UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ________
Commission File Number: 0-27605
VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1859679 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
6464 Sycamore Court North
Minneapolis, Minnesota 55369
(Address of principal executive offices, including zip code)
(763) 656-4300
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x |
Non-accelerated filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 17,125,734 shares of common stock, $.01 par value per share, outstanding as of April 18, 2014.
VASCULAR SOLUTIONS, INC.
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| Item 1. | Legal Proceedings | 20 |
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VASCULAR SOLUTIONS, INC.
| March 31, 2014 | December 31, 2013 | |||||||
| (unaudited) | (see note) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 32,762,000 | $ | 30,785,000 | ||||
| Accounts receivable, net of reserves of $280,000 and $200,000 in 2014 and 2013, respectively | 15,845,000 | 14,481,000 | ||||||
| Inventories | 15,238,000 | 14,002,000 | ||||||
| Prepaid expenses and other | 3,100,000 | 2,472,000 | ||||||
| Current portion of deferred tax assets | 6,000,000 | 6,000,000 | ||||||
| Total current assets | 72,945,000 | 67,740,000 | ||||||
| Property, plant and equipment, net | 16,734,000 | 16,187,000 | ||||||
| Goodwill | 10,537,000 | 10,532,000 | ||||||
| Intangible assets, net | 11,534,000 | 11,943,000 | ||||||
| Deferred tax assets, net of current portion and liabilities | 1,690,000 | 1,739,000 | ||||||
| Total assets | $ | 113,440,000 | $ | 108,141,000 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 5,310,000 | $ | 3,762,000 | ||||
| Accrued compensation | 4,026,000 | 4,365,000 | ||||||
| Accrued expenses | 3,373,000 | 2,467,000 | ||||||
| Accrued royalties | 228,000 | 235,000 | ||||||
| Current portion of deferred revenue and contingent consideration | 531,000 | 556,000 | ||||||
| Total current liabilities | 13,468,000 | 11,385,000 | ||||||
| Long-term deferred revenue and contingent consideration, net of current portion | 355,000 | 406,000 | ||||||
| Shareholders’ equity: | ||||||||
| Common stock, $0.01 par value: Authorized shares – 40,000,000 Issued and outstanding shares – 17,125,734 – 2014; 16,964,953 – 2013 | 171,000 | 170,000 | ||||||
| Additional paid-in capital | 93,116,000 | 92,346,000 | ||||||
| Accumulated other comprehensive earnings | (304,000 | ) | (1,000 | ) | ||||
| Retained earnings | 6,634,000 | 3,835,000 | ||||||
| Total shareholders’ equity | 99,617,000 | 96,350,000 | ||||||
| Total liabilities and shareholders’ equity | $ | 113,440,000 | $ | 108,141,000 | ||||
See accompanying notes.
Note: The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date.
VASCULAR SOLUTIONS, INC.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2014 | 2013 | |||||||
| (unaudited) | ||||||||
| Net revenue: | ||||||||
| Product revenue | $ | 29,845,000 | $ | 25,977,000 | ||||
| License and collaboration revenue | 62,000 | 87,000 | ||||||
| Total revenue | 29,907,000 | 26,064,000 | ||||||
| Product costs and operating expenses: | ||||||||
| Cost of goods sold | 9,583,000 | 8,697,000 | ||||||
| Collaboration expenses | 11,000 | – | ||||||
| Research and development | 3,290,000 | 3,405,000 | ||||||
| Clinical and regulatory | 1,300,000 | 1,163,000 | ||||||
| Sales and marketing | 7,736,000 | 6,971,000 | ||||||
| General and administrative | 2,859,000 | 2,240,000 | ||||||
| Medical device excise taxes | 345,000 | 317,000 | ||||||
| Amortization of purchased technology and intangibles | 412,000 | 367,000 | ||||||
| Total product costs and operating expenses | 25,536,000 | 23,160,000 | ||||||
| Operating earnings | 4,371,000 | 2,904,000 | ||||||
| Other earnings (expenses): | ||||||||
| Interest expense | – | (3,000 | ) | |||||
| Foreign exchange gain (loss) | 2,000 | (13,000 | ) | |||||
| Earnings before income taxes | 4,373,000 | 2,888,000 | ||||||
| Income tax expense | (1,574,000 | ) | (763,000 | ) | ||||
| Net earnings | $ | 2,799,000 | $ | 2,125,000 | ||||
Net earnings per share – basic | $ | 0.17 | $ | 0.13 | ||||
| Net earnings per share – diluted | $ | 0.16 | $ | 0.13 | ||||
See accompanying notes.
VASCULAR SOLUTIONS, INC.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2014 | 2013 | |||||||
| (unaudited) | ||||||||
| Net earnings | $ | 2,799,000 | $ | 2,125,000 | ||||
| Other comprehensive losses, net of $0 tax: Foreign currency translation adjustments | (304,000 | ) | (206,000 | ) | ||||
Comprehensive earnings | $ | 2,495,000 | $ | 1,919,000 | ||||
See accompanying notes.
VASCULAR SOLUTIONS, INC.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2014 | 2013 | |||||||
| (unaudited) | ||||||||
| Operating activities | ||||||||
| Net earnings | $ | 2,799,000 | $ | 2,125,000 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Depreciation | 772,000 | 658,000 | ||||||
| Amortization | 412,000 | 367,000 | ||||||
| Stock-based compensation | 1,285,000 | 1,055,000 | ||||||
| Deferred taxes, net | 49,000 | |||||||
| Excess tax benefit from stock-based compensation | – | (444,000 | ) | |||||
| Gain on disposal of equipment | (5,000 | ) | – | |||||
| Change in accounts receivable allowance | 80,000 | 20,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,443,000 | ) | (709,000 | ) | ||||
| Inventories | (1,233,000 | ) | 137,000 | |||||
| Prepaid expenses and other | (629,000 | ) | (9,000 | ) | ||||
| Accounts payable | 1,548,000 | 541,000 | ||||||
| Accrued expenses and compensation | 404,000 | 842,000 | ||||||
| Amortization of deferred license fees and other deferred revenue | (77,000 | ) | 245,000 | |||||
| Net cash provided by operating activities | 3,962,000 | 4,925,000 | ||||||
| Investing activities | ||||||||
| Purchase of property and equipment | (1,323,000 | ) | (1,842,000 | ) | ||||
| Proceeds from the sale of equipment | 9,000 | – | ||||||
| Net cash used in investing activities | (1,314,000 | ) | (1,842,000 | ) | ||||
| Financing activities | ||||||||
| Repurchase of common shares | (1,805,000 | ) | (1,116,000 | ) | ||||
| Excess tax benefit from stock-based compensation | 397,000 | 444,000 | ||||||
| Proceeds from the exercise of stock options and sale of stock, net of expenses | 895,000 | 106,000 | ||||||
| Net cash used in financing activities | (513,000 | ) | (566,000 | ) | ||||
| Increase in cash and cash equivalents | 2,135,000 | 2,517,000 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (158,000 | ) | (18,000 | ) | ||||
| Cash and cash equivalents at beginning of period | 30,785,000 | 11,554,000 | ||||||
| Cash and cash equivalents at end of period | $ | 32,762,000 | $ | 14,053,000 | ||||
| Supplemental disclosure of cash flow | ||||||||
| Cash paid for interest | $ | 3,000 | $ | 3,000 | ||||
| Cash paid for taxes | $ | 459,000 | $ | 269,000 | ||||
See accompanying notes.
| (1) | Basis of Presentation |
The accompanying unaudited consolidated financial statements of Vascular Solutions, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods.
| (2) | Net Earnings per Share |
In accordance with Accounting Standards Codification (ASC) 260, Earnings Per Share, basic net earnings per share for the three months ended March 31, 2014 and 2013 is computed by dividing net earnings by the weighted average common shares outstanding during the periods presented. Diluted net earnings per weighted average common share is computed by dividing net earnings by the weighted average common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options and restricted stock awards that were outstanding during the period.
Weighted average common shares outstanding for the three months ended March 31, 2014 and 2013 were as follows:
Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| (unaudited) | ||||||||
| Weighted average shares outstanding – basic | 16,686,000 | 16,043,000 | ||||||
| Weighted average shares outstanding – diluted | 17,538,000 | 16,720,000 | ||||||
| (3) | Revenue Recognition |
In the United States, the Company sells its products and services directly to hospitals and clinics. Revenue is recognized in accordance with generally accepted accounting principles as outlined in ASC 605-10-S99, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped and title passes to customers based on FOB shipping point terms. The Company negotiates credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
In all international markets, the Company sells its products to international distributors which subsequently resell the products to hospitals and clinics. The Company has agreements with each of its distributors which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor. The Company warrants that its products are free from manufacturing defects at the time of shipment to the distributor. Revenue is recognized upon shipment of products to distributors following the receipt and acceptance of a distributor’s purchase order. Allowances are provided for estimated returns and costs at the time of shipment. Sales and use taxes are reported on a net basis, excluding them from revenue.
The Company’s revenues from license agreements and research collaborations are recognized when earned. In accordance with ASC 605, for revenues which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit. Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily ASC 605.
The Company currently has a license agreement with King Pharmaceuticals, Inc. (King), now a subsidiary of Pfizer, Inc., under which the Company licensed the exclusive rights of Thrombi-Pad®, Thrombi-Gel® and Thrombi-Paste TM products to King in exchange for a license fee. The Company is amortizing the license fees on a straight-line basis over the projected 10 year economic life of the products. The Company determines the economic life of the products under its license agreements by evaluating similar products the Company has launched or other similar products in the medical industry. In addition, the Company had a five-year license agreement with Nicolai, GmbH in which the Company was amortizing the license fee on a straight-line basis over the five-year life of the agreement. This agreement was fully amortized during 2013.
Starting in January 2012, the Company began to generate revenue from selling a reprocessing service for ClosureFAST® radiofrequency catheters. In accordance with ASC 605-45, the Company recognizes this revenue gross, with the amount paid to the supplier of the reprocessing service reflected as cost of sales.
In addition, the Company has reviewed the provisions of ASC 808, Collaborative Arrangements, and the adoption of this ASC has had no impact on the amounts recorded under these agreements.
In accordance with ASC 605-45-45, the Company includes shipping and handling revenues in net revenue, and shipping and handling costs in cost of sales.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
| (4) | Inventories |
Inventories are stated at the lower of cost (weighted average first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories are comprised of the following:
March 31, 2014 | December 31, 2013 | |||||||
| (unaudited) | ||||||||
| Raw materials | $ | 7,203,000 | $ | 6,386,000 | ||||
| Work-in-process | 1,212,000 | 926,000 | ||||||
| Finished goods | 6,823,000 | 6,690,000 | ||||||
| $ | 15,238,000 | $ | 14,002,000 | |||||
| (5) | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill and acquired intangible assets for the three months ended March 31, 2014 are as follows:
Goodwill | Acquired Intangibles | |||||||
(unaudited) | ||||||||
| Balance at December 31, 2013 | $ | 10,532,000 | $ | 11,943,000 | ||||
| Amortization | – | (412,000 | ) | |||||
| Foreign currency translation adjustments | 5,000 | 3,000 | ||||||
| Balance at March 31, 2014 | $ | 10,537,000 | $ | 11,534,000 | ||||
| (6) | Credit Risk and Allowance for Doubtful Accounts |
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on an individual credit evaluation and the specific circumstances of the customer. At March 31, 2014 and December 31, 2013, the allowance for doubtful accounts was $215,000 and $150,000, respectively.
All product returns must be pre-approved, and if approved, customers are subject to a 20% restocking charge. The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At March 31, 2014 and December 31, 2013, the sales and return allowance was $65,000 and $50,000, respectively.
Accounts receivable are shown net of the combined total of the allowance for doubtful accounts and allowance for sales returns of $280,000 and $200,000 at March 31, 2014 and December 31, 2013, respectively.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
| (7) | Concentrations of Credit and Other Risks |
In the United States, the Company sells its products and services directly to hospitals and clinics. In all international markets, the Company sells its products to distributors who, in turn, sell to hospitals and clinics.
With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral. No single customer represented greater than 10% of gross accounts receivable as of either March 31, 2014 or December 31, 2013. There have been no material losses on customer receivables.
Revenue by geographic destination as a percentage of total net revenue for both of the three month periods ended March 31, 2014 and 2013 was 84% in the United States and 16% in international markets. No single customer represented greater than 10% of the total net revenue for the three months ended March 31, 2014 and 2013.
| (8) | Dependence on Key Suppliers |
The Company purchases certain key components from single-source suppliers. Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company’s financial condition and results of operations.
King Pharmaceuticals
The Company purchases its requirements for thrombin (a component in the Hemostat products) under a Thrombin-JMI Supply Agreement entered into with King on January 9, 2007. Under the terms of the Thrombin-JMI Supply Agreement, King agrees to manufacture and supply thrombin to the Company on a non-exclusive basis. The Thrombin-JMI Supply Agreement does not contain any minimum purchase requirements. King agrees to supply the Company with such quantity of thrombin as the Company may order at a fixed price throughout the term of the Thrombin-JMI Supply Agreement as adjusted for inflation, variations in potency and other factors. The Thrombin-JMI Supply Agreement has an initial term of 10 years, followed by successive automatic one-year extensions, subject to termination by the parties under certain circumstances, including: (i) termination by King without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to the Company, and (ii) termination by the Company without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to King provided that the Device Supply Agreement, which the Company also entered into with King on January 9, 2007, has expired on its terms or the parties have agreed to terminate it.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
| (9) | Commitments and Contingencies |
Boston Scientific Corporate Litigation
On May 16, 2013, the Company filed a patent infringement complaint in the United States District Court for the District of Minnesota against Boston Scientific Corporation (Boston Scientific). The complaint alleges that Boston Scientific has infringed three of the Company’s patents concerning rapid exchange guide extension technology by manufacturing and selling its Guidezilla™ guide extension catheter, which received FDA 510(k) clearance in March 2013. The Company is seeking an injunction against Boston Scientific prohibiting the manufacture and sale of its Guidezilla catheter, as well as damages for lost profits and legal costs. On June 10, 2013, the Company filed a motion for preliminary injunction asking the court to enjoin Boston Scientific’s manufacture and sale of the Guidezilla catheter during the pendency of the litigation. On July 11, 2013, Boston Scientific filed its answer and counterclaim, alleging the Company’s patents are invalid, that the Guidezilla catheter does not infringe, and that the Company’s manufacture and sale of its GuideLiner catheter violates a U.S. patent owned by Boston Scientific that expired in June 2013. The counterclaim seeks unspecified damages and payment of Boston Scientific’s attorney’s fees, expenses and costs. On December 9, 2013, the District Court granted the Company’s motion for a preliminary injunction prohibiting Boston Scientific from making, using, offering for sale or selling its Guidezilla catheter during the pendency of the parties’ on-going patent infringement litigation. On December 12, 2013, the District Court stayed the preliminary injunction to permit it to consider whether to permit Boston Scientific to move for reconsideration of the preliminary injunction. On December 23, 2013, the District Court denied Boston Scientific’s request for permission to file a motion to reconsider the preliminary injunction and lifted the stay on the preliminary injunction effective January 13, 2014. On December 27, 2013, Boston Scientific filed a motion with the United States Court of Appeals for the Federal Circuit for a stay, pending appeal, of the District Court’s preliminary injunction order and an interim stay pending the Federal Circuit’s consideration of the motion. On January 8, 2014, the Federal Circuit issued an order denying Boston Scientific’s motion for an interim stay of the preliminary injunction. On January 13, 2014, the preliminary injunction became effective prohibiting Boston Scientific from making, using, offering for sale or selling the Guidezilla guide extension catheter in the United States during the pendency of the patent litigation. On January 17, 2014, the Federal Circuit issued an order denying Boston Scientific’s motion for a stay of the preliminary injunction pending appeal. On April 15, 2014 the Federal Circuit vacated the preliminary injunction on appeal, holding that “at this stage of the case the record is too incomplete ...to warrant the grant of a preliminary injunction.” The Federal Circuit's ruling on the preliminary injunction does not affect the underlying patent litigation, which is currently scheduled to be ready for trial on or after March 2015 in the District Court.
Governmental Proceedings
On June 28, 2011, the Company received a subpoena from the U.S. Attorney’s Office for the Western District of Texas under the Health Insurance Portability & Accountability Act of 1996 (HIPAA) requesting the production of documents related to Vari-Lase products, and in particular the use of the Vari-Lase Short Kit for the treatment of perforator veins. Subsequently, the Company learned that the U.S. Attorney’s Office has commenced a criminal investigation of the same matter. The Vari-Lase Short Kit has been sold under a 510(k) clearance for the treatment of incompetence and reflux of superficial veins in the lower extremity since 2007 with total U.S. sales through March 31, 2014 of approximately $493,000 (0.1% of the Company’s total U.S. sales for such period) and has not been the subject of any reported serious adverse clinical event. On August 14, 2012, the United States District Court for the Western District of Texas unsealed a qui tam complaint that had been filed on November 19, 2010 by Desalle Bui, a former sales employee of the Company, which is the basis for the U.S. Attorney’s civil investigation, to which the federal government, after three extensions of time, elected to intervene. The complaint contains allegations of off-label promotion of Vari-Lase products for the treatment of perforator veins, re-use of single-use Vari-Lase products and kickbacks to physicians, resulting in alleged damages to the government of approximately $20 million. An amended complaint limited to allegations of off-label promotion of the Vari-Lase Short Kit resulting in an unspecified amount of damages and penalties was filed by the U.S. Attorney’s Office in December 2012. On January 22, 2014, the Company agreed with the U.S. Attorney’s Office to settle the civil lawsuit. The terms of the settlement are that the Company will make a payment of $520,000, the Company will make no admission of fault or liability, and the U.S. Attorney’s Office will dismiss the civil lawsuit with prejudice and release all civil claims that were, or could have been, brought against the Company in the civil lawsuit. The formal settlement agreement has not been completed and signed, and therefore the $520,000 settlement payment is included in accrued expenses as of March 31, 2014 and December 31, 2013. Settlement of the civil lawsuit will have no effect upon the criminal investigation, which is continuing.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
From time to time, the Company is involved in additional legal proceedings arising in the normal course of business. As of the date of this report, the Company is not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on the Company’s results of operations or financial condition.
King Agreements
On January 9, 2007, the Company entered into a License Agreement and a Device Supply Agreement with King. Under the License Agreement, the Company licensed the exclusive rights to the Company’s products Thrombi-Pad, Thrombi-Gel and Thrombi-Paste to King in exchange for a one-time license fee. Under the Device Supply Agreement, the Company agreed to manufacture the licensed products for sale to King in exchange for an initial payment. The unamortized license fee was $559,000 and $610,000 at March 31, 2014 and December 31, 2013, respectively. Amortization of the deferred revenue will be $51,000 per quarter for the remainder of the 10-year license period. The amortization of license fee was $51,000 for the three months ended March 31, 2014 and 2013.
| (10) | Income Taxes |
The Company is subject to income tax in numerous jurisdictions and at various rates and the use of estimates is required in determining the provision for income taxes. For the three month periods ended March 31, 2014 and 2013, the Company recorded a provision for taxes of $1,574,000 and $763,000 on earnings before tax of $4,373,000 and $2,888,000 resulting in an effective income tax rate of 36% and 26%, respectively. The difference between the effective tax rate of 36% for the three months ended March 31, 2014 and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of state taxes. The difference between the effective tax rate of 26% for the three months ended March 31, 2013 and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of recognizing $300,000 of research and development credits in the first quarter of 2013 that had been deferred from 2012 pending Congressional action which was completed in January 2013.
The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable earnings. The Company considers projected future taxable earnings and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized.
The Company applies ASC 740, Income Taxes, which clarifies the accounting for uncertainty in tax positions recognized in the financial statements. These provisions create a single model to address uncertainty in tax positions and clarify the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has recorded an unrecognized tax benefit of $1,268,000 as of both March 31, 2014 and December 31, 2013. The impact of tax related interest and penalties is recorded as a component of income tax expense. As of March 31, 2014, the Company has recorded $-0- for the payment of tax related interest and there were no tax penalties or interest recognized in the statements of operations.
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
The Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as in the Republic of Ireland and various state jurisdictions. At March 31, 2014, tax years 2009 through 2013 remain open to examination.
| (11) | Business Combinations and Asset Acquisitions |
Northeast Scientific
On September 17, 2013, the Company entered into an eight-year reprocessing services agreement with Northeast Scientific, Inc. (NES), a FDA-registered reprocessor of medical devices, whereby the Company paid NES a non-refundable amount of $500,000 for the exclusive right to offer NES’ reprocessing services in the United States for a commercial medical device. NES is pursuing FDA approval for its reprocessing services for the device. In the event FDA approval is obtained prior to July 1, 2014, the Company is required under the terms of the agreement to pay NES a non-refundable amount of $500,000. If FDA approval is obtained on/or after July 1, 2014, the Company is required to pay NES a non-refundable amount of $400,000. The agreement has an annual minimum unit termination clause, allowing NES to terminate the agreement if the Company does not meet certain annual minimums.
The Company accounted for the transaction as a non-business asset acquisition in the third quarter of 2013. In accordance with ASC 805, the purchase price of $900,000 was assigned to an intangible asset and no goodwill was recognized. The Company recorded a $400,000 accrual in the third quarter of 2013 in addition to the $500,000 payment, as the Company believes the FDA approval will occur after July 1, 2014. The Company will begin amortizing the intangible asset on a per unit basis over the remaining term of the agreement once the Company begins to send units to NES to be reprocessed.
| (12) | Products and Services |
The Company has three product categories as follows:
| · | Catheter products consist principally of catheters used in minimally invasive medical procedures for the diagnosis or treatment of vascular conditions, such as the GuideLiner® catheter used to access discrete regions of the coronary anatomy and the Pronto® extraction catheters used in treating acute myocardial infarction. This category also includes products used in connection with gaining percutaneous access to the vasculature to perform minimally invasive procedures, such as micro-introducer kits. |
| · | Hemostat products consist principally of blood clotting products, such as the D-Stat® Dry hemostat, a topical thrombin-based pad with a bandage used to control surface bleeding, and the D-Stat Flowable, a thick yet flowable thrombin-based mixture for preventing bleeding in subcutaneous pockets. This category also includes our line of devices used in radial artery procedures, such as our Accumed™ wrist positioning splints and Vasc™ Band inflatable compression bands. |
| · | Vein products and services consist principally of the Vari-Lase® endovenous laser, a laser console and procedure kit used for the treatment of varicose veins, and a reprocessing service for the ClosureFAST radiofrequency vein ablation catheter. |
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements – Continued
The following tables set forth, for the periods indicated, net revenue by product category along with the percent change from the previous period:
| Three Months Ended March, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Net Revenue | Percent Change | Net Revenue | Percent Change | |||||||||||||
| Catheter products | $ | 19,164,000 | 15 | % | $ | 16,627,000 | 12 | % | ||||||||
| Hemostat products | 5,997,000 | 4 | % | 5,779,000 | (2 | %) | ||||||||||
| Vein products and services | 4,684,000 | 31 | % | 3,571,000 | 21 | % | ||||||||||
| Total product revenue | 29,845,000 | 15 | % | 25,977,000 | 10 | % | ||||||||||
| License | 62,000 | (29 | %) | 87,000 | - | % | ||||||||||
| Total revenue | $ | 29,907,000 | 15 | % | $ | 26,064,000 | 10 | % | ||||||||
Executive Level Overview
Vascular Solutions, Inc. (we, us or Vascular) is focused on bringing clinically advanced solutions to interventional cardiologists, interventional radiologists, electrophysiologists, and vein practices worldwide. As a vertically-integrated medical device company, we generate ideas, create new minimally invasive medical devices, and then deliver these products and related services to physicians through our direct domestic sales force and our international distribution network. We continue to develop new products and new applications for our existing products.
During the past few years, the number of catheterization procedures performed worldwide has been declining gradually due to a number of factors – among them, the effects of weak economies on overall health care utilization rates, efforts by third-party payers to lower costs associated with medical procedures, investigations by government agencies into potential over-utilization of procedures, the implementation by hospitals of policies designed to reduce the incidence of unnecessary procedures in the wake of these outside investigations, and new diagnostic imaging and functional assessment modalities that more effectively screen patients to determine the need for treatment. Although worldwide demographic factors, including the growing incidence of obesity, diabetes, and cardiovascular disease, seem to favor long-term growth in the number of interventional procedures, we believe these recent pressures on utilization rates are likely to result in relatively flat catheterization volumes for the foreseeable future. We intend to remain competitive in this market through the continued introduction of new products and services. We expect to originate these new products and services primarily through our internal research and development and clinical efforts, but we may supplement them with targeted acquisitions or other external collaborations. Additionally, our growth has been, and will continue to be, impacted by our expansion and penetration into new geographic markets, the expansion and penetration of our direct sales organization in existing geographic markets, and our continuing focus on increasing the efficiency of our existing direct sales organization.
Our product portfolio includes a broad spectrum of over 80 products consisting of over 600 stock keeping units (SKUs) covering a wide array of blood clotting devices, extraction catheters, access catheters, guide catheters, micro-introducer kits, guidewires, snare and retrieval devices, a reprocessing service for radiofrequency catheters and endovenous laser and procedure kits for the treatment of varicose veins. Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations in three main categories based on similarities in the products or services sold. We have corporate infrastructure and direct sales capabilities in the United States and have established distribution relationships in most major international markets. In order to drive sales growth, we have invested not only in the expansion of our global distribution system, but also new product development and clinical trials to obtain regulatory approvals. A significant portion of our net revenue historically has been, and we expect to continue to be, attributable to new and enhanced products and services. We expect to continue to further validate the clinical and competitive benefits of our technology platforms to drive utilization of our current products and the development of new and enhanced products and services.
The interventional medical device industry is characterized by intense competition, rapidly evolving technology, and a high degree of government regulation. To grow our business, we have focused on continually developing and commercializing new products. Looking ahead, we expect our business may be impacted by the following trends and opportunities:
| · | The future regulatory approval of newly-developed products. Any new product that we develop must be approved by the Food and Drug Administration (FDA) in the United States and by similar regulatory bodies in other countries before they can be sold. The requirements for obtaining product approval have undergone change, and the FDA frequently implements changes to the product approval process. We monitor the changing regulatory landscape and modify our regulatory submissions as necessary to obtain product approvals. |
| · | Successfully integrating acquired products and services into our existing operations. The acquisition of products and services complementary to our existing product portfolio and customer call points provides an additional business opportunity, but is dependent on the successful integration of the acquired products into our existing business structure. |
In September 2013, we made an initial payment to Northeast Scientific, Inc. (NES) for the acquisition of exclusive eight-year rights to sell reprocessing services in the U.S. for an existing commercial medical device, pending FDA approval of the reprocessing procedure, which NES is pursuing in 2014. For additional information on this transaction, see Note 11 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for the quarter ended March 31, 2014.
| · | Managing intellectual property. The interventional medical device industry is characterized by numerous patent filings and litigation claims made to protect new and evolving product ideas. To maximize the profitability of new product ideas, we seek patent protection for those product design and method concepts which we believe have the potential to provide substantial product revenue. On October 14, 2013 we reached an agreement with Terumo Corporation and Terumo Medical Corporation (Terumo) to settle a patent and trademark infringement lawsuit brought by Terumo against us related to a prior version of our Vasc Band radial compression device in exchange for a one-time payment to Terumo in the amount of $812,500. On May 16, 2013, we filed a patent and copyright infringement complaint in the U.S. District Court for the District of Minnesota against Boston Scientific Corporation alleging that it is infringing three of our United States patents related to our GuideLiner guide extension product. Boston Scientific filed a counterclaim alleging that our GuideLiner catheter infringes a Boston Scientific patent that expired in June 2013. The Boston Scientific patent litigation is ongoing. Managing intellectual property assets and claims is a significant challenge for our business (For further discussion of the Boston Scientific, see Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q). Managing intellectual property assets and claims is a significant challenge for our business. |
Results of Operations
The following table sets forth, for the periods indicated, certain items from our statements of earnings expressed as a percentage of net revenue:
Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Net revenue: | ||||||||
| Product revenue | 100 | % | 100 | % | ||||
| License and collaboration revenue | - | - | ||||||
| Total revenue | 100 | % | 100 | % | ||||
| Product costs and operating expenses: | ||||||||
| Cost of goods sold | 32 | % | 33 | % | ||||
| Collaboration expenses | - | - | ||||||
| Research and development | 11 | % | 13 | % | ||||
| Clinical and regulatory | 4 | % | 5 | % | ||||
| Sales and marketing | 26 | % | 27 | % | ||||
| General and administrative | 10 | % | 9 | % | ||||
| Medical device excise taxes | 1 | % | 1 | % | ||||
| Amortization of purchased technology and intangibles | 1 | % | 1 | % | ||||
| Total product costs and operating expenses | 85 | % | 89 | % | ||||
| Operating earnings | 15 | % | 11 | % | ||||
| Other earnings and expenses, net | - | - | ||||||
| Earnings before income taxes . | 15 | % | 11 | % | ||||
| Income taxes | (6 | %) | (3 | %) | ||||
| Net earnings | 9 | % | 8 | % | ||||
Three months ended March 31, 2014, compared to three months ended March 31, 2013
Net revenue increased 15% to $29,907,000 for the quarter ended March 31, 2014 from $26,064,000 for the quarter ended March 31, 2013. This increase in revenue is comprised of the following components:
| % Change | ||||
| Volume of existing product and service revenue | 15 | % | ||
| New product or service introductions, which consist of any product or service that had no revenue in the comparable period in 2013 | 2 | % | ||
| Product and service pricing | (2 | %) | ||
| 15 | % | |||
Approximately 84% of our net revenue was earned in the United States and 16% of our net revenue was earned in international markets for both of the three month periods ended March 31, 2014 and March 31, 2013.
We recognized $62,000 and $87,000 of license and collaboration revenue during the three month periods ended March 31, 2014 and 2013, respectively, due to our license and device supply agreements with King and our distribution agreement with Nicolai. The 5-year term of the distribution agreement with Nicolai expired on March 31, 2013. Collaboration revenue of $11,000 and $-0- was recognized during the three months ended March 31, 2014 and 2013, respectively, as a result of an agreement we entered into in April 2013 to develop a new hemostatic device for a third party. License and collaboration revenue is expected to be approximately $250,000 for the remainder of 2014.
Gross margin increased to 68.0% for the quarter ended March 31, 2014, compared to 66.6% for the quarter ended March 31, 2013. The increase in gross margin was due to approximately $500,000 of costs incurred in the first quarter of 2013 in connection with a worldwide recall of Guardian® hemostasis vales, which had no equivalent in the first quarter of 2014. We expect gross margins to be between 67.5% and 68.5% per quarter for the remainder of 2014, subject to variations in our selling mix between United States and international markets and between our lower margin products such as the Vari-Lase products and our higher margin products such as the D-Stat Dry and GuideLiner products.
Research and development expense for the first quarter of 2014 totaled $3,290,000, or 11% of revenue, compared to $3,405,000, or 13% of revenue, for the first quarter of 2013. Research and development expenses have remained constant on a dollar basis compared to the three month period ended March 31, 2013. We expect our continuing research and development expenses to be approximately 11.5% to 12.5% of revenue for the remainder of 2014.
Clinical and regulatory expense for the first quarter of 2014 totaled $1,300,000, or 4% of revenue, compared to $1,163,000, or 5% of revenue, for the first quarter of 2013. Clinical and regulatory expenses have increased on a dollar basis compared to the quarter ended March 31, 2013, due to additional work being completed relating to anticipated future clinical studies. We expect clinical and regulatory expenses to continue to be approximately 4.0% of revenue for the remainder of 2014.
Sales and marketing expense for the first quarter of 2014 totaled $7,736,000, or 26% of revenue, compared to $6,971,000, or 27% of revenue, for the first quarter of 2013. The decrease in sales and marketing expenses as a percentage of revenue for the first quarter of 2014 was due to our ability to continue to increase sales while maintaining our number of field sales employees constant. We expect to maintain the same relative size of our direct U.S. sales force for the remainder of 2014. As result, we expect our sales and marketing expenses as a percentage of revenue to be approximately 23.0% to 24.0% for the remainder of 2014.
General and administrative expense for the first quarter of 2014 totaled $2,859,000, or 10% of revenue, compared to $2,240,000, or 9% of revenue, for the first quarter of 2013. General and administrative expenses increased on a dollar basis in the first quarter of 2014 compared to the first quarter of 2013 as a result of a $522,000 increase in legal expenses, primarily related to the patent infringement lawsuit filed against Boston Scientific in May 2013 and the U.S. Attorney’s qui tam litigation and criminal investigation (see Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q). While litigation and investigation expenses are difficult to forecast, we expect legal fees to remain at an elevated level for the remainder of 2014 due to these two on-going items. As a result, we expect general and administrative expense to be approximately 9.0% to 10.0% of revenue for the remainder of 2014.
Medical device excise taxes for the first quarter of 2014 totaled $345,000, or 1.2% of revenue, compared to $317,000, or 1.2% of revenue, for the first quarter of 2013. The statutory rate of the medical device excise tax is 2.3% of revenues on initial sales of finished medical products sold in the United States. The tax does not apply to service revenues or international sales. The Company’s effective rate for this tax is less than the statutory rate due to international sales, service revenues and sales of purchased finished goods (where the seller is responsible for paying the tax). We expect our medical device excise taxes to be approximately 1.2% of revenue for the remainder of 2014.
Amortization of purchased technology and other intangibles was $412,000 and $367,000 for the three months ended March 31, 2014 and 2013, respectively. The amortization resulted from our product and license acquisitions. As part of these asset purchases and licensing agreements, we allocated $16,000,000 to purchased technology and other intangibles that are being amortized over a period of 9 to 11 years. For a complete discussion of the most recent acquisition, see Note 11 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. We expect amortization expense to be approximately $410,000 per quarter for the remainder of 2014.
Income tax expense was $1,574,000 for the three months ended March 31, 2014, on earnings before tax of $4,373,000, resulting in an effective income tax rate of 36%. The difference between the effective tax rate of 36% and the statutory rate of 34%, relates primarily to the impact of state taxes. We expect our effective income tax rate will be approximately 36.0% per quarter for the remainder of 2014.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $32,762,000 at March 31, 2014 compared to $30,785,000 in cash and cash equivalents at December 31, 2013, an increase of $1,977,000. The majority of our cash is maintained in our operating accounts. A portion of our cash equivalents are invested in a money market fund invested in high quality, short-term money market instruments denominated in U.S. dollars such as debt instruments guaranteed by the governments of the United States, Western Europe, Australia, Japan and Canada, high quality corporate issuers and bank obligations. The money market fund’s assets are rated in the highest short-term category by nationally recognized rating agencies, such as Moody’s or Standard & Poor’s.
Cash provided by operations. We generated $3,962,000 of cash from operations for the three months ended March 31, 2014, primarily resulting from our net earnings of $2,799,000, non-cash depreciation and amortization expense of $1,184,000 and non-cash stock-based compensation of $1,285,000. Cash from operations was reduced by a $1,443,000 increase in our accounts receivable, a $1,233,000 increase in inventory, and a $629,000 increase in prepaid expenses for the three months ended March 31, 2014. These cash reductions were partially off-set by a $1,548,000 increase in accounts payable and a $404,000 increase in accrued expenses. The increases in accounts receivable and inventory were both consistent with our expectations.
Cash used for investing activities. We used $1,314,000 of cash in investing activities for the three months ended March 31, 2014, primarily consisting of the $1,323,000 of capital expenditures relating to the purchase of manufacturing and computer equipment, as well as the purchase of additional research and development equipment.
On February 18, 2014 we entered into a purchase agreement with IRET – Plymouth, LLC (“IRET”) to acquire a manufacturing and office building of approximately 79,300 square feet located at 6464 Sycamore Court North, Maple Grove, Minnesota, for a total purchase price of $7,200,000 (the “Purchase Agreement”). Subject to the satisfaction of certain terms and closing conditions customary for a real estate transaction of this type, the closing is expected to take place on December 1, 2014. Under the terms of the Purchase Agreement, in February 2014 we deposited $400,000 into escrow to be held as earnest money until the closing of the transaction. We currently lease the building and intend to continue to do so. The building houses our principal manufacturing, research and development and regulatory operations. We intend to expand the manufacturing capacity of the building and move our research and development and regulatory operations into an adjoining office building that we currently own during the remainder of 2014.
Cash provided by financing activities. We used $513,000 of cash in financing activities for the three months ended March 31, 2014. This amount was primarily due to the $1,805,000 of cash used to repurchase 77,410 shares of our common stock that vested under outstanding restricted stock awards to satisfy income tax withholding obligations. This amount was reduced by the receipt of $895,000 upon the exercise of outstanding stock options and the recognition of $397,000 of excess tax benefits from stock based compensation.
We currently anticipate that we will experience positive cash flow from our normal operating activities for the foreseeable future. We currently believe that our working capital of $59.5 million at March 31, 2014 will be sufficient to meet all of our operating and capital requirements for the foreseeable future.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2014.
Contractual Obligations
The following table summarizes our contractual cash commitments as of March 31, 2014:
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||
| Purchase of building | $ | 6,800,000 | $ | 6,800,000 | $ | - | $ | - | $ | - | ||||||||||
| Facility operating leases | 1,363,000 | 908,000 | 455,000 | - | - | |||||||||||||||
| Product license rights | 400,000 | 400,000 | - | - | - | |||||||||||||||
| Total | $ | 8,563,000 | $ | 8,108,000 | $ | 455,000 | $ | - | $ | - | ||||||||||
We do not have any other significant cash commitments related to supply agreements, nor do we have any other significant commitments for capital expenditures.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The material accounting policies that we believe are most critical to an investor’s understanding of our financial results and condition and which require complex management judgment are discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Critical Accounting Policies.”
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will likely,” “is expected,” “will continue,” “is anticipated,” “believe,” “estimate,” “projected,” “forecast,” or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Forward-looking statements such as these are based on management’s current expectations as of the date of this report but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: risks associated with patent infringement lawsuits and government criminal investigations, adoption of our new products, limited profitability, exposure to possible product liability claims, the development of new products by others, dependence on third party distributors in international markets, doing business in international markets, the availability of third party reimbursement, actions by the FDA related to our products, the loss of key vendors, and those factors set forth under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Annual Report on Form 10-Q. This list is not exhaustive, and we may supplement this list in any future filing with the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement. We undertake no obligation to, and do not intend to, revise or update publicly any forward-looking statement for any reason.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. We maintain our accounts for cash and cash equivalents principally at one major bank in the United States and one major bank in Ireland. We have a formal written investment policy that limits our investments to investments in issuers evaluated as creditworthy. We have not experienced any losses on our deposits of our cash and cash equivalents.
With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivables.
In the United States, we sell our products and services directly to hospitals and clinics. In international markets, we sell our products to independent distributors who, in turn, sell to hospitals. Sales to independent distributors are denominated in United States dollars, with the exception of sales to Germany, where sales are denominated in Euros. Sales to distributors out of our subsidiary in Ireland are denominated in Euros.
We distribute certain products on behalf of certain U.S. and international manufacturers. We pay for all distributed products in United States dollars.
We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature. A change of 0.1 in the Euro exchange rate would result in an increase or decrease of approximately $65,000 in the amount of United States dollars we receive in payment on the accounts receivable denominated in Euros with our subsidiary in Ireland and our German distributor, Nicolai GmbH. Under our current policies, we do not use foreign currency derivative instruments to manage exposure to fluctuations in the Euro exchange rate.
We are exposed to declines in the interest rates paid on deposited funds. A 0.1% decline in the current market interest rates paid on deposits would result in interest earnings being reduced by approximately $33,000 on an annual basis.
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in internal control over financial reporting.
During the fiscal quarter ended March 31, 2014, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The description of litigation and government proceedings included in Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q is incorporated into this Item 1 of Part II by reference.
From time to time, we are involved in additional legal proceedings arising in the normal course of business. As of the date of this report we are not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on our results of operations or financial condition.
The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed.
We will not be successful if the interventional medical device community does not adopt our new products or services.
We have launched over 80 new products or services since 2003. Our success will depend on the continued launch of new products and services and the medical community’s acceptance of our new products and services. We cannot predict how quickly, if at all, the medical community will accept our new products and services, or, if accepted, the continuation or extent of their use. Our potential customers must:
| · | believe that our products or services offer benefits compared to the methodologies and/or devices that they are currently using; |
| · | use our products or services and obtain acceptable clinical outcomes; |
| · | believe that our products or services are worth the price that they will be asked to pay; and |
| · | be willing to commit the time and resources required to change their current methodology. |
Because we are often selling a new technology, we have limited ability to predict the level of growth or timing of sales of these products or services. If we encounter difficulties in growing our sales of our new medical devices or services, our business will be seriously harmed.
We are involved in, and may face additional, intellectual property litigation, which could prevent us from manufacturing and selling our products or services or result in us incurring substantial costs and liabilities.
The interventional medical device industry is characterized by numerous patent filings. As a result, participants in the industry frequently experience substantial intellectual property litigation.
Some companies in the interventional medical device industry have employed intellectual property litigation in an attempt to gain a competitive advantage. In addition, non-practicing patent assertion entities have accumulated patent rights related to the medical device industry and are asserting them against operating companies in an attempt to collect settlements or licensing fees. Intellectual property litigation has proven to be very complex, and the outcome of such litigation is difficult to predict. While we do not believe that any of our products or services infringe any existing patent or other intellectual property right, we have been, and are, involved in substantial intellectual property litigation and expect to continue to become subject to intellectual property claims with respect to our new or existing products or services.
On February 14, 2013, Terumo Corporation and Terumo Medical Corporation (Terumo) filed a complaint for patent and trademark infringement against us and Lepu Medical Technology (Beijing) Co. in the United States District Court for the District of New Jersey. The complaint alleged that a prior version of the Vasc Band radial compression device manufactured by Lepu Medical Technology infringed a Terumo patent. On October 11, 2013, we reached an agreement with Terumo to settle the litigation. Under the settlement, we made a one-time payment to Terumo in the amount of $812,500 and Terumo agreed that the current design of our Vasc Band product does not infringe any claim of any issued Terumo patent and agreed that it will not sue the Company on any future issued patent concerning the current design of the Vasc Band product.
On May 16, 2013, we filed a patent and copyright infringement complaint in the U.S. District Court for the District of Minnesota against Boston Scientific Corporation alleging that it is infringing three of our United States patents by manufacturing and selling its Guidezilla guide extension catheter. Boston Scientific filed a counterclaim alleging that our GuideLiner catheter infringes a Boston Scientific patent that expired in June 2013. We cannot be sure of the outcome of our claim or the counterclaim. If we prevail in our claim, we cannot be sure whether any remedy will adequately protect our intellectual property. If Boston Scientific prevails in its counterclaim, we may be required to pay damages.
An adverse determination in any intellectual property litigation or interference proceedings against us could prohibit us from selling a product or service, subject us to significant immediate payments to third parties and require us to seek licenses from third parties. The costs associated with these license arrangements may be substantial and could include substantial up-front payments and ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a product or service.
Our involvement in intellectual property claims, whether ongoing or filed in the future and regardless of the merits of any asserted claim against us, could divert the attention of our technical and management personnel away from the development and marketing of our products and services for significant periods of time. Furthermore, the penalties involved with an adverse outcome may be severe, and the costs incurred related to defending such claims could have a material adverse effect on our results of operations or financial condition, even if we ultimately prevail in them.
The medical device industry is the subject of numerous governmental investigations into marketing and other business practices, and we currently are the subject of a pending government criminal investigation. A governmental criminal investigation could result in the commencement of litigation, indictment of the company, substantial fines, penalties and administrative remedies, including the potential disqualification from participation in government health care programs including Medicare and Medicaid. An adverse determination in the current government criminal investigation or any future civil or criminal litigation could have a material adverse effect on our ability to continue to operate our business as currently conducted and negatively impact our financial results and stock price.
The products and business activities of medical device companies are subject to rigorous regulation by the FDA and other federal, state and international governmental authorities under statutes and regulations governing health care fraud. The U.S. Attorney’s Offices have increased their scrutiny over the medical device industry in recent years. The U.S. Congress, Department of Justice, Office of Inspector General of the Department of Health and Human Services, and Department of Defense have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, medical device manufacturers, primarily related to financial arrangements with health care providers, regulatory compliance and product promotional practices.
During 2012, the U.S. Attorney’s Office for the Western District of Texas intervened in a qui tam civil lawsuit initiated against us involving allegations of off-label promotion of our Vari-Lase Short Kit endovenous laser product (see Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q). Subsequently, we learned that the U.S. Attorney’s Office has commenced a criminal investigation of the same matter. On January 22, 2014, we agreed with the U.S. Attorney’s Office to settle the civil lawsuit. The terms of the settlement are that we will make a payment of $520,000, we will make no admission of fault or liability, and the U.S. Attorney’s Office will dismiss the civil lawsuit with prejudice and release all civil claims that were, or could have been, brought against us in the civil lawsuit. The formal settlement agreement has not been completed and signed, and therefore the $520,000 settlement payment is included in accrued expenses as of March 31, 2014 and December 31, 2013. Settlement of the civil lawsuit will have no effect upon the criminal investigation, which is continuing.
We cannot predict when the criminal investigation will be resolved, the outcome of the investigation, its impact on us, or whether other federal or state legal or regulatory authorities will initiate additional related or unrelated investigations or lawsuits against us. The outcome of a criminal investigation could include substantial fines, penalties and administrative remedies such as a deferred prosecution agreement or corporate integrity agreement, or the indictment of the company or its officers. Upon conviction of a felony under statutes related to health care fraud, the company would become automatically excluded from participation in government health care programs including Medicare and Medicaid, which would substantially adversely affect our ability to continue to conduct our business. The cost of defense of any potential criminal litigation could be material and could divert the attention of management from the day-to-day operations of our business. These potential consequences of the current investigation, as well as consequences of any future governmental investigation or lawsuit of any related or unrelated matter, could have a material adverse effect on our business, results of operations and stock price.
Our future operating results are difficult to predict and may vary significantly from quarter to quarter, which may adversely affect the price of our common stock.
The ongoing introduction of new products and services that affect our overall product mix make the prediction of future operating results difficult. You should not rely on our past revenue growth as any indication of future growth rates or operating results. The price of our common stock will likely fall in the event that our operating results do not meet the expectations of analysts and investors. Comparisons of our operating results between quarters are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including:
| · | the level of sales of our products and services in our markets; |
| · | our ability to introduce new products or services and enhancements in a timely manner; |
| · | the demand for, and acceptance of, our products and services; |
| · | the success of our competition and the introduction of alternative products or services; |
| · | our ability to command favorable pricing for our products and services; |
| · | the growth of the market for our products and services; |
| · | the expansion and rate of success of our direct sales force in the United States and our independent distributors internationally; |
| · | actions relating to ongoing FDA compliance; |
| · | the effects of intellectual property disputes; |
| · | the effects of government investigations and litigation; |
| · | the size and timing of orders from independent distributors or customers; |
| · | the attraction and retention of key personnel, particularly in sales and marketing, regulatory, manufacturing and research and development; |
| · | unanticipated delays or an inability to control costs; |
| · | general economic conditions, as well as those specific to our customers and markets; and |
| · | seasonal fluctuations in revenue due to the elective nature of some procedures. |
We may face product liability claims that could result in costly litigation and significant liabilities.
The manufacture and sale of medical products entails significant risk of product liability claims. Any product liability claims, with or without merit, could result in costly litigation, reduced sales, cause us to incur significant liabilities and divert our management’s time, attention and resources. We cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all.
The market for interventional medical devices and services is highly competitive and will likely become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products or services obsolete.
The existing market for interventional medical devices and services is intensely competitive. We expect competition to increase further as companies develop new products and services or modify their existing products and services to compete directly with ours. Each of our products and services encounters competition from several medical device companies, including Medtronic Inc., Boston Scientific Corporation and Covidien plc. Each of these companies has:
| · | better name recognition; |
| · | broader product lines; |
| · | greater sales, marketing and distribution capabilities; |
| · | significantly greater financial resources; |
| · | larger research and development staffs and facilities; and |
| · | existing relationships with some of our potential customers. |
We may not be able to effectively compete with these companies. In addition, broad product lines may allow our competitors to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products or services. Broader product lines may also provide our competitors with a significant advantage in marketing competing products or services to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing. Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products or services obsolete.
We rely on continued development and improvement of our products and service, which if not successful, may have an adverse effect on our financial condition and results of operations.
We are continually engaged in developing new products and services and improving our existing products and services. New or improved products and services represent a significant component of our sales growth. We dedicate significant financial and managerial resources to product and services development and improvement. We may not achieve our development objectives within our schedule and budget, or at all, due to technical or operational challenges. Failure to achieve our development objectives on schedule may increase our development expenses and adversely impact our revenues. If we do achieve our development objectives, we may not be able to obtain regulatory approval for new or improved products or services, and we may not be successful in marketing and selling such products or services. Failure to obtain regulatory approval or successfully market and sell new or improved products and services could adversely impact our revenues and results of operations.
Constraints or interruption in production from any of our key suppliers may have a material adverse effect on our business, financial condition and results of operations.
In the interest of operational efficiency and due to quality considerations, we obtain some of the components for the products that we manufacture from a sole source. If the availability of components from a sole source of supply is constrained or interrupted, there is no assurance that we could find an alternative source of supply quickly and cost effectively, if at all. In addition, due to the stringent regulations and requirements of the FDA and equivalent regulatory entities regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for some components or materials. Unavailability of components could have a material adverse effect on our ability to manufacture and sell products and our results of operations.
We also distribute finished products that are available only from their manufacturer. In addition, the reprocessing services that we offer are performed by a single provider. Operational, quality or regulatory issues of the manufacturers of the products we distribute, or the provider of our reprocessing services, could constrain or interrupt the availability of those products or services. Any constrain or interruption in supply of finished products that we distribute, or the reprocessing services that we offer, could have a material adverse effect on our ability to sell products and services to customers, our financial condition and our results of operations.
Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our products and services in any international market.
Our international sales are subject to several risks, including:
| · | the ability of our independent distributors to sell our products and services; |
| · | the impact of recessions in economies outside the United States; |
| · | greater difficulty in collecting accounts receivable and longer collection periods; |
| · | unexpected changes in regulatory requirements, tariffs or other trade barriers; |
| · | weaker intellectual property rights protection in some countries; |
| · | potentially adverse tax consequences; and |
| · | political and economic instability. |
The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our products and services in any international market.
Our business and results of operations may be seriously harmed by changes in third-party reimbursement policies.
We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any changes affect reimbursement for catheterization procedures in which our products or services are used. Failure by physicians, hospitals and other users of our products or services to obtain sufficient reimbursement from healthcare payors for procedures in which our products or services are used, or adverse changes in governmental and private third-party payors’ policies toward reimbursement for such procedures, would seriously harm our business.
In the United States, healthcare providers, including hospitals and clinics that purchase medical devices or services such as our products and services, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of catheterization procedures. Any changes in this reimbursement system could seriously harm our business.
In international markets, acceptance of our products and services is dependent in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country. Our failure to receive international reimbursement approvals could have a negative impact on market acceptance of our products and services in the markets in which these approvals are sought.
Our products and services and our manufacturing activities are subject to extensive governmental regulation that could prevent us from selling our products or services in the United States or introducing new and improved products or services.
Our products and services and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies. We are required to:
| · | obtain the clearance of the FDA and international agencies before we can market and sell our products and services; |
| · | satisfy these agencies’ content requirements for all of our labeling, sales and promotional materials; and |
| · | undergo rigorous inspections by these agencies. |
Compliance with the regulations of these agencies may delay or prevent us from introducing any new model of our existing products or other new products or services. Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business.
We are also required to demonstrate compliance with the FDA’s quality system regulations. The FDA enforces its quality system regulations through pre-approval and periodic post-approval inspections. These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation. If we are unable to conform to these regulations, the FDA may take actions which could seriously harm our business. In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products or services.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
| January 1 – 31, 2014 | 56,503 | $ | 23.19 | - | - | |||||||||||
| February 1 – 28, 2014 | 19,647 | $ | 23.50 | - | - | |||||||||||
| March 1 – 31, 2014 | 1,260 | $ | 26.19 | - | - | |||||||||||
(1) At the request of our employees and pursuant to the terms of their Restricted Stock Awards, we purchased 56,503 shares of common stock in January, 19,647 in February and 1,260 shares of common stock in March, all at the fair market value of the common stock on the day the employees’ awards vested, to satisfy income tax withholding obligations for those employees.
None.
Not applicable.
None.
Exhibit Number | Description | |
| 3.1 | Amended and Restated Articles of Incorporation of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 to Vascular Solutions’ Form 10-Q for the quarter ended March 31, 2000). | |
| 3.2 | Amended and Restated Bylaws of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 of Vascular Solutions’ Form 8-K dated October 19, 2007). | |
4.1 | Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)). | |
10.1 | Purchase Agreement dated February 18, 2014 by and between IRET-Plymouth, LLC and Vascular Solutions, Inc. (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 8-K filed February 20, 2014). | |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VASCULAR SOLUTIONS, INC. | |||
| Date: April 22, 2014 | By: | /s/ Howard Root | |
| Howard Root | |||
| Chief Executive Officer and Director | |||
(principal executive officer) | |||
| By: | /s/ James Hennen | ||
| James Hennen | |||
| Senior Vice President of Finance and | |||
| Chief Financial Officer | |||
| (principal financial officer) | |||
| By: | /s/ Timothy Slayton | ||
| Timothy Slayton | |||
| Controller | |||
| (principal accounting officer) | |||
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