, not estimable given that the underlying alleged damages, related remediation costs, allocation and apportionment of any such responsibility, which party is responsible, and various time periods involving different parties, all remain issues in dispute and that no final decision on a remediation plan has been approved. As a result, we have not made any accrual in connection with the SNIA litigation.

Pursuant to European Union (“EU”), United Kingdom (“UK”) and Italian cross-border merger regulations applicable to the Mergers, legacy Sorin liabilities, including any potential liabilities arising from the claims against Sorin relating to the SNIA litigation, are assumed by us as successor to Sorin. Although we believe the claims against Sorin in connection with the SNIA litigation are without merit and continue to contest them vigorously, there can be no assurance as to the outcome. A finding during any appeal or novel proceedings that we are liable for environmental damage at the Caffaro Chemical Sites or its alleged cause(s) could have a material adverse effect on our results of operations, financial condition and/or liquidity.

~~Environmental Remediation Order~~

On July 28, 2015, Sorin and other direct and indirect shareholders of SNIA received an administrative order (the “Remediation Order”) from the Italian Ministry of the Environment (the “Ministry”), directing them to promptly commence environmental remediation efforts at the Caffaro Chemical Sites (as described above). We (as successor to Sorin) believe that we should not be liable for damages relating to the Caffaro Chemical Operations pursuant to the Italian statute on which the Remediation Order relies because, inter alia, the statute does not apply to activities occurring prior to 2006, the date on which the statute was enacted. (Sorin was spun off from SNIA in 2004.) Additionally, we believe that Sorin should not be subject to the Remediation Order because Italian environmental regulations only permit such an order to be imposed on an “operator” of a remediation site, and Sorin never operated any activity at any of the industrial sites concerned and, further, was never identified in any legal proceeding as an operator at any of the Caffaro Chemical Sites and could not and in fact did not cause any environmental damage at any of the Caffaro Chemical Sites.

~~Accordingly, we (as successor to Sorin) alongside other parties, challenged the Remediation Order before the Administrative~~Supreme Court ~~of Lazio in Rome (the “TAR”)~~(Corte di Cassazione).

On March 21, 2016 the TAR annulled the Remediation Order based on the fact that (i) the Remediation Order lacks any detailed analysis of the causal link between the alleged damage and our activities, a pre-condition to imposition of the measures proposed in the Remediation Order, (ii) the situation of the Caffaro site does not require urgent safety measures, because no new pollution events have occurred and no additional information or evidence of a situation of contamination exists, and (iii) there was no proper legal basis for the Remediation Order, and in any event, the Ministry failed to verify the legal elements that could have led to a conclusion of legal responsibility of the recipients of the Remediation Order.

~~The TAR decisions described above have been appealed by the Ministry before the Council of State. No information on the timing of the first hearing of this appeal is presently available.~~ We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

~~Opposition to Merger Proceedings~~Patent Litigation

On ~~July 28, 2015, the Public Administrations filed an opposition proceeding to the proposed merger between Sorin~~May 11, 2018, Neuro and ~~Cyberonics (the “Merger”~~Cardiac Technologies LLC (“NCT”), ~~before~~a non-practicing entity, filed a complaint in the ~~Commercial Courts~~United States District Court for the Southern District of ~~Milan, asking~~Texas asserting that the ~~Court to prohibit~~VNS Therapy System, when used with the ~~execution~~SenTiva Model 1000 generator, infringes the claims of U.S. Patent No. 7,076,307 owned by NCT. The complaint requests damages that include a royalty, costs, interest, and attorneys’ fees. On September 13, 2018, we petitioned the Patent Trial and Appeal Board of the ~~Merger. In its initial decision~~U.S. Patent and Trademark Office (the “Patent Office”) for an inter partes review (“IPR”) of the validity of the ‘307 patent, and on May 18, 2020, the Patent Office issued a Final Written Decision determining that all challenged claims are unpatentable. NCT is appealing the Final Written Decision. On March 24, 2020, we were granted our request for an ex parte reexamination of the ‘307 patent, and in August, ~~20, 2015,~~ the ~~Court authorized~~Patent Office issued a Non-Final Rejection of all of the Merger and the Public Administrations did not appeal this decision. The proceeding then continued as a civil case, with the Public Administration seeking damages against us. The Commercial Court of Milan delivered a decision in October 2016, fully rejecting the Public Administration’s request and awarding us €200,000 (approximately $228,000) in damages for frivolous litigation, plus €200,000 (approximately $228,000) in legal fees. The Public Administrations has appealed this decision to the Court of Appeal of Milan. The final hearing is scheduled on January 17, 2018.‘307 claims. The Court has stayed the litigation pending the outcome of ~~Appeal is likely to make a decision in mid-June 2018.~~the IPR appeal proceeding. We have not recognized an expense in connection with this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

Contract Litigation

On November 25, 2019, LivaNova received notice of a lawsuit initiated by former members of Caisson Interventional, LLC (“Caisson”), a subsidiary of the Company acquired in 2017. The lawsuit, Todd J. Mortier, as Member Representative of the former Members of Caisson Interventional, LLC v. LivaNova USA, Inc., is currently pending in the United States District Court for the District of Minnesota. The complaint alleges (i) breach of contract, (ii) breach of the covenant of good faith and fair dealing and (iii) unjust enrichment in connection with the Company’s operation of Caisson’s Transcatheter Mitral Valve Replacement (“TMVR”) program and the Company’s November 20, 2019 announcement that it was ending the TMVR program at the end of 2019. The lawsuit seeks damages arising out of the 2017 acquisition agreement, including various regulatory milestone payments. We intend to vigorously defend this claim. The Company has not recognized an expense related to this matter because any potential loss is not currently probable or reasonably estimable. In addition, we cannot reasonably estimate a range of potential loss, if any, that may result from this matter.

Tax Litigation

In a tax audit report received inon October 30, 2009, the Regional Internal Revenue Office of Lombardy (the “Internal Revenue Office”) informed Sorin Group Italia S.r.l. that, among several issues, it was disallowing in part ~~(for a total of €102.6 million (approximately $121.0 million), related to tax years 2002 through 2006)~~ a tax-deductible write down of the investment in the U.S. company, Cobe Cardiovascular Inc., which Sorin Group Italia S.r.l. recognized in 2002 and deducted in ~~five~~5 equal installments, beginning in 2002. In December 2009, the Internal Revenue Office issued notices of assessment for ~~2002, 2003 and~~ 2004. ~~The assessments for 2002 and 2003 were automatically voided for lack of merit.~~ In December 2010 and October 2011, the Internal Revenue Office issued notices of assessment for 2005 and 2006, respectively. We challenged all ~~three~~3 notices of assessment (for 2004, 2005 and 2006) before the relevant Provincial Tax Courts.

The preliminary challenges filed for 2004, 2005 and 2006 were denied at the first jurisdictional level. We appealed these decisions. The appeal submitted against the first-level decision for 2004 was successful. The Internal Revenue Office appealed this second-level decision to the Italian Supreme Court (Corte di Cassazione) in February 2017. The Italian Supreme Court’s decision is pending.

~~The appeals submitted against the first-level decisions for 2005 and 2006 were rejected. We appealed these adverse decisions to the Italian Supreme Court, where the matters are still pending.~~

In November 2012, the Internal Revenue Office served a notice of assessment for 2007, and in July 2013, served a notice of assessment for 2008. In these matters the Internal Revenue Office claims an increase in taxable income due to a reduction (similar to the previous notices of assessment for 2004, 2005 and 2006) of the losses reported by Sorin Group Italia S.r.l. for the 2002, 2003 and 2004 tax periods, and subsequently utilized in 2007 and 2008. We challenged both notices of assessment. The Provincial Tax Court of Milan has stayed its decision for years 2007 and 2008 pending resolution of the litigation regarding years 2004, 2005, and 2006. The total amount of losses in dispute iswas €62.6 million (approximately ~~$73.8 million)~~$73.2 million as of September 30, 2020). ~~We have continuously reassessed our potential exposure in these matters, taking into account~~On May 31, 2019, we filed an application to settle the ~~recent,~~litigation according to law N. 136/2018 and ~~generally adverse, trend to~~paid the required settlement balance of €1.9 million. As per law N. 136/2018, the Italian ~~taxpayers in this type of litigation. Although we believe that our defensive arguments are strong, noting~~Revenue Agency reviewed the ~~adverse trend in some of~~settlement and accepted the ~~court decisions, we have~~application by default on July 31, 2020. We recognized a benefit of €5.4 million, approximately $6.5 million, during the third quarter of 2020 as compared to the previously recognized reserve for an uncertain tax position of ~~€17.0~~€15.5 million. The difference of €10.1 million (approximately ~~$20.0 million)~~$11.8 million as of September 30, 2020) was a fully valued deferred tax asset for net operating losses, the reversal of which does not impact the condensed consolidated statement of income (loss).

Other Matters

Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of time. Since the outcome of these matters cannot be predicted with certainty, the costs associated with them could have a material adverse effect on our consolidated net income, financial position or liquidity.

Note ~~10.~~11. Stockholders’ Equity

~~Comprehensive income~~The tables below present the condensed consolidated statement of stockholders’ equity as of and for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Ordinary Shares	Ordinary Shares - Amount		Additional Paid-In Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
June 30, 2020	49,476	$	76,338	$	1,750,798	$	(1,057)	$	(35,089)	$	(457,804)	$	1,333,186
Stock-based compensation plans	—	—		7,670		4		—		—		7,674
Cancellation of shares	(73)	—		—		—		—		—		—
Net loss	—	—		—		—		—		(14,772)		(14,772)
Other comprehensive income	—	—		—		—		24,704		—		24,704
September 30, 2020	49,403	$	76,338	$	1,758,468	$	(1,053)	$	(10,385)	$	(472,576)	$	1,350,792

June 30, 2019	49,380	$	76,217	$	1,717,220	$	(1,292)	$	(13,174)	$	(295,643)	$	1,483,328
Stock-based compensation plans	1	—		8,262		10		—		—		8,272
Net income	—	—		—		—		—		32,118		32,118
Other comprehensive loss	—	—		—		—		(28,436)		—		(28,436)
September 30, 2019	49,381	$	76,217	$	1,725,482	$	(1,282)	$	(41,610)	$	(263,525)	$	1,495,282


	Ordinary Shares	Ordinary Shares - Amount		Additional Paid-In Capital		Treasury Stock		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
December 31, 2019	49,411	$	76,257	$	1,734,870	$	(1,263)	$	(19,392)	$	(406,755)	$	1,383,717
Adoption of ASU No. 2016-13 (1)	—	—		—		—		—		(639)		(639)
Stock-based compensation plans	65	81		23,598		210		—		—		23,889
Cancellation of shares	(73)	—		—		—		—		—		—
Net loss	—	—		—		—		—		(65,182)		(65,182)
Other comprehensive income	—	—		—		—		9,007		—		9,007
September 30, 2020	49,403	$	76,338	$	1,758,468	$	(1,053)	$	(10,385)	$	(472,576)	$	1,350,792

December 31, 2018	49,323	$	76,144	$	1,705,111	$	(1,462)	$	(24,476)	$	(251,579)	$	1,503,738
Stock-based compensation plans	58	73		20,371		180		—		—		20,624
Net loss	—	—		—		—		—		(11,946)		(11,946)
Other comprehensive loss	—	—		—		—		(17,134)		—		(17,134)
September 30, 2019	49,381	$	76,217	$	1,725,482	$	(1,282)	$	(41,610)	$	(263,525)	$	1,495,282

(1)Refer to “Note 17. New Accounting Pronouncements”

The table below presents the change in each component of AOCI, net of tax, and the reclassifications out of AOCI into net ~~earnings~~income for the nine months ended September 30, ~~2017~~2020 and ~~September 30, 2016~~2019 (in thousands):


	Change in Unrealized Gain (Loss) on Derivatives		Foreign Currency Translation Adjustments Gain (Loss) (1)		Total
December 31, 2019	$	513	$	(19,905)	$	(19,392)
Other comprehensive income before reclassifications, before tax	632		8,008		8,640
Tax expense	(152)		0		(152)
Other comprehensive income before reclassifications, net of tax	480		8,008		8,488
Reclassification of loss from accumulated other comprehensive loss, before tax	681		0		681
Reclassification of tax benefit	(162)		0		(162)
Reclassification of loss from accumulated other comprehensive loss, after tax	519		0		519
Net current-period other comprehensive income, net of tax	999		8,008		9,007
September 30, 2020	$	1,512	$	(11,897)	$	(10,385)

December 31, 2018	$	(944)	$	(23,532)	$	(24,476)
Other comprehensive income (loss) before reclassifications, before tax	933		(16,628)		(15,695)
Tax expense	(224)		0		(224)
Other comprehensive income (loss) before reclassifications, net of tax	709		(16,628)		(15,919)
Reclassification of gain from accumulated other comprehensive loss, before tax	(1,598)		0		(1,598)
Reclassification of tax expense	383		0		383
Reclassification of gain from accumulated other comprehensive loss, after tax	(1,215)		0		(1,215)
Net current-period other comprehensive loss, net of tax	(506)		(16,628)		(17,134)
September 30, 2019	$	(1,450)	$	(40,160)	$	(41,610)

(1)Taxes are not provided for foreign currency translation adjustments as translation adjustments are related to earnings that are intended to be reinvested in the countries where earned.

Change in Unrealized Gain (Loss) on Derivatives
Foreign Currency Translation Adjustments Gain (Loss) ⁽¹⁾
Total
As of December 31, 2016 $ 3,619
$ (72,106 ) $ (68,487 )
Other comprehensive (loss) income before reclassifications, before tax (10,124 ) 111,123
100,999
Tax benefit 2,784
—
2,784
Other comprehensive (loss) income before reclassifications, net of tax (7,340 ) 111,123
103,783
Reclassification of loss from accumulated other comprehensive income, before tax 4,201
—
4,201
Tax benefit (1,028 ) —
(1,028 )
Reclassification of loss from accumulated other comprehensive income, after tax 3,173
—
3,173
Net current-period other comprehensive (loss) income, net of tax (4,167 ) 111,123
106,956
As of September 30, 2017 $ (548 ) $ 39,017
$ 38,469

As of December 31, 2015 $ 888
$ (55,116 ) $ (54,228 )
Other comprehensive (loss) income before reclassifications, before tax (5,970 ) 32,598
26,628
Tax benefit 1,792
—
1,792
Other comprehensive (loss) income before reclassifications, net of tax (4,178 ) 32,598
28,420
Reclassification of loss from accumulated other comprehensive income, before tax 746
—
746
Tax benefit (279 ) —
(279 )
Reclassification of loss from accumulated other comprehensive income, after tax 467
—
467
Net current-period other comprehensive (loss) income, net of tax (3,711 ) 32,598
28,887
As of September 30, 2016 $ (2,823 ) $ (22,518 ) $ (25,341 )


~~(1)~~	~~Taxes are not provided for foreign currency translation adjustments as translation adjustments are related to earnings that are intended to be reinvested in the countries where earned.~~

Note ~~11.~~12. Stock-Based Incentive Plans

Stock-based incentive plans compensation expense is as follows (in thousands):


										Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,					2020		2019		2020		2019
	2017		2016		2017		2016
Service-based stock appreciation rights ("SARs")	$	2,535	$	1,983	$	6,001	$	6,567
Service-based restricted stock units ("RSUs")	2,225		2,517		6,718		8,419
Service-based restricted stock units (“RSUs”)									Service-based restricted stock units (“RSUs”)	$	4,410	$	3,583	$	13,139	$	10,428
Service-based stock appreciation rights (“SARs”)									Service-based stock appreciation rights (“SARs”)	3,211		2,896		9,185		7,804
Market performance-based restricted stock units	301		14		482		17		Market performance-based restricted stock units	814		757		2,745		2,146
Operating performance-based restricted stock units	636		254		1,060		572		Operating performance-based restricted stock units	(962)		983		882		2,752
Employee share purchase plan									Employee share purchase plan	337		312		894		997
Total stock-based compensation expense	$	5,697	$	4,768	$	14,261	$	15,575	Total stock-based compensation expense	$	7,810	$	8,531	$	26,845	$	24,127

During the nine months ended September 30, ~~2017,~~2020, we ~~executed~~issued stock-based compensatory ~~award agreements~~awards with ~~contract~~ terms ~~agreed upon by us and the respective individuals, as~~ approved by the Compensation Committee of our Board of

Directors. ~~Awards~~The awards with service conditions generally vest ratably over four years, subject to forfeiture unless service conditions are met. Market performance-based awards cliff vest ~~ratably over four~~after three years subject to ~~forfeiture unless certain future prices~~the rank of our ~~shares on~~total shareholder return for the ~~NASDAQ Stock Market exceed certain threshold prices in~~three-year period ending December 31, 2022 relative to the ~~first year following the grant date. And finally, operating~~total shareholder returns for a peer group of companies. Operating performance-based awards cliff vest ~~ratably over four~~after three years subject to ~~forfeiture unless~~the achievement of certain thresholds of cumulative adjusted ~~net sales and adjusted net income are met~~free cash flow for ~~fiscal~~the three year ~~2017.~~period ending December 31, 2022. Compensation expense related to ~~award agreements executed~~awards granted during ~~2017~~2020 for the three and nine months ended September 30, ~~2017 were $2.0~~2020 was $3.3 million and ~~$3.2~~$6.6 million, respectively.

Stock-based compensation agreements ~~executed~~issued during the nine months ended September 30, ~~2017,~~2020, representing potential shares and their weighted average grant date fair values by type follows (shares in thousands, fair value in dollars):


	Nine Months Ended September 30, 2020
	Shares	Weighted Average Grant Date Fair Value
Service-based SARs	1,133	$	15.73
Service-based RSUs	599	$	44.42
Market performance-based RSUs	93	$	39.83
Operating performance-based RSUs	93	$	43.57

Nine Months Ended September 30, 2017
Shares Weighted Average Grant Date Fair Value
Service-based SARs 639
$ 17.03
Service-based RSUs 108
$ 57.37
Market performance-based RSUs 158
$ 25.29
Operating performance-based RSUs 189
$ 56.18

Note ~~12.~~13. Income Taxes

During the three and nine months ended September 30, 2017, we recorded consolidated income tax expense of $1.9 million and $10.9 million, respectively, with consolidated effective income tax rates of 6.1% and 9.3%, respectively.

Our ~~consolidated~~ effective income tax rate from continuing operations for the three and nine months ended September 30, 2017 included the impact of various discrete tax items, including a net $4.0 million deferred tax benefit due to the release of valuation allowances on tax losses upon the completion of a reorganization of our legal entities in the U.S.2020 was 21.3% and ~~a $2.1 million tax benefit from the resolution of prior period tax matters. Discrete tax items~~(37.9)% compared with (49.6)% and 65.9% for the nine months ended September 30, 2017 also included the acquisition of Caisson and the $38.1 million non-taxable gain recognized to re-measure our existing equity investment in Caisson at fair value on the acquisition date, a $3.9 million deferred tax benefit associated with certain temporary differences arising from the Mergers and the recognition of a $3.0 million deferred tax asset related to a reserve for an uncertain tax position recognized in a prior year, in addition to various other discrete items.

~~During~~ the three and nine months ended September 30, ~~2016, we recorded consolidated income tax expense of $9.7 million and $16.9 million, respectively, with consolidated~~2019, respectively. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, changes in valuation allowances, changes in tax credits and incentives, and changes in unrecognized tax benefits associated with uncertain tax positions.

We continually assess the realizability of ~~45.7%~~our worldwide deferred tax asset and ~~514.5%~~valuation allowance positions, and when the need arises, we establish or release valuation allowances accordingly.

Compared with the three months ended September 30, 2019, the change in the effective tax rate for the three months ended September 30, 2020 was primarily attributable to a discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by a valuation allowance for certain jurisdictions outside the U.S., ~~respectively. The~~as compared to a U.S. federal tax benefit from a return to provision reconciliation, partially offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses during the three months ended September 30, 2019. We established valuation allowances as it is more likely than not that we will be unable to realize the related historical deferred tax assets.

Compared with the nine months ended September 30, 2019, the change in the effective tax rate for the nine months ended September 30, ~~2016~~2020 was ~~impacted~~primarily attributable to a $42.4 million realized discrete tax benefit related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by the ~~recording~~establishment of a $74.5 million valuation ~~allowances~~allowance for the U.K. and

other jurisdictions outside the U.S., as compared to a release of ~~$23.9~~uncertain tax positions and a U.S. federal tax benefit from a return to provision reconciliation, partly offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses and attributes during the nine months ended September 30, 2019.

We operate in multiple jurisdictions throughout the world, and our tax returns are periodically audited or subjected to review by tax authorities. As a result, there is an uncertainty in income taxes recognized in our financial statements. Tax benefits totaling $4.0 million ~~related~~and $12.9 million were unrecognized as of September 30, 2020 and December 31, 2019, respectively. It is reasonably possible that, within the next twelve months, due to ~~certain~~the settlement of uncertain tax ~~jurisdictions, including France~~positions with various tax authorities and the ~~UK, in which we did not record~~expiration of statutes of limitations, unrecognized tax benefits ~~generated~~could decrease by ~~their operating~~up to approximately $0.7 million.

We monitor income tax developments in countries where we conduct business. On March 27, 2020, the U.S. enacted the CARES Act which provided for a 5-year loss carryback for losses incurred in 2018-2020. We recorded a discrete tax benefit of $42.4 million to account for the effect of the CARES Act during the nine months ended September 30, 2020. Further regulations and notices as well as state legislative changes addressing conformity to the ~~tax expense generated by profitable operations in higher tax jurisdictions, such as the U.S. and Germany, offset by tax savings from our inter-company financing as part of our 2015 tax restructuring.~~

CARES Act are still pending.

Note ~~13. Net Income (Loss)~~14. Earnings Per Share

~~The following table sets forth~~Reconciliation of the shares used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Basic weighted average shares outstanding	48,652	48,395	48,582	48,329
Add effects of share-based compensation instruments (1)	0	425	0	0
Diluted weighted average shares outstanding	48,652	48,820	48,582	48,329

(1)Excluded from the computation of ~~basic and~~ diluted ~~net income (loss)~~earnings per share ~~(in thousands, except per~~were stock options, SARs and restricted share ~~data):~~units totaling 4.1 million and 1.4 million for the three months ended September 30, 2020 and 2019, respectively, and 4.2 million and 3.2 million for the nine months ended September 30, 2020 and 2019, respectively, because to include them would have been anti-dilutive under the treasury stock method.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net sales $ 309,664
$ 295,268
$ 916,156
$ 903,284
Cost of sales 108,233
106,454
318,584
360,675
Product remediation 1,642
689
2,573
2,243
Gross profit 199,789
188,125
594,999
540,366
Operating expenses:
Selling, general and administrative 121,177
109,233
353,943
345,744
Research and development 31,393
32,175
104,051
94,076
Merger and integration expenses 2,013
7,576
7,743
20,537
Restructuring expenses 792
4,381
12,060
37,219
Amortization of intangibles 12,350
11,775
35,445
33,959
Total operating expenses 167,725
165,140
513,242
531,535
Income from operations 32,064
22,985
81,757
8,831
Interest income 199
585
724
1,119
Interest expense (1,421 ) (3,495 ) (5,314 ) (6,665 )
Gain on acquisition of Caisson Interventional, LLC —
—
39,428
—
Foreign exchange and other gains (losses) 491
1,216
957
(2 )
Income before income taxes 31,333
21,291
117,552
3,283
Income tax expense 1,913
9,731
10,881
16,891
Losses from equity method investments (1,590 ) (13,129 ) (20,072 ) (19,382 )
Net income (loss) $ 27,830
$ (1,569 ) $ 86,599
$ (32,990 )

Net Sales

The table below ~~illustrates~~presents net sales by operating segment and ~~market geography~~geographic region (in thousands, except for percentages):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		% Change		2020		2019		% Change
Cardiopulmonary
United States	$	33,549	$	39,054	(14.1)	%	$	96,223	$	119,580	(19.5)	%
Europe	29,947		30,052		(0.3)	%	87,475		99,933		(12.5)	%
Rest of World	43,704		50,908		(14.2)	%	140,925		152,650		(7.7)	%
	107,200		120,014		(10.7)	%	324,623		372,163		(12.8)	%
Heart Valves
United States	3,129		4,626		(32.4)	%	8,990		13,660		(34.2)	%
Europe	7,945		9,572		(17.0)	%	22,822		30,757		(25.8)	%
Rest of World	10,062		14,679		(31.5)	%	32,001		43,484		(26.4)	%
	21,136		28,877		(26.8)	%	63,813		87,901		(27.4)	%
Advanced Circulatory Support
United States	12,331		6,313		95.3	%	28,075		22,290		26.0	%
Europe	162		186		(12.9)	%	835		497		68.0	%
Rest of World	49		36		36.1	%	136		310		(56.1)	%
	12,542		6,535		91.9	%	29,046		23,097		25.8	%
Cardiovascular
United States	49,009		49,993		(2.0)	%	133,288		155,530		(14.3)	%
Europe	38,054		39,810		(4.4)	%	111,132		131,187		(15.3)	%
Rest of World	53,815		65,623		(18.0)	%	173,062		196,444		(11.9)	%
	140,878		155,426		(9.4)	%	417,482		483,161		(13.6)	%
Neuromodulation
United States	79,854		88,433		(9.7)	%	197,345		245,870		(19.7)	%
Europe	10,475		10,425		0.5	%	27,474		34,080		(19.4)	%
Rest of World	8,079		13,685		(41.0)	%	20,458		31,511		(35.1)	%
	98,408		112,543		(12.6)	%	245,277		311,461		(21.2)	%
Other	797		641		24.3	%	1,927		1,958		(1.6)	%
Totals
United States	128,863		138,426		(6.9)	%	330,633		401,400		(17.6)	%
Europe (1)	48,529		50,235		(3.4)	%	138,606		165,267		(16.1)	%
Rest of World	62,691		79,949		(21.6)	%	195,447		229,913		(15.0)	%
Total	$	240,083	$	268,610	(10.6)	%	$	664,686	$	796,580	(16.6)	%

(1)Europe sales include those countries in which we have a direct sales presence, whereas European countries in which we sell through distributors are included in “Rest of World.”

Three Months Ended September 30,
2017 2016 % Change
Cardiac Surgery
United States $ 44,991
$ 46,768
(3.8)%
Europe ⁽¹⁾
40,429
38,009
6.4%
Rest of world 74,402
63,741
16.7%
159,822
148,518
7.6%
Neuromodulation
United States 76,286
74,864
1.9%
Europe ⁽¹⁾
8,057
8,489
(5.1)%
Rest of world 6,673
6,151
8.5%
91,016
89,504
1.7%
Cardiac Rhythm Management
United States 931
2,178
(57.3)%
Europe ⁽¹⁾
44,468
44,747
(0.6)%
Rest of world 13,012
9,843
32.2%
58,411
56,768
2.9%
Other 415
478
(13.2)%
$ 309,664
$ 295,268
4.9%

Nine Months Ended September 30,
2017 2016 % Change
Cardiac Surgery
United States $ 129,160
$ 133,995
(3.6)%
Europe ⁽¹⁾
126,028
128,229
(1.7)%
Rest of world 202,424
190,788
6.1%
457,612
453,012
1.0%
Neuromodulation
United States 231,350
220,892
4.7%
Europe ⁽¹⁾
25,500
24,208
5.3%
Rest of world 18,340
15,801
16.1%
275,190
260,901
5.5%
Cardiac Rhythm Management
United States 5,605
7,471
(25.0)%
Europe ⁽¹⁾
142,811
149,141
(4.2)%
Rest of world 33,819
31,445
7.5%
182,235
188,057
(3.1)%
Other 1,119
1,314
(14.8)%
$ 916,156
$ 903,284
1.4%


~~(1)~~	~~Includes those countries in Europe where LivaNova has a direct sales presence. Countries where sales are made through distributors are included in ‘Rest of world’.~~

The table below ~~illustrates~~presents segment income ~~(loss)~~ from continuing operations (in ~~thousands)~~thousands, except for percentages):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		% Change		2020		2019		% Change
Cardiovascular	$	(7,311)	$	36,180	(120.2)	%	$	(8,037)	$	47,289	(117.0)	%
Neuromodulation	21,154		30,010		(29.5)	%	82,294		52,260		57.5	%
Other	(10,921)		(21,869)		(50.1)	%	(58,407)		(75,845)		(23.0)	%
Total reportable segment income from continuing operations (1)	$	2,922	$	44,321	(93.4)	%	$	15,850	$	23,704	(33.1)	%

Three Months Ended September 30,
2017 2016 % Change
Cardiac Surgery $ 23,807
$ 17,791
33.8 %
Neuromodulation 45,932
47,049
(2.4 )%
Cardiac Rhythm Management 5,427
(4,598 ) 218.0 %
Other (27,947 ) (13,525 ) (106.6 )%
Total Reportable Segment's Income from Operations ⁽¹⁾
$ 47,219
$ 46,717
1.1 %
(1)For a reconciliation of segment income from continuing operations to (loss) income from continuing operations before tax refer to “Note 15. Geographic and Segment Information” in the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Cardiovascular

Nine Months Ended September 30,
2017 2016 % Change
Cardiac Surgery $ 63,490
$ 29,197
117.5 %
Neuromodulation 139,357
134,871
3.3 %
Cardiac Rhythm Management 13,536
(14,432 ) 193.8 %
Other (79,378 ) (49,090 ) (61.7 )%
Total Reportable Segment's Income from Operations ⁽¹⁾
$ 137,005
$ 100,546
36.3 %


~~(1)~~	~~For a reconciliation of segment operating income to consolidated operating income refer to “Note 14. Geographic and Segment Information”~~ i~~n the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.~~

~~Cardiac Surgery~~Cardiovascular net sales ~~increased by 7.6% and 1.0%~~ for the three and nine months ended September 30, ~~2017, as~~2020 compared to the three and nine months ended September 30, ~~2016, respectively. Net~~2019 decreased 9.4% and 13.6%, respectively, largely due to the impact of COVID-19. The decline in net sales ~~increased $11.3 million~~ for the three ~~months ended September 30, 2017, as compared to the prior-year period~~and nine month periods were due to ~~growth~~declines in ~~both cardiopulmonary product revenue and heart valve revenue and favorable foreign currency exchange rate fluctuations.~~ Cardiopulmonary sales ~~increased 7.6%~~of 10.7% and 12.8%, ~~or $8.7~~respectively. Cardiopulmonary sales of $107.2 million ~~for the three months ended September 30, 2017, due to strength in heart-lung machines as a result of geographic sales expansion~~ and ~~continued progress towards upgrading customers from older machines to our current S5 device. Heart valve sales increased by 7.7%, or $2.6~~$324.6 million for the three months ended September 30, 2017, as compared to the prior-year period due primarily to increased demand for the Perceval sutureless tissue valve in the U.S. and quarter over quarter improvement in Europe, which more than offset declines in mechanical heart valve sales globally. Cardiac Surgery net sales increased $4.6 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, due primarily to growth of $5.3 million in cardiopulmonary product revenue, partially offset by a decline in heart value revenues. Year-to-date cardiopulmonary product sales increased over the prior-year period due to heart-lung machine sales expansion outside of the U.S. and Europe. Cardiac Surgery operating income for the three months ended September 30, 2017 increased 33.8% over the prior-year period primarily due to increased operating leverage from the $11.3 million increase in sales. The 117.5% increase in operating income for the nine months ended September 30, 2017 over the prior-year period was primarily driven by inventory fair value step-up amortization of $25.2 million that was recognized during the nine months ended September 30, 2016. The inventory fair value step-up was fully amortized by September 30, 2016.

~~Neuromodulation net sales increased by 1.7% and 5.5%~~ for the three and nine months ended September 30, ~~2017, as~~2020 were negatively impacted by declines in HLM and oxygenator sales. HLM sales were negatively impacted due to COVID-19 impacts on hospital budgets for capital equipment, while Oxygenator sales were negatively impacted by a decline of non-emergent cardiac surgery procedures globally. Heart Valves sales of $21.1 million and $63.8 million for the three and nine months ended September 30, 2020 declined by $7.7 million and $24.1 million, respectively, primarily due to declines in sales of Perceval and other tissue valves due to a decline in cardiac surgery procedures globally due to COVID-19. Advanced Circulatory Support sales of $12.5 million and $29.0 million for the three and nine months ended September 30, 2020 increased 91.9% and 25.8%, respectively, resulting from the full U.S. commercial release of LifeSPARC during the third quarter of 2020.

Cardiovascular operating income for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, ~~2016, respectively. The increase in net sales~~2019 decreased primarily due to the receipt of ~~$1.5~~insurance recovery proceeds related to the litigation involving our 3T device of $33.8 million ~~for~~during the three months ended September 30, ~~2017, over the prior-year period was primarily due to increased average selling prices driven by continued AspireSR penetration of the U.S. market,~~2019 as well as a decline in net sales, as discussed above, partially offset by a ~~decline~~decrease in ~~unit sales due to hurricane-related impacts in the U.S. and customer anticipation of the SenTiva system, our new generation VNS Therapy System, which launched in October 2017. The increase in~~3T legal expenses.

Neuromodulation

Neuromodulation net sales ~~of $14.3 million~~ for the three and nine months ended September 30, ~~2017 over~~2020 compared to the ~~prior-year period~~three and nine months ended September 30, 2019 decreased 12.6% and 21.2%, respectively. The decrease in net sales for the three and nine months ended September 30, 2020 was primarily due to ~~strong~~declines in both new patient ~~sales~~ and ~~price premiums partially offset by hurricane-related impacts in the U.S.~~end of service implants globally as patients and ~~customer anticipation of the SenTiva system. The decrease in~~ physicians delayed implant procedures due to COVID-19.

Neuromodulation operating income for the three months ended September 30, ~~2017 as~~2020 compared to the ~~prior-year period was~~three months ended September 30, 2019 decreased primarily ~~due~~related to ~~increased selling, general and administrative costs driven by~~a decline in net sales, ~~force expansion and marketing efforts in the U.S. The increase in~~as discussed above. Neuromodulation operating income for the nine months ended September 30, ~~2017 as~~2020 increased compared to the prior-year period was primarily driven by increased operating leverage as a result of higher net sales, partially offset by the increased costs associated with sales force expansion and marketing efforts in the U.S.

Cardiac Rhythm Management net sales increased by 2.9% for the three months ended September 30, 2017, as compared to the prior-year period primarily due to favorable foreign currency exchange rate fluctuations. Additionally, growth of the

PLATINIUM Cardiac Resynchronization Therapy devices (CRT-Ds) in Europe and continued demand for KORA 250 pacemakers in Japan were mostly offset by a decrease in Implantable Cardiac Defibrillator (ICD) sales. Cardiac Rhythm Management net sales decreased by 3.1% for the nine months ended September 30, ~~2017, as compared to the prior-year period. This decline was primarily~~2019 due to ~~a decrease~~an increase in ~~ICD sales and reduced sales in~~operating income resulting from the ~~U.S. and Europe, both~~net impact of ~~which reflect a~~the change in ~~customer preferences. Cardiac Rhythm Management operating income increased $10.0 million and~~fair value of contingent consideration arrangements of $28.0 million ~~for the three and nine months ended September 30, 2017, respectively,~~ as compared to the prior-year periods. The increase for the three months ended September 30, 2017 over the prior-year period was due to cost reductions resulting from prior restructuring actions, improvements in selling, general and administrative costs driven by reductions in the overall sales force and increased net sales. The increase for the nine months ended September 30, 2017well as ~~compared to the prior-year period was driven by inventory fair value step-up amortization~~a $50.3 million impairment of ~~$10.0 million that was recognized~~an IPR&D asset during the nine months ended September 30, ~~2016, cost reductions resulting from prior restructuring actions and cost reductions associated with a reduction in the overall sales force~~2019, partially offset by ~~decreased sales during the nine months ended September 30, 2017.~~overall declines in net sales.

‘Other’ comprises the results from our corporate and new ventures activity. Operating loss from Other increased $14.4 million for the three months ended September 30, 2017, as compared to the prior-year period, primarily due to $3.9 million of Caisson related expenses and $12.9 million in increased Corporate costs. Operating loss from Other increased $30.3 million for the nine months ended September 30, 2017, as compared to the prior-year period, primarily due to $17.9 million of increased Caisson-related expenses and increased Corporate costs of $20.3 million. Increased Corporate costs during the three and nine months ended September 30, 2017 includes $2.8 million and $8.3 million in legal costs, respectively, primarily associated with litigation related to our 3T devices and investments in building out global capabilities including international expansion, and project-related expenses.

Cost of Sales and Expenses

The table below ~~illustrates~~presents our comparative cost of sales and ~~major~~significant expenses as a percentage of sales:

Three Months Ended September 30,
2017 2016 Change
Cost of sales 35.0 % 36.1 % (1.1 )%
Product remediation 0.5 % 0.2 % 0.3 %
Gross profit 64.5 % 63.7 % 0.8 %
Operating expenses:
Selling, general and administrative 39.1 % 37.0 % 2.1 %
Research and development 10.1 % 10.9 % (0.8 )%
Merger and integration expenses 0.7 % 2.6 % (1.9 )%
Restructuring expenses 0.3 % 1.5 % (1.2 )%
Amortization of intangibles 4.0 % 4.0 % — %


								Three Months Ended September 30,						Nine Months Ended September 30,
	Nine Months Ended September 30,							2020		2019		Change		2020		2019		Change
	2017		2016		Change
Cost of sales	34.8	%	39.9	%	(5.1	)%
Cost of sales - exclusive of amortization							Cost of sales - exclusive of amortization	36.0	%	32.1	%	3.9	%	31.9	%	30.8	%	1.1	%
Product remediation	0.3	%	0.2	%	0.1	%	Product remediation	0.5	%	1.1	%	(0.6)	%	1.0	%	1.4	%	(0.4)	%
Gross profit	64.9	%	59.8	%	5.1	%
Operating expenses:
Selling, general and administrative	38.6	%	38.3	%	0.3	%	Selling, general and administrative	41.3	%	45.8	%	(4.5)	%	47.8	%	47.2	%	0.6	%
Research and development	11.4	%	10.4	%	1.0	%	Research and development	19.7	%	17.1	%	2.6	%	16.3	%	15.6	%	0.7	%
Merger and integration expenses	0.8	%	2.3	%	(1.5	)%	Merger and integration expenses	0.5	%	2.5	%	(2.0)	%	1.0	%	1.8	%	(0.8)	%
Restructuring expenses	1.3	%	4.1	%	(2.8	)%	Restructuring expenses	(0.1)	%	0.3	%	(0.4)	%	0.3	%	0.6	%	(0.3)	%
Impairment of intangible assets							Impairment of intangible assets	—	%	—	%	—	%	—	%	6.3	%	(6.3)	%
Amortization of intangibles	3.9	%	3.8	%	0.1	%	Amortization of intangibles	4.0	%	4.1	%	(0.1)	%	4.4	%	3.7	%	0.7	%
Litigation provision, net							Litigation provision, net	1.2	%	(12.6)	%	13.8	%	0.6	%	(4.2)	%	4.8	%

Cost of Sales - Exclusive of Amortization

Cost of sales consisted primarily of direct labor, allocated manufacturing overhead and the acquisition cost of raw materials and components. Cost of sales as a percentage of net sales ~~decreased by 1.1% to 35.0% and by 5.1% to 34.8%~~ for the three and nine months ended September 30, ~~2017, respectively, as~~2020 compared to the ~~prior-year periods. The cost improvement for the~~ three and nine months ended September 30, ~~2017 reflects management’s focus on cost efficiencies~~2019 increased primarily due to ~~improve gross margin. The cost improvement~~product mix and unfavorable manufacturing variances of $7.0 million and $13.0 million for the three and nine months ended September 30, 2020, respectively, due to the decline in demand resulting from COVID-19 with these increases for the nine months ended September 30,2020 compared to the nine months ending September 30, ~~2017 was primarily due to inventory fair value step-up amortization in the prior year, which accounted for 3.9% of the~~2019 partially offset by a decrease in ~~our~~ cost of sales ~~as a percentage of~~resulting from the net ~~sales, as well as the previously mentioned cost efficiencies. The total amount recognized for amortization~~impact of the change in fair value ~~step-up in inventory for the nine months ended September 30, 2016 was $35.2~~of sales-based contingent consideration arrangements of $18.3 million. ~~The fair value step-up in inventory basis was fully amortized by September 30, 2016.~~

~~Sales,~~Selling, General and Administrative ~~(“SG&A”) Expenses~~

SG&A expenses consisted of sales, marketing, general and administrative activities. SG&A expenses as a percentage of net sales for the three months ended September 30, ~~2017 increased~~2020 compared to the three months ended September 30, 2019 decreased primarily due to sales and marketing cost reductions resulting from COVID-19 as well as a decrease in 3T legal expenses, the settlement of tax litigation that resulted in the reversal of a tax penalty of $4.3 million in the third quarter of 2020 and cost containment actions.

Merger and Integration (“M&I”) Expenses

M&I expenses consist primarily of costs associated with computer systems integration efforts, organizational structure integration, synergy and tax planning. M&I expenses as a percentage of net sales ~~by 2.1% to 39.1%, as compared to the prior-year period, and was consistent at 38.6%~~ for the ~~nine~~three months ended September 30, ~~2017, as~~2020 compared to the ~~prior-year period. The 2.1% increase was largely attributable~~three months ended September 30, 2019 decreased primarily due to ~~litigation related to~~the completion of certain integration activities associated with our ~~3T devices~~merger and ~~other legal matters.~~acquisitions.

Research and Development (“R&D”) Expenses

R&D expenses ~~consisted~~consist of product design and development efforts, clinical ~~trial~~study programs and regulatory ~~activities.~~activities, which are essential to our strategic portfolio initiatives, including DTD, obstructive sleep apnea and heart failure. R&D expenses as a percentage of net sales ~~was consistent~~ for the three months ended September 30, ~~2017, as~~2020 compared to the prior-year period, and increased by 1.0% to 11.4% for the nine months ended September 30, 2017, as compared to the prior-year period. The increase is due to the acquisition of Caisson, inclusive of $5.8 million in post-combination compensation expense recognized concurrent with the acquisition of Caisson, and $6.4 million in compensation expense associated with the retention of the employees of Caisson.

~~Merger and Integration Expenses~~

Merger and integration expenses consisted primarily of consulting costs associated with computer systems integration efforts, organization structure integration, synergy and tax planning, as well as the integration of internal controls for the two legacy organizations. In addition, integration expenses include retention bonuses, branding and renaming efforts and lease cancellation penalties in Milan and Brussels.

~~Merger and integration expenses as a percentage of net sales decreased by 1.9% to 0.7% for~~ the three months ended September 30, ~~2017 as compared to the prior-year period, and decreased by 1.5% to 0.8% for the nine months ended September 30, 2017 as compared to the prior-year period. These decreases were~~2019 increased primarily due to a ~~continued~~ decline in ~~integration activities.~~

~~Restructuring Expenses~~

Restructuring expenses were primarily due to our efforts under our 2015 and 2016 Reorganization Plans and the Suzhou, China exit plan, to leverage economies of scale, eliminate duplicate corporate expenses and streamline distributions, logistics and office functions in order to reduce overall costs. Restructuring expenses as a percentage of net sales ~~decreased by 1.2% to 0.3% and 2.8% to 1.3% for~~as well as an increase in R&D expense resulting from the ~~three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods due to a continued decline~~net impact of changes in ~~restructuring activities.~~

~~Gain on Caisson Acquisition~~

On May 2, 2017, we acquired the remaining 51% equity interests in Caisson which we previously accounted for under the equity method. On the acquisition date, we remeasured our notes receivable due from Caisson and our existing investment in Caisson at fair value ~~and recognized a pre-tax non-cash gain~~ of ~~$1.3~~milestone-based contingent consideration arrangements of $6.3 million, ~~and $38.1 million, respectively.~~

~~Foreign Exchange and Other Gains (Losses)~~

Foreign exchange and other gains were $0.5 million and $1.2 million for the three months ended September 30, 2017 and September 30, 2016, respectively. The gains were primarily due to net foreign currency gains associated with foreign currency commercial transactions, freestanding foreign currency forward contracts, intercompany debt, and third-party financial assets and liabilities. The gains of $1.0 million for the nine months ended September 30, 2017 included a $3.2 million gain on a sale of the cost-method investment, Istituto Europeo di Oncologia S.R.L, partially offset by ~~net foreign currency exchange losses~~$2.8 million in R&D expenses incurred in the prior year period associated with the Company’s former TMVR program, the impact of ~~$2.2 million.~~COVID-19 on our clinical studies, as well as a decrease in certain 2019 costs for increased investment in Epilepsy.

Impairment of Intangible Assets

During the second quarter of 2019, we determined that LivaNova would experience a delay in the estimated commercialization date of the Company’s obstructive sleep apnea product currently under development. This delay constituted a triggering event that required an impairment evaluation of the IPR&D asset arising from the ImThera acquisition. Based on the assessment performed, we determined that the IPR&D asset was impaired and as a result, recorded an impairment of $50.3 million, which is included in our Neuromodulation segment.

Litigation Provision, Net

In July 2019, we entered into agreements with our insurance carriers to recover $33.8 million under our product liability insurance policies related to the litigation involving our 3T device. The insurance recovery was received and recognized during the third quarter of 2019.

Income Taxes

LivaNova PLC is domiciled and resident in the UK. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries, and the income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary. As a result of the changes in the overall level of our income, the ~~deployment of~~earnings mix in various ~~tax strategies~~jurisdictions and the changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another.

~~During the three and nine months ended September 30, 2017, we recorded consolidated income tax expense of $1.9 million and $10.9 million, respectively, with consolidated~~Our effective income tax ~~rates of 6.1% and 9.3%, respectively.~~

~~Our consolidated effective income tax~~ rate from continuing operations for the three and nine months ended September 30, 2017 included the impact of various discrete tax items including a net $4.0 million deferred tax benefit due to the release of valuation allowances on tax losses upon the completion of a reorganization of our legal entities in the U.S.2020 was 21.3% and ~~a $2.1 million tax benefit from the resolution of prior period tax matters. Discrete tax items~~(37.9)% compared with (49.6)% and 65.9% for the nine months ended September 30, 2017 also included the acquisition of Caisson and the $38.1 million non-taxable gain recognized to re-measure our existing equity investment in Caisson at fair value on the acquisition date, a $3.9 million deferred tax benefit associated with certain temporary differences arising from the Mergers and the recognition of a $3.0 million deferred tax asset related to a reserve for an uncertain tax position recognized in a prior year, in addition to various other discrete items.

Compared with the three months ended September 30, 2019, the change in the effective tax rate for the three months ended September 30, 2020 was primarily attributable to a discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by a valuation allowance for certain jurisdictions outside the U.S., ~~respectively. The~~as compared to a U.S. federal tax benefit from a return to provision reconciliation, partially offset by the establishment of a valuation allowance for a portion of the U.S. federal and state net operating losses during the three months ended September 30, 2019. We established valuation allowances as is more likely than not that we will be unable to realize the related historical deferred tax assets.

Compared with the nine months ended September 30, 2019, the change in the effective tax rate for the nine months ended September 30, ~~2016~~2020 was ~~impacted~~primarily attributable to a $42.4 million realized discrete tax benefit related to the CARES Act and the discrete tax benefit due to the release of the uncertain tax position upon the settlement of tax litigation in Italy offset by the ~~recording~~establishment of a $74.5 million valuation ~~allowances~~allowance for the U.K. and other jurisdictions outside the U.S., as compared to a release of ~~$23.9 million related~~uncertain tax positions and a U.S. federal tax benefit from a return to ~~certain tax jurisdictions, including France~~provision reconciliation, partly offset by the establishment of a valuation allowance for a portion of the U.S. federal and ~~the UK, in which we did not record tax benefits generated by their~~state net operating losses ~~as well as the tax expense generated by profitable operations in higher tax jurisdictions, such as the U.S.~~ and ~~Germany, offset by tax savings from our inter-company financing as part of our 2015 tax restructuring.~~

~~Losses from Equity Method Investments~~

~~Losses from equity method investments were $1.6 million and $20.1 million~~attributes during the three and nine months ended September 30, 2017, respectively. Losses for the three months ended September 30, 2017 were due to our equity method investee losses, primarily from Highlife and MicroPort. Losses for the nine months ended September 30, 2017 included the impairment of our investment in, and notes receivable from, Highlife of $13.0 million, which consisted of the investment impairment of $4.7 million and the notes receivable impairment of $8.3 million. We recognized losses of $13.1 million and $19.4 million during the three and nine months ended September 30, 2016, respectively, primarily due to a $9.2 million impairment of our investment in Respicardia and losses from our equity method investees.2019.

Liquidity and Capital Resources

In June 2020, we raised combined net proceeds of $699.7 million from our Term Loan and Notes borrowings. Additionally, we utilized the combined net proceeds to repay $525.4 million of aggregate outstanding principal. Refer to “Note 8. Financing Arrangements” in the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt and debt transactions. As of September 30, 2020, our cash and cash equivalents was $227.8 million.

Based on our current business plan, we believe that our existing cash and cash equivalents, future cash generated from operations and ~~available~~ borrowing ~~capacity~~ under our ~~credit~~current debt facilities will be sufficient to fund our expected operating needs, working capital requirements, R&D opportunities, capital expenditures, and debt service requirements over the ~~next 12 months. We regularly review our capital needs and consider various investing and financing alternatives to support our requirements. Refer to “Note 7. Financing Arrangements” in~~twelve-month period beginning from the issuance date of these condensed consolidated financial ~~statements in this Quarterly Report on Form 10-Q for additional information regarding our debt.~~statements. Our liquidity could be adversely ~~affected~~impacted by the factors affecting future operating results, including those referred to in “Part II, - Item 1A. Risk Factors” in ~~2016~~the 2019 Form ~~10-K.~~10-K as supplemented by the factors referred to in “Part II, Item 1A, Risk Factors” in our Quarterly Reports on Form 10-Q.

On June 29, 2017, we entered into a new Finance Contract with the EIB to support financing of certain of our R&D projects. The Finance Contract has a borrowing base of €100 million (or approximately $118 million) and can be drawn in up to two tranches, each in a minimum amount of €50 million (or approximately $59 million). Drawdowns must occur by December 30, 2018 and the last repayment date of any tranche will be no earlier than four years and no later than eight years after the disbursement of the relevant tranche. Loans under the Finance Contract are subject to certain covenants and other terms and conditions.

No provision has been made for income taxes on unremitted earnings of our foreign controlled subsidiaries (non-UK subsidiaries) as of September 30, ~~2017.~~2020. In the event of the distribution of those earnings in the form of dividends, a sale of the subsidiaries or certain other transactions, we may be liable for income taxes. However, the tax liability on future distributions should not be significant as most jurisdictions with unremitted earnings have various participation exemptions or no withholding tax.

Cash Flows

Net cash and cash equivalents provided by (used in) operating, investing and financing activities and the net increase ~~(decrease)~~ in the balance of cash and cash equivalents were as follows (in thousands):


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2017			2016				2020		2019
Operating activities	$	73,665		$	49,348		Operating activities	$	(116,407)	$	(94,008)
Investing activities	(41,797		)	(36,363		)	Investing activities	(33,337)		(30,519)
Financing activities	(10,000		)	(62,996		)	Financing activities	315,927		153,741
Effect of exchange rate changes on cash and cash equivalents	3,501			1,030			Effect of exchange rate changes on cash and cash equivalents	491		(1,105)
Net increase (decrease)	$	25,369		$	(48,981	)
Net increase in cash and cash equivalents							Net increase in cash and cash equivalents	$	166,674	$	28,109



~~(Mark One)~~
þ	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~ ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~
	~~For the quarterly period ended September 30, 2017~~
	or
¨	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)~~ ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~
	~~For the transition period from _______________ to _______________~~



~~England and Wales~~		~~98-1268150~~
~~(State or other jurisdiction of~~ ~~incorporation or organization)~~	~~(I.R.S. Employer~~ ~~Identification No.)~~
~~20 Eastbourne Terrace~~ ~~London, United Kingdom~~	~~W2 6LG~~
~~(Address of principal executive offices)~~	~~(Zip Code)~~
~~(44) (0) 20 3325 0660~~
~~Registrant’s telephone number, including area code:~~



Large accelerated filer	þ ☑	Accelerated filer	¨☐
Non-accelerated filer	¨ ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	¨☐
Emerging growth company	¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act			¨☐



Class			Outstanding at October 27, ~~2017~~2020
Ordinary Shares - £1.00 par value per share			~~48,211,559~~48,596,417


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net sales	$	240,083	$	268,610	$	664,686	$	796,580
Costs and expenses:
Cost of sales - exclusive of amortization	86,467		86,128		212,152		245,324
Product remediation	1,133		3,076		6,868		11,136
Selling, general and administrative	99,199		123,015		317,424		375,932
Research and development	47,368		45,904		108,422		124,023
Merger and integration expenses	1,094		6,716		6,616		14,345
Restructuring expenses	(349)		698		2,025		4,563
Impairment of intangible assets	0		0		0		50,295
Amortization of intangibles	9,685		11,146		29,346		29,690
Litigation provision, net	2,994		(33,834)		3,970		(33,834)
Operating (loss) income from continuing operations	(7,508)		25,761		(22,137)		(24,894)
Interest income	47		151		482		624
Interest expense	(14,673)		(4,774)		(25,237)		(10,490)
Foreign exchange and other gains (losses)	3,420		327		507		(795)
(Loss) income from continuing operations before tax	(18,714)		21,465		(46,385)		(35,555)
Income tax (benefit) expense	(3,990)		(10,653)		17,581		(23,431)
Losses from equity method investments	(48)		0		(221)		0
Net (loss) income from continuing operations	(14,772)		32,118		(64,187)		(12,124)
Net (loss) income from discontinued operations, net of tax	0		0		(995)		178
Net (loss) income	$	(14,772)	$	32,118	$	(65,182)	$	(11,946)

Basic (loss) income per share:
Continuing operations	$	(0.30)	$	0.66	$	(1.32)	$	(0.25)
Discontinued operations	0		0		(0.02)		0
	$	(0.30)	$	0.66	$	(1.34)	$	(0.25)

Diluted (loss) income per share:
Continuing operations	$	(0.30)	$	0.66	$	(1.32)	$	(0.25)
Discontinued operations	0		0		(0.02)		0
	$	(0.30)	$	0.66	$	(1.34)	$	(0.25)

Shares used in computing basic (loss) income per share	48,652		48,395		48,582		48,329
Shares used in computing diluted (loss) income per share	48,652		48,820		48,582		48,329


•	~~Trademarks for our VNS therapy systems, the VNS Therapy~~^® ~~System, the VITARIA~~^® ~~System and our proprietary pulse generator products: Model 102 (Pulse~~^®~~), Model 102R (Pulse Duo~~^®~~), Model 103 (Demipulse~~^®~~), Model 104 (Demipulse Duo~~^®~~), Model 105 (AspireHC~~^®~~), Model 106 (AspireSR~~^®~~) and Model 1000 (SenTiva™).~~


•	~~Trademarks for our implantable cardiac pacemakers and associated services: REPLY 200™, ESPRIT™, KORA 100™, KORA 250™, SafeR™, the REPLY CRT-P™, the remedé~~^® ~~System.~~


•	~~Trademarks for our Implantable Cardioverter Defibrillators and associated technologies: the INTENSIA™, PLATINIUM™, and PARADYM~~^®~~product families.~~


•	~~Trademarks for our cardiac resynchronization therapy devices, technologies services: SonR~~^®~~, SonRtip™~~^, ~~SonR CRT™, the INTENSIA™, PARADYM RF™, PARADYM 2™and PLATINIUM™ product families and the Respond CRT™ clinical trial.~~


•	~~Trademarks for heart failure treatment product: Equilia~~^®.



	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	65,158		$	39,789
Accounts receivable, net	314,041			275,730
Inventories	214,593			183,489
Prepaid and refundable taxes	58,969			60,615
Assets held for sale	14,117			4,477
Prepaid expenses and other current assets	55,176			55,973
Total Current Assets	722,054			620,073
Property, plant and equipment, net	213,769			223,842
Goodwill	781,070			691,712
Intangible assets, net	717,646			609,197
Investments	46,380			61,092
Deferred tax assets, net	4,356			6,017
Other assets	117,855			130,698
Total Assets	$	2,603,130		$	2,342,631
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations	$	52,074		$	47,650
Accounts payable	102,651			92,952
Accrued liabilities and other	92,212			75,567
Taxes payable	28,954			22,340
Accrued employee compensation and related benefits	80,466			78,302
Total Current Liabilities	356,357			316,811
Long-term debt obligations	71,853			75,215
Deferred income taxes liability	152,133			172,541
Long-term employee compensation and related benefits	33,957			31,668
Other long-term liabilities	74,404			39,487
Total Liabilities	688,704			635,722
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,250,361 shares issued and 48,200,257 shares outstanding at September 30, 2017; 48,156,690 shares issued and 48,028,413 shares outstanding at December 31, 2016	74,697			74,578
Additional paid-in capital	1,731,565			1,719,893
Accumulated other comprehensive income (loss)	38,469			(68,487		)
Retained earnings (deficit)	72,024			(14,575		)
Treasury stock at cost, 50,104 shares at September 30, 2017 and 128,277 shares at December 31, 2016	(2,329		)	(4,500		)
Total Stockholders’ Equity	1,914,426			1,706,909
Total Liabilities and Stockholders’ Equity	$	2,603,130		$	2,342,631



Cash ⁽¹⁾	$	15,660
Debt forgiven ⁽²⁾	6,309
Deferred consideration ⁽¹⁾	12,994
Contingent consideration ⁽¹⁾	29,303
Fair value of consideration transferred	64,266
Fair value of our interest prior to the acquisition ⁽²⁾	52,505
Fair value of total consideration	$	116,771



Cash and cash equivalents	$	1,468
In-process research and development	89,000
Goodwill	42,417
Other assets	918
Current liabilities	1,023
Deferred income tax liabilities, net	16,009
Net assets acquired	$	116,771



Caisson Acquisition	Fair value at May 2, 2017		Valuation Technique	Unobservable Input	Ranges
Regulatory milestone-based payments	$	14,883	Discounted cash flow	Discount rate	2.6% - 3.4%
				Probability of payment	90-95%
				Projected payment years	2018-2023

Sales-based earnout	16,805		Monte Carlo simulation	Discount rate	11.5-12.7%
				Sales volatility	36.9%
				Projected years of sales	2019-2033
	$	31,688



Balance at December 31, 2016	$	3,890
Purchase price - Caisson contingent consideration	31,688
Payments	(1,841		)
Changes in fair value	231
Effect of changes in foreign currency exchange rates	249
Balance at September 30, 2017 ⁽¹⁾	$	34,217



Balance at December 31, 2016	$	33,487
Adjustments	(15		)
Remediation activity	(5,672		)
Effect of changes in foreign currency exchange rates	2,446
Balance at September 30, 2017 ⁽¹⁾	$	30,246



	September 30, 2017		December 31, 2016
Respicardia Inc. ⁽¹⁾	$	21,129	$	17,518
ImThera Medical, Inc. ⁽²⁾	12,000		12,000
Rainbow Medical Ltd. ⁽³⁾	4,178		3,733
MD Start II	1,179		526
Other ⁽⁴⁾	150		—
	$	38,636	$	33,777



	% Ownership ⁽¹⁾	September 30, 2017		December 31, 2016
MicroPort Sorin CRM (Shanghai) Co. Ltd. ⁽²⁾	49.0%	$	6,948	$	4,867
Highlife S.A.S. ⁽³⁾	38.0%	779		6,009
Caisson Interventional LLC ⁽⁴⁾		—		16,423
Other		17		16
Total		$	7,744	$	27,315



	Fair Value as of		Fair Value Measurements Using Inputs Considered as:
	September 30, 2017		Level 1		Level 2		Level 3
Liabilities:
Derivative liabilities - designated as cash flow hedges (foreign currency exchange rate "FX")	$	724	$	—	$	724	$	—
Derivative liabilities - designated as cash flow hedges (interest rate swaps)	1,807		—		1,807		$	—
Derivative liabilities - freestanding instruments (FX)	1,456		—		1,456		—
Contingent consideration	34,217		—		—		34,217
	$	38,204	$	—	$	3,987	$	34,217



Description of Contract	September 30, 2017		December 31, 2016
FX derivative contracts to be exchanged for British Pounds	$	16,928	$	6,663
FX derivative contracts to be exchanged for Japanese Yen	44,618		57,840
FX derivative contracts to be exchanged for Canadian Dollars	13,341		—
Interest rate swap contracts	62,917		63,246
	$	137,804	$	127,749



Description of Contract	September 30, 2017			Net Amount Expected to be Reclassified to Earnings in the Next 12 Months
FX derivative contracts	$	(287	)	$	(287	)
Interest rate swap contracts	(261		)	(69		)
	$	(548	)	$	(356	)



	Nine Months Ended September 30, 2017
	Shares	Weighted Average Grant Date Fair Value
Service-based SARs	639	$	17.03
Service-based RSUs	108	$	57.37
Market performance-based RSUs	158	$	25.29
Operating performance-based RSUs	189	$	56.18



	Three Months Ended September 30,				Nine Months Ended September 30,
Net Sales:	2017		2016		2017		2016
Cardiac Surgery	$	159,822	$	148,518	$	457,612	$	453,012
Neuromodulation	91,016		89,504		275,190		260,901
Cardiac Rhythm Management	58,411		56,768		182,235		188,057
Other	415		478		1,119		1,314
	$	309,664	$	295,268	$	916,156	$	903,284



	Three Months Ended September 30,						Nine Months Ended September 30,
Income from Operations:	2017			2016			2017			2016
Cardiac Surgery	$	23,807		$	17,791		$	63,490		$	29,197
Neuromodulation	45,932			47,049			139,357			134,871
Cardiac Rhythm Management	5,427			(4,598		)	13,536			(14,432		)
Other	(27,947		)	(13,525		)	(79,378		)	(49,090		)
Total Reportable Segments’ Income from Operations	47,219			46,717			137,005			100,546
Merger and integration expenses	2,013			7,576			7,743			20,537
Restructuring expenses	792			4,381			12,060			37,219
Amortization of intangibles	12,350			11,775			35,445			33,959
Income from operations	$	32,064		$	22,985		$	81,757		$	8,831



	Three Months Ended September 30,				Nine Months Ended September 30,
Capital expenditures:	2017		2016		2017		2016
Cardiac Surgery	$	5,541	$	6,465	$	13,292	$	16,774
Neuromodulation	370		1,781		2,348		5,602
Cardiac Rhythm Management	1,537		1,591		4,343		2,786
Other	1,633		2,435		4,021		3,766
	$	9,081	$	12,272	$	24,004	$	28,928


~~(1)~~	~~Goodwill recognized as a result of the Caisson acquisition. Refer to “Note 2. Acquisitions.”~~


~~(1)~~	~~Net sales to external customers in the UK include $9.6 million and $26.8 millionfor the three and nine months ended September 30, 2017, respectively and $8.8 million and $27.9 million for the three and nine months ended September 30, 2016, respectively.~~


~~(3)~~	No single customer represented over 10% of our consolidated net sales. Except for the U.S. and France, no country’s net sales exceeded 10% of our consolidated net sales. French sales were $29.6 million and $96.6 million for the three and nine months ended September 30, 2017, respectively, and $28.9 million and $95.9 million for the three and nine months ended September 30, 2016, respectively.



PP&E	September 30, 2017		December 31, 2016
United States	$	62,630	$	61,279
Europe	137,682		130,777
Rest of world	13,457		31,786
Total	$	213,769	$	223,842



	September 30, 2017			December 31, 2016
Trade receivables from third parties	$	326,498		$	285,336
Allowance for bad debt	(12,457		)	(9,606		)
	$	314,041		$	275,730


	September 30, 2020		December 31, 2019
Raw materials	$	48,325	$	45,225
Work-in-process	18,949		14,581
Finished goods	110,817		104,348
	$	178,091	$	164,154



	September 30, 2017		December 31, 2016
Income taxes payable on inter-company transfers of property ⁽¹⁾	$	19,445	$	19,445
Deposits and advances to suppliers	7,298		5,417
Earthquake grant receivable	4,983		4,748
Unbilled receivables	4,363		—
Escrow deposit - Caisson	2,000		—
Current loans and notes receivable	1,553		7,093
Derivative contract assets	—		8,269
Other prepaid expenses	15,534		11,001
	$	55,176	$	55,973


~~(1)~~	The income taxes payable on intercompany transfers of property asset is the asset account created to defer the income tax effect of an intercompany intellectual property sale pursuant to ASC 810-10-45-8.


~~(2)~~	~~Primarily cash surrender value of company owned life insurance policies.~~


	September 30, 2020		December 31, 2019
Contingent consideration (1)	$	16,571	$	22,953
Legal and administrative costs	14,034		11,066
Operating lease liabilities	11,941		11,110
Contract liabilities	7,723		6,728
Research and development costs	5,328		5,160
Provisions for agents, returns and other	3,772		3,922
Restructuring related liabilities (2)	1,813		4,315
Product remediation (3)	1,715		3,251
Derivative contract liabilities (4)	1,338		3,173
CRM purchase price adjustment payable to MicroPort Scientific Corporation	0		14,891
Other accrued expenses	34,073		33,531
	$	98,308	$	120,100