LEMAITRE VASCULAR

2020 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) that involve substantial risks and uncertainties, particularly risks related to the regulatory environment, our common stock, fluctuations in our quarterly and annual results, our ability to successfully integrate acquisitions into our business, and risks related to our business and industry generally, such as risks inherent in the process of developing and commercializing products and services that are safe and effective for use in the peripheral vascular disease market. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future net sales, gross margin expectations, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections, or expectations prove incorrect, our actual results, performance, or financial condition may vary materially and adversely from those anticipated, estimated, or expected. No forward-looking statement can be guaranteed and actual results may vary materially from those projected in the forward-looking statements. We intend to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements. These risks and uncertainties include, but are not limited to: the status of our global regulatory approvals and compliance with foreign regulatory requirements to market and sell our products outside the United States; the duration of the lapse in CE mark approval for certain of our devices; the closure of an audit by one of our notified bodies in support of the issuance and/or maintenance of CE marks covering certain of our products or the failure of such audit to be successfully closed; the risk of significant fluctuations in our quarterly and annual results due to numerous factors; the risk that assumptions about the market for the Company’s products and the productivity of the Company’s direct sales force and distributors may not be correct; the risk that we may not be able to maintain our recent levels of profitability; the risk that the Company may not realize the anticipated benefits of its strategic activities; risks related to the integration of acquisition targets; the acceleration or deceleration of product growth rates; risks related to product demand and market acceptance of the Company’s products and pricing; the risk that a recall of our products could result in significant costs or negative publicity; the risk that the Company is not successful in transitioning to a direct-selling model in new geographies.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K and in our other Securities and Exchange Commission filings.

Unless the context requires otherwise, references to “LeMaitre Vascular,” “LeMaitre,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to LeMaitre Vascular, Inc. and its subsidiaries.

LeMaitre, AlboGraft, AnastoClip, AnastoClip GC, Artegraft, Cardial, CardioCel, Dialine, Eze-Sit, Glow ‘N Tell, InvisiGrip, LeverEdge, LifeSpan, MollRing Cutter, Omniflow, ProcCol, Pruitt, Pruitt F3, Pruitt-Inahara, Python, RestoreFlow, Syntel, VascuCel, VascuTape, TRIVEX, Wovex, XenoSure, and the LeMaitre Vascular logo are registered trademarks of LeMaitre Vascular or one of its subsidiaries, and AlboSure, Chevalier, DuraSure, EndoRE, Flexcel, MultiTASC, Periscope, and PeriVu are unregistered trademarks of LeMaitre Vascular. This Annual Report on Form 10-K also includes the registered and unregistered trademarks of other persons, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or TM symbols.         

Item  1.         Business

Overview

LeMaitre Vascular is a global provider of medical devices and human tissue cryopreservation services largely used in the treatment of peripheral vascular disease, end-stage renal disease, and to a lesser extent cardiovascular disease. We develop, manufacture, and market vascular devices to address the needs of vascular surgeons and, to a lesser extent, other specialties such as cardiac surgeons, general surgeons and neurosurgeons. Our diversified portfolio of devices consists of brand name products that are used in arteries and veins outside of the heart and are well known to vascular surgeons, and includes the LeMaitre valvulotome, the XenoSure biologic patch, the Artegraft collagen vascular graft, the Pruitt F3 carotid shunt, VascuTape radiopaque tape, and Syntel embolectomy catheters. Our principal product offerings are sold throughout the world, primarily in the United States, Europe, the United Kingdom, Canada and Asia/Pacific Rim. We estimate that the annual worldwide market for our core product lines is approximately $900 million.

We sell our products and services primarily through a direct sales force. As of December 31, 2020 our sales force was comprised of 80 sales representatives in North America, Europe and Asia/Pacific Rim, including two export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have North American sales offices in Chandler, Arizona and Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, with additional European sales offices in Milan, Italy; Madrid, Spain; and Hereford, England. Our Asia/Pacific Rim headquarters is located in Singapore, with additional Asia/Pacific Rim sales offices in Tokyo, Japan; Shanghai, China; and Kensington, Australia. During the years ended December 31, 2020 and 2019, approximately 95% and 94%, respectively, of our net sales were generated in territories in which we employ direct sales representatives. We sell our products in other countries through distributors.

Since March 2020, the COVID-19 pandemic has significantly impacted the markets into which we sell devices, our sales and our operations. In response to COVID-19, many hospitals have limited elective procedures, and many of our devices are used in elective procedures. Additionally, our sales representatives’ access to hospitals and surgeons has been restricted by hospitals or local governments. In areas where the COVID-19 pandemic has materially abated, we have begun to see restrictions eased. During 2020, these dynamics resulted in, and we expect will continue to result in, variable sales. In response to the COVID-19 pandemic, we have modified our manufacturing operations in order to adhere to social distancing requirements dictated by local law. In Q2 2020 we also undertook measures to reduce our operating costs, including temporary base salary cuts and a reduction in force of approximately 13% of our full-time employees. However, as sales have normalized, we have been rehiring personnel in many areas. We ended our temporary base salary cuts on August 31, 2020.

The Peripheral Vascular Disease Market

Based on industry statistics, we estimate that peripheral vascular disease affects more than 200 million people worldwide and that the annual worldwide market for all peripheral vascular devices exceeds $5 billion. The disease encompasses a number of conditions in which the arteries or veins that carry blood to or from the legs, arms, or organs other than the heart become narrowed, obstructed, weakened, or otherwise compromised, and also includes other conditions, such as diabetes, which is caused by kidney failure. In many cases peripheral vascular disease goes undetected, sometimes leading to life-threatening events including stroke, ruptured aneurysm, pulmonary embolism or death. We believe that the peripheral vascular disease market will grow due to the increase in the incidence and diagnosis rates of peripheral vascular disease, a shift by doctors to using higher-priced endovascular devices, and the adoption of western healthcare standards in the developing world. Clinical studies have identified several factors that increase the risk of peripheral vascular disease, including smoking, diabetes, obesity, high blood pressure, lack of exercise, coronary artery disease, high cholesterol, and being over the age of 65. Demographic trends suggest an increase in the prevalence of peripheral vascular disease over time, driven primarily by rising levels of obesity and diabetes and an aging population. We believe that our strong brands, established sales force, suite of peripheral vascular device offerings, and broad network of vascular surgeon customers position us to capture an increasing share of this large and growing market.

Vascular surgeons treat peripheral vascular disease and also perform vascular procedures associated with other diseases, such as end-stage renal disease. We estimate that there are more than 17,000 vascular surgeons worldwide, including 2,800 board-certified vascular surgeons and several thousand general surgeons who perform vascular procedures in the United States, as well as more than 3,000 vascular surgeons in Europe and Asia/Pacific Rim. In contrast to other specialists, such as interventional cardiologists and interventional radiologists, vascular surgeons perform both open vascular surgeries and endovascular procedures. Open vascular surgery involves opening the body, cutting vessels, and suturing. Endovascular procedures typically are minimally invasive, catheter-based procedures involving repairing vessels from within using real-time imaging. We estimate that in 2020, over 90% of our net sales were from devices used in open vascular procedures.

Our Business Strategies

We have grown our business by using a three-pronged strategy: focusing on the vascular surgeon call point, competing for sales in low rivalry niche markets, and expanding our growth platform through our worldwide direct sales force as well as acquiring and developing complementary vascular devices.

•         Focused call point. We have historically directed our product offering and selling efforts towards the vascular surgeon, and estimate that in 2020 approximately 80% of our sales were to hospitals for use by vascular surgeons. As vascular surgeons are typically positioned to perform both open vascular surgeries and endovascular procedures, we sell devices in both the open and endovascular markets to the same end user. More recently we have begun to explore adjacent market customers, or non-vascular surgeon customers, who can be served by our vascular device technologies, such as cardiac surgeons and neurosurgeons.

•          Low rivalry niche segments. We seek to build and maintain leading positions in niche product and services segments, which we define as under $200 million in annual worldwide revenue. We believe that the relative lack of competitive focus on these segments by larger competitors, as well as the differentiated features and consistent quality of our products, enable higher selling prices and market share gains. We have, however, also sought to sell complementary offerings into larger, more competitive market segments, particularly when we believe that our offerings in those segments are highly differentiated, such as the Artegraft collagen vascular graft, Omniflow II biosynthetic graft, or the RestoreFlow human tissue cryopreservation services.

•         Direct sales force expansion, and the addition of complementary products through acquisitions and to a lesser extent research and development. We sell our products primarily through a direct sales force in North America, Europe and Asia/Pacific Rim. Since 1998, we have built our sales force from zero to 80 direct sales representatives, including two export managers. Prior to Covid-19, we hit a high water mark of 112 direct sales representatives in 2019. We believe that direct-to-hospital sales build closer customer relationships, allow for higher selling prices and gross margins, and are not subject to the risk of customer loss related to distributor turnover. In countries where we do not have a direct sales force, we sell our products through distributors. For the year ended December 31, 2020, approximately 95% of our net sales were generated through our direct-to-hospital sales force, and no single hospital customer accounted for more than 2% of our net sales. We intend to further expand and diversify our product offerings and add new technology platforms, mostly through acquisitions. We believe our experience acquiring and integrating product lines and businesses is one of our competitive advantages. We evaluate the acquisition of additional product lines and businesses that may be complementary to our product offerings, refine our current product lines, develop new applications for our existing technologies, and obtain regulatory approvals for our devices in new segments and geographies in order to further access the broader peripheral vascular device market and select other markets.

Acquisition History

We were founded in 1983 by George D. LeMaitre, M.D., a vascular surgeon who designed and developed the LeMaitre Valvulotome. Through a combination of complementary acquisitions and research and development efforts, we have expanded to 16 product lines. We have completed 24 acquisitions since 1998:

We manufacture most of our devices in-house, having relocated the manufacturing operations of 19 of our 24 acquisitions to our Burlington, Massachusetts headquarters, and we continue to look at ways to make our operations more efficient. The human tissue processing and cryopreservation operations associated with RestoreFlow allografts take place in our Fox River Grove, Illinois facility. The manufacture of our Cardial devices takes place in our Saint-Etienne, France facility. The manufacture of our recently acquired Artegraft biologic grafts takes place in North Brunswick, New Jersey. On a limited basis, we use third party manufacturers: Specifically, we purchase remote endarterectomy devices and TRIVEX systems from third parties. We also purchase our CardioCel and VascuCel patches from Anteris Technologies Ltd (formerly Admedus Ltd) in Malaga, Australia.

Our Products and Services

We have a portfolio of 16 product offerings, most of which treat vascular disease, and most of which are used in open vascular surgery and dialysis access, and one of which is a service related to the processing and cryopreservation of human vascular tissue.

Our 16 product offerings include seven that are biologic implants, and one that is a service of processing and cryopreserving human tissue for implantation. These offerings include the XenoSure patch (bovine pericardium), CardioCel and VascuCel patches (bovine pericardium), ProCol graft (bovine mesenteric vein), Artegraft (bovine carotid artery), Omniflow II biosynthetic graft (ovine tissue and synthetic mesh), surgical glue (porcine gelatin) and the RestoreFlow Allograft cryopreserved graft (human cadaver tissue). These biologic product lines represented 43% of our sales in 2020, 35% in 2019, and 36% in 2018. No single product line accounted for more than 20% of our revenues in 2020, 2019 or 2018.

Allografts

Through our RestoreFlow allograft business, we provide human cadaver tissue cryopreservation services, in particular the processing and cryopreservation of veins and arteries. Our RestoreFlow allografts are cryopreserved human tissue grafts, including saphenous veins, femoral veins and arteries, aortic and iliac arteries, aortic and pulmonary valved conduits and pulmonary patches. These allografts are used in a variety of vascular reconstructions such as peripheral bypass, hemodialysis access, and aortic infections. Currently we offer these cryopreservation services in the United States and Canada.

Angioscopes

The PeriVu Disposable Angioscope is a fiberoptic catheter used for viewing the lumen of a blood vessel. PeriVu also provides direct visualization of valves during in-situ bypass procedures.

Balloon Catheters for Embolectomy and Thrombectomy

Our TufTex and Syntel lines of embolectomy catheters are used to remove blood clots from arteries or veins. We sell single-lumen latex and latex-free embolectomy catheters as well as dual-lumen latex and latex-free embolectomy catheters. The dual-lumen embolectomy catheters enable clot removal and simultaneous irrigation or guide-wire trackability. Our Syntel thrombectomy catheter features a silicone balloon and is designed for removing thrombi in the venous system.

Balloon Catheters for Occlusion and Perfusion

Occlusion catheters temporarily occlude blood flow to allow the surgeon time and space to complete a procedure. Perfusion catheters perfuse blood and other fluids into the vasculature. Our Pruitt line of occlusion and perfusion catheters reduces vessel trauma by using internal balloon fixation rather than traditional external clamp fixation.

Bovine Grafts

Our ProCol biologic graft is a bovine mesenteric vein used for dialysis access in patients with a previously-failed synthetic graft. Our Artegraft biologic graft is a bovine carotid artery used for dialysis access in patients with or without a previously-failed synthetic graft. Its biological fibrous matrix is processed to enhance long-term patency and provide a tightly woven, cross-linked conduit that is flexible and compliant. Artegraft is also indicated for lower extremity bypass. Currently we distribute these two bovine grafts only in the United States.

Vascular and Cardiac Patches

Our XenoSure biologic patches are made from bovine pericardium, and are used primarily for closure of vessels after surgical intervention. Our AlboSure Vascular Patch is a polyester patch used primarily for vessel closure after surgical intervention.

Our VascuCel and CardioCel biologic patches are acellular, collagen bioscaffolds with optimized biocompatibility and zero aldehyde toxicity. These patches are used in vessel repair as well as heart repair and reconstruction, including neonatal repairs.

Carotid Shunts

Our Pruitt F3, Pruitt F3-S and Flexcel carotid shunts are used to temporarily shunt blood to the brain while the surgeon removes plaque in a carotid endarterectomy surgery. Our Pruitt F3 and Pruitt F3-S shunts feature internal balloon fixation rather than traditional external clamp fixation, reducing vessel trauma. Our Flexcel shunt is a non-balloon shunt offered for surgeons who prefer external clamp fixation.

Closure Systems

Our AnastoClip AC and AnastoClip GC closure systems attach vessels to one another with titanium clips instead of sutures. These closure systems create an interrupted anastomosis that expands and contracts as the vessel pulses, which some surgeons believe improves the durability of the anastomosis. The AnastoClip AC and AnastoClip GC closure systems also facilitate compliant dura closure in neuro applications. 

Ovine Vascular Grafts

Our Omniflow II biosynthetic vascular graft is a composite of cross-linked ovine collagen with a polyester mesh endoskeleton. It is indicated for lower extremity bypass and dialysis access. This device is not available in the United States.

Polyester Vascular Grafts

Our AlboGraft, Wovex and Dialine II vascular grafts are collagen-impregnated polyester grafts used to bypass or replace diseased arteries. These prostheses are available in straight tube and bifurcated versions.

ePTFE Vascular Grafts

Our LifeSpan ePTFE vascular graft is an expanded polytetrafluoroethylene (ePTFE) graft used to bypass or replace diseased arteries and to create dialysis access sites. LifeSpan is available in both regular and thin wall options and with an optional full or partial external spiral support. Our stepped and tapered LifeSpan models are designed to reduce the risk of steal syndrome and high cardiac output, complications that sometimes arise in dialysis access grafts.

Powered Phlebectomy

Our TRIVEX powered phlebectomy system is comprised of capital equipment and disposables that enable removal of varicose veins. In this procedure, an illuminator is inserted through a small incision in the leg, enabling visualization of varicose veins. A second instrument, a resector, removes the veins. Compared to conventional hook phlebectomy, this surgical procedure is faster and results in more complete vein removal through fewer incisions.

Radiopaque Tape

Our VascuTape radiopaque tape is a flexible, medical-grade tape with centimeter or millimeter markings printed with a proprietary radiopaque ink which is visible to the eye and an x-ray machine. VascuTape is applied to the skin and provides interventionalists with a simple way to cross-reference between the inside and the outside of a patient’s body, allowing them to locate tributaries or lesions beneath the skin.

Remote Endarterectomy Devices

Our EndoRE line of remote endarterectomy devices are used to remove plaque from arteries in the leg in a minimally invasive procedure requiring a single incision. Our EndoRE devices are used to dissect the plaque from the vessel, cut the far end of the plaque to free it for removal, and then withdraw it from the vessel.

Surgical Glue

Our Cardial surgical glue is a biologic-based glue that is typically used for joining dissected vessel layers and reinforcing sutures in cardiac and vascular procedures.

Valvulotomes

Our valvulotomes (or valve cutters) cut or disrupt valves in the saphenous vein, a vein that runs from the foot to the groin, so the vein can be repurposed as an artery to carry blood past diseased arteries to the lower leg or the foot. We believe our valvulotomes reduce costs for hospitals by enabling lower extremity bypass surgery to be performed with several small incisions rather than one continuous ankle-to-groin incision, thereby reducing the length of hospital stays and the likelihood of wound complications.

Sales and Marketing

As of December 31, 2020, we employed 80 field sales representatives, including two export managers. We believe the expansion of our sales force since 1998 has been a key success factor, and it remains one of our primary long-term strategies. Approximately 95% of net sales occurred in territories in which we employ field sales representatives. Outside our direct markets, we generally sell our products through country-specific distributors.

Our marketing efforts include direct mail and exhibitions at medical congresses, which we believe are important to our brand development. We believe that marketing allows us to reach vascular surgeons who are beyond the reach of our direct sales force.

We also provide training to our vascular surgeons on specific procedures including in situ bypass, carotid endarterectomy and interrupted anastomosis. More recently we initiated a general surgical skills training program targeted to less-experienced doctors as a way to introduce them to our product offerings.

Research and Development

Our research and development activities have historically focused on product development, including developing enhancements and extensions to our existing product lines; process engineering, including designing and optimizing our manufacturing lines; and regulatory and clinical, including obtaining and maintaining regulatory approvals in various geographies.

In 2018, our product development and process engineering efforts were primarily focused on expanding and enhancing our biologic product lines including XenoSure and Omniflow II, and the integration of our ProCol manufacturing into our Burlington facility. We also introduced quality-based improvements to the design of the LeMaitre Valvulotome as well as TRIVEX. In 2019, our focus remained on biologic products, launching a biologic dural patch for use in neuro-surgery procedures, and the transfer of Omniflow II and Syntel manufacturing into our Burlington facility. In addition, we undertook a project to begin distribution of cardiac allografts for use in cardiac replacement and repair. We also continued development on a next-generation powered phlebectomy system. In 2020 we continued our efforts with respect to the cardiac allograft and next-generation powered phlebectomy projects as well as the manufacturing transfers, and also provided support to our growing regulatory and clinical efforts. All of our products are subject to our design control procedures throughout the various stages of product development. These procedures may include bench testing, animal testing, human cadaveric studies and human clinical trials conducted by independent physicians, and post-market surveillance of product performance. We may use feedback received from independent physicians to demonstrate product functionality before commencing full-scale marketing of any product.

Our regulatory and clinical efforts have historically been focused on obtaining and maintaining regulatory approvals in various geographies. In the past we have typically not conducted clinical trials as we have usually acquired product lines with regulatory approvals already established. In addition, we preferred to avoid the time, expense and risk associated with initiating clinical trials. However, increasing regulatory requirements in many geographies have resulted in the need for more clinical testing.  As such, this component of our research and development spending has increased in recent years. In 2017 we initiated a clinical trial in an effort to obtain the approval of our XenoSure patch in China for cardiac and vascular indications. We have completed enrollment of this trial, and we expect to make our cardiac submission to the Chinese National Medical Products Administration (NMPA) in 2021 and for the vascular indication in 2022.

In 2017 the EU adopted new regulations for medical devices (MDR), which replace the European Medical Devices Directive (93/42/EC as amended by 2007/47/EC) (MDD) and which apply after a transition period ending on May 26, 2021. After this date, our MDD certificates then in effect will remain valid until their expiration dates, which range from December 2021 to May 2024.  Our products will then be subject to the MDR, which require all of our products, regardless of classification, to obtain a new CE mark in accordance with the new, more stringent standards. Going forward, we expect a significant portion of our regulatory and clinical time and expenses to be devoted to this transition. See –“Government Regulation” below for more information about the status of our MDD certificates.

Manufacturing and Processing

Our primary manufacturing facilities are located in Burlington, Massachusetts. We also have facilities in Saint-Etienne, France where our Wovex and Dialine vascular grafts, Chevalier Valvulotome and surgical glue are produced, North Brunswick, New Jersey where Artegraft is produced and Fox River Grove, Illinois where RestoreFlow allografts are processed, cryopreserved, stored and distributed.

We eventually integrate manufacturing of most acquired lines into our Burlington operations. However, our EndoRE, CardioCel and VascuCel products are currently manufactured by third parties. We renovated our biologic cleanroom in Burlington in 2017, and in 2018 moved our ProCol biologic grafts into this space. In 2019 we expanded our biologic clean room, and in 2020 transferred the manufacturing of Omniflow II into it. In 2018, we initiated a project to transfer the manufacturing of the Syntel embolectomy business we acquired from Applied Medical, which we completed in 2020. In 2019 we leased a fifth Burlington building, which will allow continued expansion of our manufacturing footprint. We are currently constructing another biologic clean room where we expect to manufacture CardioCel and VascuCel.

We manufacture certain proprietary components, assemble most of our devices ourselves, and inspect, test, and package all of our finished products. By designing and manufacturing many of our products from raw materials, and assembling and testing as many of our subassemblies and products as practical, we believe we can maintain better quality control, ensure compliance with applicable regulatory standards and internal specifications, limit outside access to our proprietary technology, ensure adequate product supply for our customers, and make design modifications in a timely manner. We have custom-designed proprietary manufacturing and processing equipment and have developed proprietary enhancements for existing production machinery. Our products are built to stock.

We process and cryopreserve human tissue provided to us by qualified U.S. tissue procurement organizations. Donated human tissue is procured from deceased donors by these organizations. We have strict specifications relating to the physical condition and characteristics of the tissue and the donor, the medical history of the donor and certain test results of the donated tissue. We also use various supplies in connection with the processing and cryopreservation of human tissue, including certain proprietary solutions and antibiotics.

Our management information systems provide us with the ability to evaluate our performance, collect business intelligence, and make better strategic decisions. These systems include customer relationship management, order entry, invoicing, on-line inventory management, lot traceability, purchasing, shop floor control, shipping and distribution analysis, as well as various accounting-oriented functions. These systems enable us to track our products from order inception through manufacturing and then through delivery to our customers.

We purchase certain components from, and have certain product lines manufactured by, third parties. Most of our components are readily available from several supply sources, but we do rely on single- and limited-source suppliers for several of our key product components and our third-party-manufactured products, most notably the purchase of CardioCel and VascuCel devices from Anteris in Malaga, Australia. While we do have a contractual arrangement with Anteris, we do not have contractual arrangements with many of our suppliers and manufacturers, and we order our supplies and products on an as-needed basis. There are relatively few, or in some cases no, alternative, validated sources for these supplies, products and components. At any time, our suppliers could discontinue or become incapable of the manufacture or supply of these materials on acceptable terms or otherwise. We do not ordinarily carry a significant inventory of these supplies, products and components. Identifying and qualifying additional or replacement suppliers, if required, may not be accomplished quickly or at all and could involve significant additional costs. To date, we have not experienced any significant supply disruptions from existing sources of supplies, products and components, but there is no guarantee that we will not experience such disruptions in the future.

Our Burlington and Saint-Etienne manufacturing facilities have been certified to ISO 13485 quality management system standards, which enables us to satisfy certain regulatory requirements of the EU, Canada, and other foreign jurisdictions. Our Fox River Grove, Illinois facility has been accredited by the American Association of Tissue Banks for the processing, storage and distribution of cardiac and vascular tissue for transplantation and licensed by certain state agencies. Our manufacturing and processing facilities are subject to periodic inspections by various regulatory authorities and Notified Bodies (described below) to ensure compliance with domestic and international regulatory requirements. See “Government Regulation” for further information.

Competition

The segments in which our product lines compete are characterized by rapid change resulting from technological advances and scientific discoveries. No one company competes against all of our product lines; rather, we compete with a range of companies. Notable larger competitors include Baxter International, Inc., Boston Scientific Corporation, Cardiovascular Systems, Inc., Medtronic, Becton, Dickinson and Company, CryoLife, Edwards Lifesciences Corporation, Getinge, LifeNet Health, Terumo Medical Corporation, Silk Road Medical and W. L. Gore & Associates.

The success of our products relies on effective service support as well as superior product technology, quality, product and service availability, reliability, ease of use, cost-effectiveness, physician familiarity, and brand recognition. While we also compete on the basis of price, sometimes our more technologically advanced products are sold at higher prices. We believe our continued success may depend on our ability to broaden and optimize our direct sales channel, acquire or develop complementary vascular devices, obtain regulatory and reimbursement approvals, maintain sufficient inventory, and retain skilled personnel. We also compete on the basis of procedure type. The treatment of peripheral vascular disease has experienced a shift from open vascular surgery towards minimally invasive endovascular procedures, and most of our products are used primarily in open vascular surgery. Our ability to compete effectively relies on keeping pace with product offerings in the vascular device market, as well as in the minimally invasive endovascular market.

Many of our competitors have substantially greater financial, technological, research and development, regulatory, marketing, sales, and personnel resources than we do. Certain of these competitors are able to manufacture at lower costs and may therefore offer comparable products at lower prices, especially commodity products such as polyester and ePTFE vascular grafts. Certain of these competitors may also have greater experience in developing and improving products, obtaining regulatory approvals, and manufacturing and marketing such products. In the case of allografts, certain competitors may have an advantage in sourcing tissue due to higher volume purchases and longer term relationships with tissue procurement organizations. Additionally, some of our competitors may obtain patent protection or regulatory approval or clearance, or achieve product commercialization before us, any of which could adversely affect our business.

Intellectual Property

We believe that our success is dependent, to a certain extent, on the development and maintenance of proprietary aspects of our technologies. We rely on a combination of trade secret laws, patents, trademarks and confidentiality and invention assignment agreements to protect our intellectual property rights.

We maintain a limited portfolio of patents in the United States relating to various aspects of our products. The majority of our issued U.S. patents are set to expire at various times from 2021 to 2031.

We manufacture, market, and sell our Periscope Dissector product pursuant to a license agreement with a third-party. This arrangement requires us to pay a royalty, determined as a percentage of our net sales of this product. If we fail to make the required payments or otherwise fail to observe the terms of this license agreement, we may lose our ability to sell these products. We previously had similar license arrangements for our LifeSpan and TRIVEX product lines but these arrangements ended in 2019. We believe that our brands have been an important factor in our success. We rely on common law and registered trademarks to protect our brands. Some of our registered trademarks are LeMaitre, XenoSure, Pruitt, VascuTape, Glow ‘N Tell and RestoreFlow, each of which is registered in the U.S, the EU, or both, and in certain cases in other foreign countries.

We rely on trade secret protection for certain unpatented aspects of other proprietary technology. Most of our products are not protected by patents. Patent protection is not available when we acquire a commercialized product that is not patented, such as the embolectomy catheters we acquired from Applied Medical in September 2018 and the product lines we acquired from Becton, Dickinson in October 2018. In the past, other companies have independently developed or otherwise acquired comparable or substantially equivalent proprietary information and techniques, and there can be no assurance that others will not do so in the future or otherwise gain access to our proprietary technology or disclose such technology, or that we can meaningfully protect our trade secrets. We have a policy of requiring employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship. Our confidentiality agreements also require our employees to assign to us all rights to any inventions made or conceived during their employment with us. We also generally require our consultants to assign to us any inventions made during the course of their engagement. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for us in the event of unauthorized use, transfer, or disclosure of confidential information or inventions.

The laws of foreign countries generally do not protect our proprietary rights to the same extent as do U.S. laws and we may experience more difficulty enforcing our proprietary rights in certain foreign jurisdictions.

See “Item 1A. Risk Factors” for a description of certain risks associated with our intellectual property.

Government Regulation

Medical devices and human tissues are subject to regulation by the U.S. FDA, and, in some instances, other federal and state authorities and foreign governments.

United States Regulation of Medical Devices

Most of our products are medical devices subject to extensive regulation by the FDA under 21 U.S. Code Chapter 9, the Federal Food, Drug, and Cosmetic Act (the FDCA). FDA regulations govern, among other things, product development, testing, manufacturing, packaging, labeling, storage, clearance or approval, advertising and promotion, sales and distribution, and import and export.

Premarket Pathways

Most medical devices must receive either 510(k) clearance or Premarket Application approval (PMA approval) from the FDA prior to commercial distribution. Devices deemed to pose relatively less risk are placed in either class I or II, which requires the manufacturer to submit a premarket notification requesting permission for commercial distribution; this is known as 510(k) clearance. Some low-risk devices are exempted from this requirement. Class II devices may be subject to special controls, such as performance standards and FDA guidelines that are not applied to class I devices. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices deemed not substantially equivalent to a previously 510(k)-cleared device or to a pre-amendment class III device (i.e., one in commercial distribution before May 28, 1976) for which PMA applications have not been called, are placed in class III, which generally requires PMA approval. In all cases, a user fee is required for 510(k) submissions and PMA applications, which in the case of PMA applications can be very costly.

510(k) Clearance. To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating that the proposed device is substantially equivalent in intended use and performance to a “predicate device” (i.e., a previously 510(k)-cleared class I or class II device or a pre-amendment class III device for which the FDA has not yet called for PMA applications). The FDA’s 510(k) clearance pathway usually takes from three to 12 months, but it can take longer. In reviewing a premarket notification, the FDA may request additional information, including clinical data. Nearly all of our devices currently sold in the U.S. are marketed pursuant to 510(k) clearance, with the exception of our ProCol biologic vascular graft.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change as specified by FDA guidelines, requires a new 510(k) clearance. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. Also, the manufacturer may be subject to significant regulatory fines or penalties.

PMA Approval. The PMA approval pathway requires proof of the safety and effectiveness of the proposed device to the FDA’s satisfaction, making this pathway much more costly, lengthy, and uncertain. A PMA application must provide extensive preclinical and clinical trial data, as well as detailed information about the device and its components regarding, among other things, device design, manufacturing, and labeling. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with the Quality System Regulation (QSR) which imposes elaborate testing, control, documentation, and other quality assurance procedures on the manufacturing process.

If the FDA approves a PMA, the approved indications or claims may be more limited than those originally sought. The PMA can include post-approval conditions that the FDA believes to be necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale, and distribution. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement is required if the device or its labeling or manufacturing process are modified. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.

Clinical Trials. A clinical trial is typically required to support a PMA application and is sometimes required to support 510(k) clearance. In some cases, one or more smaller feasibility Investigational Device Exemption (IDE) studies may precede a pivotal IDE clinical trial intended to comprehensively demonstrate the safety and effectiveness of the investigational device. All clinical studies of investigational devices must be conducted in compliance with the FDA’s extensive requirements. If an investigational device could pose a significant risk to patients (as defined in the regulations), the FDA, prior to initiation of clinical use, must approve an IDE application showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. A non-significant risk device does not require submission to the FDA of an IDE application. Both significant risk and non-significant risk investigational devices require approval from institutional review boards (IRBs) at the study centers where the device will be used. The FDA and the IRB at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. During a study, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, record keeping, and prohibitions on the promotion of investigational devices. The investigators must obtain patient informed consent, follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with all reporting and record-keeping requirements. Required records and reports are subject to inspection by the FDA. Prior to granting PMA approval, the FDA typically inspects the records relating to the conduct of the study and the clinical data supporting the PMA application for compliance with IDE requirements.

Although the QSR does not fully apply to investigational devices, the requirement for controls on design and development does apply. The sponsor also must manufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions of IDE approval that FDA may impose with respect to manufacturing.

Historically, our products have been introduced into the U.S. market using 510(k) clearance, and we have not used the PMA process for any products that we currently market or sell in the U.S., other than our ProCol vascular graft, which had PMA approval at the time we acquired the device. If we were to seek U.S. approval for our Omniflow II biosynthetic vascular graft, for example, we would be required to follow the PMA process.

Postmarket Regulation

After a device is placed on the market, regardless of the classification or premarket pathway, significant regulatory requirements apply. These include:

We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. The most recent FDA inspection of our Burlington facility was in August 2020, the results of which were satisfactory. Non-compliance with applicable FDA requirements can result in, among other things, public warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the FDA to grant marketing approvals, withdrawal of marketing approvals, a recommendation by the FDA to disallow us to enter into government contracts, and criminal prosecutions. The FDA also has the authority to request repair, replacement, or refund of the cost of any device manufactured or distributed by us. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result.

International sales of medical devices manufactured in the U.S. that are not approved or cleared by the FDA for use in the U.S., or are banned or deviate from lawful performance standards, are subject to FDA export requirements. Before exporting such products to a foreign country, we must first comply with the FDA’s regulatory procedures for exporting unapproved devices.

United States Regulation of Human Tissue

FDA

Our allografts are subject to extensive regulation by the FDA under Title 21 of the Code of Federal Regulations, Part 1271 (Human Cells, Tissues, and Cellular and Tissue-Based Products). These regulations were promulgated under Section 361 of the Public Health Service Act, which authorized the FDA to issue regulations to prevent the spread of communicable disease. Under these regulations, the FDA requires registration of establishments that process human cells, tissues, and cellular and tissue-based products. These FDA regulations also establish donor-eligibility criteria, current good tissue practice and other procedures to prevent the introduction, transmission, and spread of communicable diseases by such products, including through donor screening and testing. Our Fox River Grove, Illinois facility and our Burlington, Massachusetts facility are both registered with the FDA’s Center for Biologics Evaluation and Research. The regulations also provide for the inspection of tissue establishments by the FDA. The FDA most recently inspected our Fox River Grove, Illinois facility in February 2018 and the results of that inspection were satisfactory. In the event of non-compliance with these regulations, the FDA may issue a warning letter, order the recall and/or destruction of tissues and/or order the suspension or cessation of processing and preservation of new tissues.

AATB

We voluntarily comply with the standards of the tissue bank industry’s accreditation organization, the American Association of Tissue Banks (the AATB). The AATB has established standards for tissue banking and administers an accreditation program. Compliance with the AATB’s standards are a predicate to accreditation, which must be renewed every three years. Our Fox River Grove, Illinois facility has been accredited by the AATB for the processing, storage and distribution of cardiac and vascular tissue for transplantation through May 13, 2024. Our Burlington, Massachusetts facility is also accredited for the storage and distribution of tissue. The AATB is entitled to inspect accredited members at any time. The AATB most recently inspected our Fox River Grove, Illinois facility in October 2020, and the results were satisfactory.

NOTA

Under the National Organ Transplant Act, it is unlawful for any person or entity to knowingly acquire, receive, or otherwise transfer any human organ for valuable consideration for use in human transplantation if the transfer affects interstate commerce. However, “valuable consideration” excludes reasonable payments associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of a human organ. We believe the compensation we receive with respect to our allografts falls within this statutory exception.

State Regulation

Certain states regulate the processing, storage and distribution of human tissue. We are licensed or registered, as applicable, with California, Delaware, Florida, Illinois, Maryland, New York and Oregon. The regulatory agencies of these states may inspect our Fox River Grove, Illinois facility from time to time to monitor compliance with applicable state regulations.

Other U.S. Regulations

We, and our products and services, are also subject to a variety of state and local laws in those jurisdictions where our products and services are or will be marketed or distributed, and federal, state, and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We are subject to various federal and state laws governing our relationships with the physicians and others who purchase or make referrals for our products. For instance, federal law prohibits payments of any form that are intended to induce a referral for any item payable under Medicare, Medicaid, or any other federal healthcare program. Many states have similar laws. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations now or in the future, or that such laws or regulations will not have an adverse effect on our business.

We are subject to federal, state, and local laws, rules, regulations, and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling, and disposal of certain hazardous and potentially hazardous substances used in connection with our operations. Although we believe that we have complied with these laws and regulations in all material respects, and have never been required to correct any noncompliance, there can be no assurance that we will not be required to incur significant costs to comply with environmental regulations in the future.

International Regulation of Medical Devices

Sales of medical devices are subject to regulatory requirements in many countries. The regulatory review process may vary greatly from country to country. The EU has adopted numerous directives and standards relating to medical devices regulating their design, manufacture, clinical trials, labeling, and adverse event reporting, including the Medical Devices Directive (93/42/EEC) (the MDD), which is applicable to our products. Devices that comply with the requirements of the MDD are entitled to bear a CE mark, indicating that the device conforms with the essential requirements of the applicable directive and can be commercially distributed in countries that are members of the EU, as well as the United Kingdom, Iceland, Lichtenstein, Norway, Turkey and Switzerland. Each member state of the EU has implemented the directives into its respective national law and has each established a “Competent Authority” to apply the directive in its territory.

The MDD classification system places devices into Class I, IIa, IIb, or III, depending on the risks and characteristics of the medical device. The MDD also defines the essential requirements that devices must meet before being placed on the market, establishes assessment procedures for approving a device, and creates mechanisms for Competent Authorities to manage implementation or to intervene when public health requires. Essential requirements include manufacturing, design, performance, labeling, and safety requirements, and may include providing certain clinical data. These requirements vary based on the device classification and other related factors.

A manufacturer of low-risk devices typically may demonstrate conformity based on a self-declaration. The European Standardization Committees have adopted numerous harmonized standards for specific types of medical devices. Compliance with relevant standards establishes a presumption of conformity with the essential requirements. Manufacturers of higher-risk devices generally must use a “Notified Body”—an appointed independent third party—to assess conformity. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s devices. An assessment by a Notified Body in one country within the EU is generally required in order for a manufacturer to commercially distribute the product throughout the EU. Most of our devices are considered higher-risk devices that require Notified Body assessment.

EU medical device laws also address advertising and promotion of medical devices, clinical investigations, and requirements for handling adverse events. Post-market surveillance of medical devices is generally conducted on a country-by-country basis; however, the MDD sets forth certain specific requirements for reporting adverse events. The Medical Device Vigilance system is the mechanism by which adverse event reporting is managed and monitored in the EU.

Our products are regulated in the EU under the European Medical Devices Directive (93/42/EC as amended by 2007/47/EC) (MDD). In order to market our medical devices in the EU, we are required to obtain CE mark certifications, which denote conformity, and manufacturers of higher-risk devices generally must use a “Notified Body”—an appointed independent third party to assess conformity. We have received CE mark certifications to sell nearly all of our products, though currently there is a lapse in our CE mark certifications for some of our products due to one of our Notified Bodies abandoning all MDD services. On June 13, 2019, the Notified Body that issued the majority of our CE marks, Lloyd's Register Quality Assurance or LRQA, notified its clients that it would cease providing all services relating to the MDD to all clients, including us, as of September 12, 2019, subsequently extended to September 30, 2019. As a result, all LRQA-issued CE marks, unless earlier transferred to a new Notified Body, would lapse as of that date. Prior to receipt of such notice, we had begun transitioning most of our CE mark certifications to a new Notified Body, TUV SUD. However, TUV SUD was unable to complete all work necessary to reissue our CE mark certifications by September 30, 2019. Under the MDD, only product placed on the EU market prior to September 30, 2019 was eligible for sale. As a result, prior to September 30, 2019, we manufactured and shipped inventory in amounts that for most products we believed would be sufficient to supply our EU customers while we awaited reissuance of the CE marks by TUV SUD. TUV SUD issued CE mark certifications in February 2020 for many of our products, representing 37% of our 2020 EMEA sales, and in February 2021, we received a CE mark for our LifeSpan ePTFE product from SGS, another one of our Notified Bodies. For some products for which CE marks have not yet been reissued, we have continued selling product from our inventory reserves previously placed on the market in the EU. We had believed those inventory reserves would be adequate to meet demand, but in some cases they have not been sufficient due to the delay in the expected receipt of our CE mark certifications. We currently do not have valid CE marks for the following products:

We have been engaged in a process with TUV SUD to obtain CE marks for XenoSure and AlboGraft since February 2019. We have answered a substantial number of questions related to those products, and we believe their review with respect to those products will conclude by May 2021. TUV SUD, in Q4 2020 as part of the XenoSure/AlboGraft CE marking process, also audited our Burlington facility, and that audit remains open. Approximately 60% of the findings in that audit have been accepted by TUV SUD, and the Company is currently engaged in a dialog with TUV SUD to try to resolve the outstanding findings. However, issuance of CE marks for XenoSure and AlboGraft depends in part on a successful audit closure as well as approvals of the product-specific reviews. Together, XenoSure and AlboGraft accounted for 27% of EMEA sales in 2020. Additionally, retention of our other CE marks representing 37% of our 2020 EMEA sales previously issued by TUV SUD could also depend on a successful audit closure. There can be no assurance that TUV SUD will issue CE marks for these products.

We currently expect that CE marks will be issued by SGS for the products AnastoClips, Flexcel shunts and Pruitt shunts by May 2021. However, there can be no assurance that SGS will issue CE marks for these products. We believe it is unlikely that SGS will issue a CE mark for AlboSure.

As a result of the CE mark lapses, we have begun experiencing backorders related to some of these products and our revenues are being impacted. The backorders for these products approximated $0.2 million as of December 31, 2020. To mitigate, in part, the impact of these backorders, we have sought exemptions, or derogations, in certain European countries from the requirement to apply CE marking to XenoSure and AlboGraft on a temporary basis while we continue to seek reissuance of CE marks by TUV SUD. We have received temporary authorization to sell XenoSure without a CE mark in 12 countries in Europe and AlboGraft in 13 countries in Europe, in each case subject to certain conditions and for limited time periods, expiring as soon as April 22, 2021. If we are unsuccessful in obtaining or maintaining extensions for these temporary authorizations or the reissuance of our CE marks for XenoSure or AlboGraft is materially delayed or withheld, our revenues could be further impacted and our business could be harmed.

Additionally, the CE mark for our Omniflow II graft is currently being transferred to our Burlington headquarters due to our discontinuation of operations in Melbourne, Australia in June 2020.  If the transfer is not successful, the Omniflow II will be subject to an MDR application process (see below).  While the MDD CE mark would still remain valid for Australian-built product, any new Burlington-produced units would not be allowed onto the European market until issuance of the MDR CE mark. We expect that the inventory of the majority of such products held by our European subsidiary will only be sufficient to supply our customers until Q2 2022, based on historical sales, and as a result, we may go into backorder for Omniflow II until the MDR CE mark is issued.  If the CE mark certification for Omniflow II is materially delayed or withheld, our European revenues could be impacted and our business could be harmed.

In April 2017, the EU adopted new regulations for medical devices (MDR), which replace the MDD and will apply beginning May 26, 2021. Our products will be subject to the MDR, which requires all of our products, regardless of classification, to obtain a new CE mark in accordance with the new, more stringent standards under the MDR. As a condition to CE mark approval, clinical evidence from clinical investigations will be required for Class III and implantable devices. As our Notified Bodies start to transition from MDD to MDR, they have begun to impose more rigorous requirements on us in order to obtain approval to renew the CE marks on certain of our products. For example, we have been informed by BSI, our Notified Body for the product lines manufactured in our Saint-Etienne, France facility, that they require more clinical data for three of the four product lines for the continuance of the CE mark certifications and the upcoming MDR certifications for such devices. Additionally, if CE marks are not issued for any or all of our products with lapsed marks before May 26, 2021, then we will need to reinitiate the application process in its entirety under the MDR for any such lapsed product, a process that could take up to two years for each product. If we fail to obtain new CE marks on these products or our other products under the MDR in a timely manner, or at all, future sales of our products in the EU could be adversely impacted. We believe it is unlikely BSI will re-issue a CE mark for our biologic glue product.

The United Kingdom left the EU on January 31, 2020, which is commonly referred to as “Brexit”. Pursuant to the formal withdrawal arrangements agreed between the U.K. and the EU, the U.K. was subject to a transition period until December 31, 2020. After December 31, 2020, medical device manufacturers wishing to import their devices into the U.K. were provided a transition period for registration of their devices until the end of 2021. The U.K. will continue to recognize CE marking through June 2023 and thereafter, a separate marking will be required for devices. If our efforts to obtain new regulatory approval in the U.K. is materially delayed or denied, we may be required to incur additional expenses in order to develop, manufacture and commercialize our product candidates in the EU and our future sales may be impacted. We opened our Hereford, England office in 2019 largely in response to Brexit.

In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA or international equivalent could require us to implement a recall of, any of our products and, if someone is harmed by a malfunction or a product defect, we may experience product liability claims for such defects. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital and may harm our reputation and financial results. Future recalls or claims could also result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future.

In some cases, we rely on international distributors or third party agents to obtain premarket approvals, complete product registrations, comply with clinical trial requirements, and complete those steps that are customarily taken in the applicable jurisdictions to comply with governmental and quasi-governmental regulation. In the future, we expect to continue to rely on distributors and agents in this manner where appropriate.

Canada regulates the import and sale of medical devices through Health Canada (HC). HC classifies medical devices into four classifications, with Class I being the lowest risk and Class IV being the highest. Class I and II devices are often cleared for sale after they are CE marked or listed on the company’s ISO certification and filed via fax-back applications. Higher classification risk devices (Class III and IV) require filing dossiers that resemble US 510(k) applications. These applications can range in cost and typically take longer for approval. As a holder of Canadian device licenses, we are subject to inspection by HC at our Canadian office, and we must maintain a valid Medical Device Single Audit Program (MDSAP) certificate.  Our Canadian office was most recently inspected in August 2017, the results of which were satisfactory.  Our Burlington office was audited under the MDSAP in November 2020, and the auditing organization conducting the audit, TUV SUD, notified us of their refusal to issue an MDSAP certificate on January 28, 2021.  Our facility was subsequently reaudited by a different auditing organization, SGS, in February 2021 under the MDSAP, the results of which were satisfactory.  An MDSAP certificate has not yet been issued to us by SGS; however we expect issuance of the MDSAP certificate in March 2021.  If we fail to receive the certificate in a timely manner, or at all, Health Canada may suspend or cancel our device licenses until issuance of the certificate.

In Japan, the Ministry of Health, Labor and Welfare (MHLW) regulates medical devices through the Pharmaceutical Affairs Law, which was reformed effective April 1, 2005. The revisions to Japan’s regulations have resulted in longer lead times for product registration. As a holder of Japanese device licenses, we are also subject to inspection by several Japanese authorities including Japan’s Pharmaceutical and Medical Device Agency (PMDA), Tokyo Metropolitan Government (TMG), and third parties such as Japan’s Electrical Safety & Environmental Technologies Laboratories (JET). Our Japanese office was most recently inspected by JET in April 2020, the results of which were satisfactory.

Australia regulates the import and sale of medical devices through the Therapeutic Goods Administration (TGA). The TGA has built its regulatory framework around requirements similar to those issued in Europe. As such, many medical devices (those with a lower risk profile) may gain relatively fast marketing clearance using their existing EU-issued CE marking. Higher risk devices (those in EU/Aus Class III) must go through a full design review which can be costly and take longer to complete. Issued licenses for medical devices do not require renewal, but do require an annual fee to remain active in the TGA registry.  As a holder of Australian device licenses, we are also subject to inspection by TGA in both Australia and the United States.  Our North Melbourne facility, where we previously manufactured our Omniflow II graft until we transferred production to Burlington, was most recently inspected by TGA in December 2018, and our Burlington facility was inspected in February 2021 under the MDSAP, the results of which were satisfactory. An MDSAP certificate has not yet been issued to us by SGS; however we expect issuance of the MDSAP certificate in March 2021. If we fail to receive the certificate in a timely manner, or at all, we would be subject to regular surveillance audits by all MDSAP jurisdictions, including Australia. Australia requires all foreign manufacturers to have an in country ‘sponsor’ who must have a licensed business inside of Australia. Our licenses are managed on our behalf by our sponsor, Emergo Group.

In China, the National Medical Products Administration (NMPA) regulates and must approve all medical devices to be marketed and sold in China. China has a three-class risk classification system, with Class I being the lowest and Class III being the highest risk. Home country approval, such as 510(k) or PMA clearance, is required as a prerequisite to any application. Additionally, the NMPA often tests devices at its own testing laboratory to confirm each device’s specifications. The approval process is typically lengthy and usually requires clinical trials. NMPA licenses are valid for five years from date of issuance and require renewal prior to expiration. As a holder of Chinese device licenses, we are subject to inspection by NMPA in both China and the United States. Our Shanghai offices were most recently inspected by NMPA in August 2018, the results of which were satisfactory. The NMPA requires all companies located outside of China to appoint a legal entity who maintains a registered business inside of China as the license holder. After the formation of our Chinese subsidiary in 2015, we transferred our licenses from our third-party license holders to our subsidiary.

There can be no assurance that new laws or regulations or new interpretations of laws and regulations regarding the release or sale of medical devices will not delay or prevent sale of our current or future products.

Third-Party Reimbursement

United States

Healthcare providers that purchase medical devices generally rely on third-party payors, including the Medicare and Medicaid programs and private payors (such as indemnity insurers, employer group health insurance programs, and managed care plans) to reimburse all or part of the cost of those products. As a result, demand for our products is and will continue to be dependent in part on the coverage and reimbursement policies of these payors. The manner in which reimbursement is sought and obtained varies based upon the type of payor involved and the setting in which the product is furnished and utilized. For example, Medicare reimbursement policies favor outpatient treatment. Furthermore, payments from Medicare, Medicaid, and other third-party payors are subject to legislative and regulatory changes and are susceptible to budgetary pressures.

In the U.S., third-party payors generally pay healthcare providers directly for the procedures they perform and in certain instances for the products they use. Our sales volumes depend on the extent to which third-party payors cover our products and the procedures in which they are used. In general, a third-party payor only covers a medical product or procedure when the plan administrator is satisfied that the product or procedure is medically necessary because it improves health outcomes, including quality of life or functional ability, in a safe and cost-effective manner. Even if a device has received clearance or approval for marketing by the FDA, there is no assurance that third-party payors will cover the cost of the device and related procedures in which the device is used.

In many instances, third-party payors cover the procedures performed using our products using price fee schedules that do not vary reimbursement to reflect the cost of the products and equipment used in performing those procedures. In other instances, payment or reimbursement is separately available for the products and equipment used, in addition to payment or reimbursement for the procedure itself. Even if coverage is available, third-party payors may place restrictions on the circumstances in which they provide coverage or may offer reimbursement that is not sufficient to cover the cost of our products. Many of the products that compete with ours are less expensive. Therefore, although coverage may be available for our products and the related procedures, the levels of approved coverage may not be sufficient to justify using our products instead of those of competitors.

In addition, many third-party payors are moving to managed care systems in which providers contract to provide comprehensive healthcare for a fixed cost per person rather than the traditional fee for service model. Managed care providers often attempt to control the cost of healthcare by authorizing fewer elective surgical procedures. Under current prospective payment systems, such as the diagnosis-related group system and the hospital out-patient prospective payment system, both of which are used by Medicare and in many managed care systems used by private third party payors, the reimbursement for our products will be incorporated into the overall reimbursement of a procedure, and there will be no separate reimbursement for our products. As a result, we cannot be certain that hospital administrators and physicians will purchase our products.

If hospitals and physicians cannot obtain adequate reimbursement for our products or the procedures in which they are used, our business, financial condition, and results of operations could suffer a material adverse impact.

International

Our success in international markets will depend largely upon the availability of reimbursement from the third-party payors through which healthcare providers are paid in those markets. Reimbursement and healthcare payment systems in non-U.S. markets vary significantly by country. The main types of healthcare payment systems are government sponsored healthcare and private insurance. As in the U.S., reimbursement is subject to legislative and regulatory changes and is susceptible to budgetary pressures. Reimbursement approval must be obtained individually in each country in which our products are marketed. Outside the United States, we may pursue reimbursement approval in those countries in which we sell directly to the hospital. In other markets, we generally rely on the distributors who sell our products to obtain reimbursement approval. There can be no assurance that reimbursement approval will be received.

U.S. Fraud and Abuse Laws

We may directly or indirectly be subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the U.S. federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment, and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General, or OIG, has issued a series of regulations, known as “safe harbors.” Safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy safe harbors may result in increased scrutiny by government enforcement authorities, such as the OIG.

U.S. Patient Protection and Affordable Care Act

In March 2010, significant reforms to the U.S. healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the PPACA). Under the PPACA we are subject to the Physician Payments Sunshine Act, which was enacted as part of the PPACA and requires detailed public disclosure of certain payments and “transfers of value” from us to healthcare professionals, such as the payment of royalties, compensation for services provided such as training, consulting, and reimbursement for travel and meal expenses. Certain states also require us to disclose similar information or even prohibit some forms of these payments.

Employees and Human Capital Management

We had 403 employees, including 386 full-time employees, at December 31, 2020. Our full-time employees are comprised functionally as follows: 216 manufacturing and operations, 114 sales and marketing, 38 general and administrative and 18 research and development.

We strive to create a demanding and rewarding work environment by emphasizing teamwork and decentralized decision-making. We are committed to providing equal employment and advancement opportunities to all individuals, and all employment decisions are based on merit, qualifications, and abilities. LeMaitre Vascular does not discriminate in employment opportunities or practices on the basis of race, color, religion, sex, national origin, age, disability, sexual orientation, gender identity, breastfeeding or related medical conditions, religious dress, military or veteran status or any other characteristic protected by law. This policy governs all aspects of employment, including selection, job assignment, compensation, discipline, termination, and access to benefits and training.

We believe in providing competitive pay and benefits to all our employees. We utilize third party benchmark compensation data to determine market wages. Our compensation is designed to attract, retain, and motivate employees to achieve results while balancing short- and long-term company performance. We work with external benefits consultants to evaluate the quality, competitiveness, and cost of our benefit offerings to our employees.  In 2020, for example, we improved the company match under our U.S. 401(K) plan.

We review the number of new hires every month to understand our ability to attract talent. We also review our voluntary turnover to understand our ability to retain talent. In 2020, we hired 38 new employees and our world-wide voluntary resignation rate was 8.4%.

COVID safety was a significant concern and focus for us in 2020. We have taken extensive measures to keep our employees safe. We are following all COVID safety best practices including but not limited to requiring masks be worn at all times, socially distanced workstations, hand sanitizer and soap available throughout our buildings, closed conference, break and lunch rooms, and a voluntary work from home policy. We have also invested in Kinexon proximity sensors that help our employees stay socially distanced at all times and allow us to contact trace effectively in the case of a positive diagnosis. Our proximity sensors have been assigned to all employees who work in all our offices globally.

Customers

Our sales are not dependent on any single customer or distributor, and we continue to expand our distribution channel worldwide through direct sales representatives and independent distributors. No single customer accounted for more than 2% of our net sales in 2020.

Corporate Information

On October 19, 2006, we executed our initial public offering, and our common stock trades on The Nasdaq Global Market under the symbol “LMAT.” In January 2021 we changed our brand name to “LeMaitre”. Our principal executive offices are located at 63 Second Avenue, Burlington, Massachusetts 01803, and our telephone number is (781) 221-2266. Our website address is www.lemaitre.com.

Where You Can Find More Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations portion of our website (www.lemaitre.com) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, (SEC). The address of the SEC’s website is www.sec.gov. Information on our investor relations page and on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically incorporated herein or therein by reference, and you should not consider any information contained in, or that can be accessed through, our website as part of this Annual Report on Form 10-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law. In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Charters of our Audit, Compensation and Nominating and Corporate Governance Committees are available on our website and are available in print to any stockholder who requests such information.

Item 1A.         Risk Factors

Investing in our securities involves a high degree of risk. You should carefully consider the following information about the risks described below, together with the other information contained in this Report and in our other public filings in evaluating our business. The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Report or presented elsewhere by management from time to time. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are not material may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

Risks Related to Our Business

If we do not comply with international regulatory requirements to market our products outside the U.S., our business will be harmed.    

Sales of medical devices outside the U.S. are subject to international regulatory requirements that vary from country to country. These requirements and the amount of time required for approval may differ from our experiences with the U.S. FDA. In some cases, we rely on our international distributors to obtain premarket approvals, complete product registrations, comply with clinical trial requirements, and complete those steps that are customarily taken in the applicable jurisdictions to comply with governmental and quasi-governmental regulation. In the future, we expect to continue to rely on distributors in this manner in those countries where we continue to market and sell our products through them. Failure to satisfy these foreign regulations would impact our ability to sell our products in these countries and could cause our business to suffer. There can be no assurance that we will be able to obtain or maintain the required regulatory approvals in these countries.

Our products are regulated in the European Union (EU) and the U.K. under the European Medical Devices Directive (93/42/EC as amended by 2007/47/EC) (MDD). In order to market our medical devices in the EU, we are required to obtain CE marks, which denote conformity to the essential requirements of the MDD, and manufacturers of higher-risk devices generally must use a “Notified Body”—an appointed independent third party to assess conformity. We have received CE marks to sell nearly all of our products, though currently there is a lapse in our CE marks for some of our products due to one of our Notified Bodies abandoning all services related to the MDD. On June 13, 2019, the Notified Body that issued the majority of our CE mark certifications, Lloyd's Register Quality Assurance or LRQA, notified its clients that it would cease providing all Notified Body services relating to the MDD to all clients, including us, as of September 12, 2019, which date was subsequently extended to September 30, 2019. As a result, all LRQA-issued CE marks, unless earlier transferred to a new Notified Body, would lapse as of such date. Prior to receipt of such notice, we had begun transitioning our CE marks to a new Notified Body, TUV SUD. However, TUV SUD was unable to complete all work necessary to reissue our CE marks by September 30, 2019. Under the MDD, only product placed on the European market prior to September 30, 2019 was eligible for sale to EU countries. As a result, prior to September 30, 2019, we manufactured and shipped inventory in amounts that for most products we believed would be sufficient to supply our EU customers while we awaited reissuance of the CE marks by TUV SUD. In February 2020, TUV SUD issued CE marks for many of our products, representing 37% of our 2020 EMEA sales, and we most recently received a CE mark for our LifeSpan ePTFE product in February 2021 from another one of our Notified Bodies, SGS. For some products for which CE marks have not yet been reissued, we have continued selling product from our inventory reserves already placed on the market in the EU prior to September 30, 2019. We previously believed those inventory reserves would be adequate to meet demand, but in some cases they have not been sufficient due to the delay in the expected receipt of our CE marks. We currently do not have valid CE marks for the following products:

We have been engaged in a process with TUV SUD to obtain CE marks for XenoSure and AlboGraft since February 2019. We have answered a substantial number of questions related to those products, and we believe their review with respect to those products will conclude by May 2021. TUV SUD, in Q4 2020 as part of the XenoSure/AlboGraft CE marking process, also audited our Burlington facility, and that audit remains open. Approximately two-thirds of the findings in that audit have been accepted by TUV SUD, and the Company is currently engaged in a dialog with TUV SUD to try to resolve the outstanding findings. Issuance of CE marks for XenoSure and AlboGraft depends on a successful audit closure as well as product-specific approvals. Together, XenoSure and AlboGraft accounted for 27% of EMEA sales in 2020. Additionally, retention of our other CE marks previously issued by TUV SUD could also depend on a successful audit closure, representing 37% of our 2020 EMEA sales. There can be no assurance that TUV SUD will issue CE marks for these products on a timely basis or at all.

We expect that CE marks will be issued by SGS for the products ascribed to them in the chart above by May 2021, except with respect to AlboSure, which may not achieve CE marking by this deadline. There can be no assurance that SGS will issue CE marks for these products on a timely basis or at all.

As a result of the CE mark lapses, we have begun experiencing backorders related to some of these products and our revenues are being impacted. The backorders for these products approximated $0.2 million as of December 31, 2020. To mitigate, in part, the impact of these backorders, we have sought temporary exemptions, or derogations, in certain European countries from the requirement to apply CE marks to XenoSure and AlboGraft while we continue to seek reissuance of CE marks. We have received temporary authorization to sell XenoSure without a CE mark in 13 countries in Europe, and AlboGraft in 14 countries, in each case subject to certain conditions and for limited periods expiring as soon as April 22, 2021. Where customers are not satisfied with this authorization status, they have in some cases decided to stop using our product and/or use a competing product and may continue to do so in the future, which could further impact our revenues. If we are unsuccessful in obtaining extensions of these derogations, or the reissuance of our CE marks for any of these products is materially delayed or withheld, our revenues could be further impacted and our business could be harmed.

Additionally, the CE mark for our Omniflow II graft is currently being transferred to our Burlington headquarters due to our discontinuation of operations in North Melbourne, Australia in June 2020.  If the transfer is not successful, the Omniflow II will be subject to an MDR application process (see below).  While the MDD CE mark would still remain valid for Australian-built product, Burlington-produced units would not be allowed onto the European market until issuance of the MDR CE mark. We expect that the inventory of the majority of such products held by our European subsidiary will only be sufficient to supply customers until Q2 2022, based on historical sales, and as a result, we may go into backorder for Omniflow II until the MDR CE mark is issued.  If the CE mark certification for Omniflow II is materially delayed or withheld, our European revenues could be impacted and our business could be harmed.

In April 2017, the EU adopted new regulations for medical devices (MDR), which replace the MDD and will apply beginning May 26, 2021. Our products will be subject to the MDR, which requires all of our products, regardless of classification, to obtain a new CE mark in accordance with the new, more stringent standards under the MDR. As a condition to CE mark approval, clinical evidence will be required for Class III and implantable devices. As our Notified Bodies start to transition from MDD to MDR, they have begun to impose more rigorous requirements on us in order to obtain approval to renew the CE marks on certain of our products. For example, we have been informed by BSI, our Notified Body for the product lines manufactured in our Saint-Etienne, France facility, that three of the four product lines require more clinical data for the continuance of current CE mark certifications as well as the upcoming MDR certifications. If we fail to obtain sufficient clinical data for these products, our current CE marks may be suspended or not issued in a timely manner or at all. Additionally, if CE marks are not issued for any or all of our products with lapsed marks before May 26, 2021, then we will need to reinitiate the application process in its entirety under the MDR for any such lapsed product, a process that could take up to two years for each product. Our preparation of filings under the MDR has been delayed due to our work on the other CE mark matters described above. If we fail to obtain new CE marks on these products or our other products under the MDR in a timely manner, or at all, future sales of our products in the EU could be adversely impacted.

There can be no assurance that we will be able to obtain or maintain CE marks for our existing products, especially those for which TUV SUD functions as our Notified Body, and obtaining CE marks may involve a significant amount of time and expense, stringent clinical and preclinical testing, or modification of our products and could result in limitations being placed on the use of our products in order to obtain approval. If we fail to obtain new CE marks on our products in a timely manner, or at all, future sales of our products could be adversely impacted.

Failure to receive or maintain approval would prohibit us from selling these products in the EU or the U.K., and would require significant delays in obtaining individual country approvals. If we do not receive or maintain these approvals, our business could be harmed. Maintaining a CE mark is contingent upon our continued compliance with applicable European medical device requirements, including limitations on advertising and promotion of medical devices and requirements governing the handling of adverse events. As highlighted above, there can be no assurance that we will be successful in obtaining, retaining or maintaining the CE mark for any of our current products. In particular, adverse event reporting requirements in the EU and the U.K. mandate that we report incidents which led or could have led to death or serious deterioration in health. Under certain circumstances, we could be required to or could voluntarily initiate a recall or removal of our product from the market in order to address product deficiencies or malfunctions. Any recall of our products may harm our reputation with customers and divert managerial and financial resources.

Our facilities are subject to periodic inspection by numerous regulatory authorities, including governmental agencies and Notified Bodies, and we must demonstrate compliance with the applicable medical devices regulations. Our most recent inspections were as follows:

*Certificate issuance pending

As noted above, TUV SUD audited the Company as part of the Medical Device Single Audit Program (MDSAP) in November 2020. In January, TUV SUD determined not to issue an MDSAP certificate. LeMaitre promptly engaged SGS to undertake a new MDSAP audit. The in-person part of the new audit ended on February 25, 2021, with a recommendation for approval, and we expect successful issuance of an MDSAP certificate in March 2021. If we fail to receive the certificate in a timely manner, or at all, Health Canada may act to suspend or cancel our device licenses until issuance of the certificate.  Additionally, the other jurisdictions participating in the MDSAP may determine to independently audit us (regardless of receipt of a new certificate). The Company currently does not expect any sales impact in any geography from its MDSAP inactive status.

Any failure by us to comply with regulatory requirements may entail our taking corrective action, such as modification of our policies and procedures. In addition, we may be required to cease all or part of our operations for some period of time until we can demonstrate that appropriate steps have been taken. There can be no assurance that we will be found in compliance with such standards in future audits.

We also pursue registrations in other jurisdictions in which we sell our devices directly, such as Japan and China. In 2015, the China Food and Drug Administration (NMPA) significantly increased the application fees for product registrations and imposed additional requirements for obtaining product approval, which includes requirements for conducting clinical trials to support the registration application process on newly introduced products in China. As a result, we may not seek registration for certain products where the cost is not justified. Any delay in product registrations could have a negative impact on our results of operations.

The COVID-19 global pandemic outbreak has caused disruptions in our business that are expected to continue for an indefinite period of time.

Like many companies, we have experienced negative effects on our revenues and operations as a result of the COVID-19 global pandemic. The wide geographic spread of the pandemic has adversely affected the global economy and has resulted in fluctuating and unpredictable demand for our products, many of which are used in elective surgical procedures. We began to experience the negative impacts of the pandemic in March 2020. The negative impact to sales continued in the quarter ended June 30, 2020, with sales decreasing by approximately 16% as compared to the quarter ended June 30, 2019. During the quarters ended September 30, 2020 and December 31, 2020 our revenues increased as compared to the prior year quarters; however, this was primarily due to our recently acquired Artegraft product line and foreign currency exchange rates.

We currently expect COVID-19’s impact on our revenues to continue into 2021, but it is difficult to estimate by how much due to the uncertainty of the duration and severity of the pandemic. In addition, a recession resulting from the spread of COVID-19 could materially affect our revenues, our business and the value of our common stock.

In addition to impacts to our sales, we have experienced other adverse impacts on our business from COVID-19, including, but not limited to, restrictions on employee travel and limitations on our sales representatives’ access to customers. While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at this time.

We may experience significant fluctuations in our quarterly and annual results.

Fluctuations in our quarterly and annual financial results have resulted and will continue to result from numerous factors, including:

These factors, some of which are not within our control, may cause the price of our common stock to fluctuate. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results are not always meaningful and should not be relied upon as the sole indicator of our future performance.

If we are unable to expand our product and service offerings, we may not achieve our growth objectives and our results of operations could suffer.

Treatment of peripheral vascular and cardiovascular disease includes both open vascular surgery and minimally invasive endovascular procedures, and most of our products are used primarily or exclusively in open surgery procedures. We market and sell our products primarily to vascular surgeons. We estimate that in 2020 over 90% of our sales were from devices used in open surgery.

We may not be able to compete effectively unless we can keep pace with existing or new products, services and technologies in the vascular device market and the minimally invasive endovascular procedure segment, in particular. Our success in developing and commercializing new products and new versions of our existing products and services is affected by our ability to:

If we are unable to expand our product or service offerings, we may not achieve our growth objectives and our results of operations as well as our stock price could suffer.

We may not maintain our recent levels of profitability.

There can be no assurance we will continue to achieve net sales growth and/or profit growth in the future. In 2020 we undertook substantial cost reductions in response to the COIVD-19 pandemic, and we have reversed many of those reductions. If, for example, we are unable to effectively manage our operating expenses due to, for example, additional CE mark expenses, or increased headcount, we may need to implement cost-cutting again in order to maintain or improve our profitability. Decreased investment levels may inhibit future growth in net sales and earnings.

Additionally, our ability to maintain and increase profitability will be influenced by many factors, including:

We may experience difficulties in integrating acquired businesses and products into our business, or we may not realize the anticipated benefits of these acquisitions.

In order to expand our product offerings, we have completed 24 acquisitions, and a key part of our strategy is to acquire additional businesses, products, or technologies in the future. Our growth strategy depends, in part, upon our ability to identify, negotiate, complete, and integrate suitable acquisitions. If we are unable to complete acquisitions on satisfactory terms or at all, our growth objectives and sales could be negatively affected.

Even if we complete acquisitions, we may experience:

We could also discover deficiencies withheld from us due to fraud or otherwise not uncovered in our due diligence prior to an acquisition, including but not limited to deficiencies in internal controls, data adequacy and integrity, product quality, and regulatory compliance, as well as undisclosed contractual or other liabilities and product liabilities, any of which could result in us becoming subject to penalties or other liabilities. Any of these difficulties could negatively impact our ability to realize the intended and anticipated benefits that we currently expect from our acquisitions or from future acquisitions, and could harm our financial condition and results of operations.

For any of these reasons or as a result of other factors, we may not realize the anticipated benefits of our acquisitions and our operating results may be harmed.

Our call point focus on the vascular surgeon with a product portfolio largely used in open vascular surgical procedures may be too narrow, which may adversely affect our future sales.

The treatment of peripheral vascular disease continues to shift from open vascular surgery to minimally invasive endovascular procedures. For example, some vascular surgeons have begun using transcarotid arterial revascularization, a new minimally invasive procedure, to treat carotid artery disease in lieu of a procedure in which our carotid shunts and vascular patches are used. We market and sell our products primarily to vascular surgeons, and the majority of our marketing efforts and sales relate to products used in open vascular surgery rather than in endovascular procedures. We estimate that in 2020, over 90% of our net sales were from devices used in open vascular procedures.

Demographic trends and other factors, such as reimbursement rates, are driving vascular surgeons to increasingly specialize in certain kinds of procedures, such as the creation and maintenance of dialysis access sites and endovascular therapies. Vascular surgeon training programs may focus on those therapies to the exclusion of open vascular procedures. If there is a decline in vascular surgeons training in open vascular procedures in favor of training in minimally invasive endovascular procedures, this could limit the number of vascular surgeons using our products due to lack of open vascular skills. Further, even those physicians trained in open procedures may discontinue performing them if there is a lack of demand. If this trend continues, it could lead to the fragmentation of our customer base, which would reduce cross-selling opportunities and the efficiency of each sales call by our sales representatives, which in turn could negatively impact our business.

CardioCel is sold to a different call point from that of most of our product lines, and we may not be successful in selling to that call point.

Historically, the majority of sales of CardioCel have been to pediatric cardiac surgeons, a call point that is different from our main call point focus. We market and sell our products primarily to vascular surgeons, and the majority of our marketing efforts and sales relate to products used in open vascular surgery. As a result, our sales representatives call predominantly on vascular surgeons and to a lesser extent, cardiac and neuro surgeons. Our success in selling CardioCel will depend, in part, on our sales representatives devoting a portion of their time to making sales calls to, and establishing relationships with, pediatric cardiac surgeons. If they do not undertake these activities or are unsuccessful in doing so, then this could lead to the loss of CardioCel sales and customers, and our financial condition or results of operations could be harmed. Most of our product lines are used in vascular procedures and as a result, our sales representatives are able to cross-sell most of our product portfolio to vascular surgeons.  Cross-selling opportunities to pediatric cardiac surgeons are limited. Additionally, if our sales representatives spend less time focused on vascular surgeons, the sales of our vascular products could decrease, and our financial condition or results of operations could be harmed.

Our tissue processing and preservation services are subject to a variety of risks, including those related to the procurement of human tissue and regulatory requirements.

Our ability to successfully provide RestoreFlow allograft processing, preservation and distribution services may be affected by the following:

Our failure in any one or more of these areas could adversely impact our ability to provide processing, preservation and distribution services related to allografts and therefore our business and operations.

Our dependence on sole- and limited-source suppliers could hinder our ability to deliver our products and services to our customers on a timely basis or at all and could harm our results of operations.

We rely on sole- and limited-source suppliers for some of our important components and certain products. For example, components of our EndoRE product line are manufactured for us by third-party suppliers. Also, we rely on a sole-source supplier for ovine material used in our Omniflow II graft.

With respect to our RestoreFlow allografts, we rely on tissue procurement organizations to provide donated tissue to us for processing and cryopreservation. While we have relationships with multiple tissue procurement organizations, we cannot be sure that the supply of suitable human tissue will be available to us at the levels we need, in which case our allograft service revenues could be adversely affected.

When we acquire a product line, we often enter into an agreement with the seller of the product line for a period of one to three years for the supply of the acquired product until we can transition manufacturing to our facilities. Those arrangements are always sole source supply arrangements with a supplier that has determined to divest the product it is manufacturing. As a result, the supplier may not allocate sufficient resources to the manufacture of our product in favor of dedicating resources to its remaining business. Additionally, there is significant risk if the supplier does not have the financial means to continue to supply product. For example, in the case of our 2019 acquisition of the CardioCel and VascuCel biologic patches, Anteris Technologies Ltd (formerly known as Admedus Ltd) and its affiliates have agreed to continue to supply those products to us for up to three years. For the year ended December 31, 2020, Anteris reported revenue from continuing operations of A$7.1 million and a loss before income tax from continuing operations of A$15.3 million.  If Anteris fails to meet its obligations under the supply agreement on a timely basis, or at all, then we may experience interruptions in our supply of the acquired products or we may not receive a future supply of the acquired products until we establish our own manufacturing. If we do not have sufficient supply of an acquired product, this could lead to loss of sales, customer dissatisfaction and damage to our reputation, and our financial condition or results of operations could be harmed.

There are relatively few, or in some cases no, alternative, validated sources of supply for these materials and products. We do not always have supply agreements in place with suppliers, instead placing orders on an as-needed basis. At any time, these suppliers could discontinue or become incapable of the manufacture or supply of these materials or products on acceptable terms or otherwise. We do not ordinarily carry a significant inventory of these materials and products. Identifying and qualifying additional or replacement suppliers, if required, may not be accomplished quickly or at all and could involve significant additional costs. Any supply interruption from our suppliers or failure to obtain replacement suppliers would interrupt our ability to manufacture our products and result in production delays and increased costs, and may limit our ability to deliver products to our customers. This could lead to loss of sales and customers, and our financial condition or results of operations could be harmed.

Any disruption in our manufacturing facilities could harm our results of operations.

Our principal worldwide executive, distribution, and manufacturing operations are located in five leased facilities in Burlington, Massachusetts. We also have manufacturing sites in North Brunswick, New Jersey and Saint-Etienne, France as well as a tissue processing preservation and distribution facility in Fox River Grove, Illinois. These facilities and the equipment we use to manufacture our products would be difficult to replace and could require substantial lead-time to repair or replace in the event of a natural or man-made disaster. In such event, we could not shift production or processing to alternate manufacturing facilities, and we would be forced to rely on third-party manufacturers, if available at all. Although we carry insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses, including potential damage to our reputation, and may not continue to be available to us on acceptable terms, or at all.

We depend on our senior management team and other key sales and technical personnel, and if we are unable to retain them or recruit additional qualified personnel we may not be able to manage our operations and meet our strategic objectives.

We depend on the continued services of our senior management team and other key sales and technical personnel, as well as our ability to continue to attract and retain additional highly qualified personnel. Each of our key employees may terminate his or her employment with us at any time, and the loss of any of our senior management team or key employees could harm our business. Because we compete for such personnel with other companies, academic institutions, government entities, and other organizations, we may not be able to meet our future hiring needs or retain existing personnel on acceptable terms. Any loss or interruption of the services of our key personnel could also significantly reduce our ability to effectively manage our operations and meet our commercial or strategic objectives, because we cannot be sure that we would be able to find an appropriate replacement on a timely basis.

Certain of our products contain materials derived from animal sources and may become subject to additional regulation.

Our AlboGraft vascular graft, AlboSure vascular patch, Artegraft biologic patch, Dialine II vascular graft, Wovex vascular graft, XenoSure biologic patch, ProCol vascular graft and CardioCel and VascuCel patch products contain bovine tissue or material derived from bovine sources, our Omniflow II Biosynthetic Vascular Graft contains ovine tissue, and our surgical glue contains porcine gelatin. Products that contain materials derived from animal sources are increasingly subject to scrutiny in the media and by regulatory authorities. Regulatory authorities are concerned about the potential for the transmission of disease from animals to humans via those materials. This public scrutiny has been particularly acute in Japan and Western Europe with respect to products derived from animal sources because of concern that bovine materials infected with the agent that causes bovine spongiform encephalopathy, otherwise known as BSE or mad cow disease, may, if ingested or implanted, cause a variant of the human Creutzfeldt-Jakob Disease, an ultimately fatal disease with no known cure. Cases of BSE in cattle discovered in Canada and the U.S. have also increased awareness of the issue in North America. Certain regions or countries have issued regulations that require products to be processed from bovine tissue sourced from countries, like Australia or New Zealand, where no cases of BSE have occurred. Products that contain materials derived from animals, including our products, may become subject to additional regulation, or even be banned in certain countries, because of concern over the potential for the transmission of infectious agents. Significant new regulation, or a ban of our products, could impair our current business or our ability to expand our business, and in the case of a ban or suspension, could materially and adversely affect our results of operations.

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

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

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

If we are unable to increase our selling prices to customers, or if we are required to make price concessions, our rate of net sales growth could be reduced and our operating results could suffer.

In the years ended December 31, 2020, 2019 and 2018, a material portion of our increases in net sales was driven by higher average selling prices to our hospital customers across several of our product lines, particularly with respect to valvulotome sales. In the past, we have been able to rely upon our well-known brands and our established reputation to implement price increases.

Additionally, we may become unable to implement further increases in the selling prices of our products:

We also expect marketplace changes to increasingly place pressure on medical device pricing as hospitals join group purchasing organizations, integrated delivery networks, managed care organizations and other groups that seek to aggregate purchasing power and as hospitals are given financial incentives to improve quality and reduce costs. Due to pricing pressures, surgeons may even perform alternative procedures making our products unnecessary.

If we become unable to raise selling prices, or if we are required to make price concessions, it could reduce our rate of net sales growth and harm our operating results.

The risks inherent in operating internationally and the risks of selling and shipping our products and of purchasing our components and products internationally may adversely impact our net sales, results of operations, and financial condition.

We derive a significant portion of our net sales from outside of the U.S. For the year ended December 31, 2020, 42% of our net sales were derived from outside of the U.S.. Our international sales operations expose us and our representatives, agents, and distributors to risks inherent in operating in foreign jurisdictions. These risks include:

We cannot assure you that one or more of these factors will not harm our business. Any material decrease in our international sales would adversely impact our net sales, results of operations, and financial condition.

The use or misuse of our products and tissues we distribute may result in injuries that lead to product liability suits, which could be costly to our business.

If our products or the tissue we process are defectively designed, manufactured, processed or labeled, contain defective components, or are misused, or if our products or the tissues we process are found to have caused or contributed to injuries or death, we may become subject to costly litigation by our customers or their patients. Although we offer training for physicians, we do not require that physicians be trained in the use of our products or the tissues we distribute, and physicians may use our products or the tissues we distribute incorrectly or in procedures not contemplated by us. We are from time to time involved in product liability claims. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us. Claims of this nature may also adversely affect our reputation, which could damage our position in the market and subject us to recalls.

We cannot assure you that our product liability insurance coverage will be sufficient to satisfy any claim made against us. Further, we may not be able to maintain the same level of coverage, and we may not be able to obtain adequate coverage at a reasonable cost and on reasonable terms, if at all. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing coverage in the future. Additionally, if any such product liability claim or series of claims is brought against us for uninsured liabilities or is in excess of our insurance coverage, our business could be harmed.

From time to time, we are involved in litigation where the outcome is uncertain and which could entail significant expense.

We are subject, from time to time, to legal proceedings and litigation, including, but not limited to, actions relating to product liability, employment matters, intellectual property, contract disputes and other commercial matters. Because the outcome of litigation is inherently difficult to predict, it is possible that the outcome of litigation, or even simply the defense of litigation, could entail significant cost for us, divert management’s time and attention and harm our business.  Additionally, we could experience adverse effects of litigation even before finally adjudicated if a counterparty is granted intermediate relief such as an injunction.  Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. The fact that we operate in international markets also increases the risk that we may face legal exposures as we seek to comply with a large number of varying legal and regulatory requirements. If any such proceedings were to result in an unfavorable outcome, it could adversely affect our business, financial condition and results of operations.

If we fail to convert additional countries or products from distributor sales to direct sales, or encounter difficulties in effecting such conversions, our results of operations could suffer.

We have a history of converting international distributor sales to direct-to-hospital sales by buying out our foreign distributor agreements and selling direct-to-hospital through our own direct sales representatives. In the future, we may elect to convert select additional countries and products from distributor sales to direct-to-hospital sales. Such conversions sometimes result in disruptions in our sales in the applicable geographies. These transitions may also have an adverse effect on our cash flow because distributors, unlike direct sales representatives, pay us for inventory which they store for later sale. In addition, switching to a direct sales force may subject us to longer customer collection times and larger bad debt expense, since we would be required to collect customer payments directly rather than bill and collect from the single distributor.

Our distribution agreements are exclusive, where permissible, with terms of up to five years. These agreements may temporarily constrain our ability to convert certain countries or products from a distributor to a direct-to-hospital model. In order to ensure a successful market transition, we may compensate a distributor in connection with the termination of their distributorship, even where the payment of compensation is not required by contract or local law.

Following termination of any distribution agreement, we may encounter difficulties in transitioning to a direct-to-hospital model. The transition to a direct sales model may require us to meet regulatory requirements that were previously the responsibility of the distributor, which may subject us to additional costs. It also may take us longer than expected to find qualified sales personnel to establish an effective sales force, which could negatively impact projected sales. If a distributor sold our products through a network of sales agents, rather than exclusively through its own personnel, we may not be able to establish relationships with all members of that network, temporarily limiting our access to the existing market. Similarly, failure to maintain or quickly re-establish a distributor’s close relationships with the physicians who use our products could reduce sales. Further, it may be difficult or impossible to transfer the assignment of a distributor’s rights to sell our products, and as a result, sales to customers may be delayed until a new agreement or approval is obtained. The transition to a direct sales model may also require us to incur additional expenses and may be time-consuming to manage remotely, as is the case with our sales office in China, which consumes a disproportionate amount of resources in view of its sales levels. As a result of these risks, there can be no assurance that we will be successful in transitioning to a direct sales model in the countries that we select, and difficulties that we encounter in these transitions could negatively affect our business.

Fluctuations in the exchange rate of the U.S. dollar and other currencies may adversely impact our results of operations.

Our results of operations are reported in U.S. dollars. While the majority of our revenue is denominated in U.S. dollars, a significant portion of our revenue and costs is denominated in other currencies, such as the Euro, the British pound, the Japanese yen, the Canadian dollar, the Chinese yuan and the Australian dollar. For the year ended December 31, 2020, 42% of our net sales were to customers outside the U.S., largely in currencies other than the U.S. dollar. As a result, we face exposure to movements in currency exchange rates. Our results of operations and our operating expenses are exposed to foreign exchange rate fluctuations as the financial results of those operations are translated from local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign currency-based local operations will result in increased net assets, revenue, operating expenses, and net income. Conversely, our local currency-based net assets, revenue, operating expenses, and net income will decrease if the U.S. dollar strengthens against the local currency. Additionally, receivable and payable balances denominated in currencies other than the functional currency may result in gains and losses upon settlement that may adversely impact our results of operations.

Risks Related to the Regulatory Environment

Oversight of the medical device industry might affect the manner in which we may sell medical devices and compete in the marketplace.

There are laws and regulations that govern the means by which companies in the healthcare industry may market their products and services to healthcare professionals and may compete by discounting the prices of their products and services, including for example, the federal Anti-Kickback Statute, the federal False Claims Act, the federal Health Insurance Portability and Accountability Act of 1996, state law equivalents to these federal laws that are meant to protect against fraud and abuse and analogous laws in foreign countries. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, civil and criminal penalties, damages, fines, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Although in structuring our sales and marketing practices and customer discount arrangements we strive to comply with those laws and regulations, we cannot assure you that government officials charged with responsibility for enforcing those laws will not assert that our sales and marketing practices or customer discount arrangements are in violation of those laws or regulations= or that government regulators or courts will interpret those laws or regulations in a manner consistent with our interpretation. Federal and state laws are also sometimes open to interpretation, and from time to time we may find ourselves at a competitive disadvantage if our interpretation differs from that of our competitors.

Our business is subject to complex, costly, and burdensome regulations. We could be subject to significant penalties if we fail to comply.

The production and marketing of our products and services and our ongoing research and development are subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. U.S. and foreign regulations applicable to medical devices and human tissues are wide-ranging and govern, among other things, the testing, marketing, and premarket clearance or approval of new medical devices and services related to human tissue, as applicable, in addition to regulating manufacturing and processing practices, reporting, promotion and advertising, importing and exporting, labeling, and record-keeping procedures.

Our failure to comply with applicable regulatory requirements could result in governmental agencies or a court taking action, including any of the following:

•          issuing public warning letters to us;

•          imposing fines and penalties on us;

•          issuing an injunction preventing us from manufacturing, processing, selling or distributing our products;

•          bringing civil or criminal charges against us;

•          delaying the introduction of our new products into the market;

•          ordering a recall of, or detaining or seizing, our products or cryopreserved human tissue; or

•          withdrawing or denying approvals or clearances for our products.

If any or all of the foregoing were to occur, our business, results of operations, and reputation could suffer.

If we are not successful in obtaining and maintaining clearances and approvals from governmental agencies for our medical devices, we will not be able to sell our products, and our future growth will be significantly hampered.

Each medical device that we wish to market in the U.S. generally must receive either 510(k) clearance or approval of a premarket application, or PMA, from the FDA before the product can be marketed or sold. Either process can be lengthy and expensive. The FDA’s 510(k) clearance procedure usually takes three to twelve months from the date the FDA receives the application, but may take longer. Although 510(k) clearances have been obtained for nearly all of our current products that require such clearances, the FDA may condition, limit or prohibit our sales of these products if safety or effectiveness problems develop with the devices. Our new products or significantly modified existing products could be denied 510(k) clearance and required to undergo the more burdensome PMA approval process if they are not found to be substantially equivalent.

The PMA approval process is much more costly, lengthy, and uncertain than the premarket notification process. It generally takes from six months to three years from the date the application is submitted to, and filed with, the FDA, and may take longer. Achieving premarket approval typically requires extensive clinical trials and may require the filing of numerous amendments with the FDA over time. The FDA may also require post-approval studies to continue demonstrating the safe and effective performance of these devices. We do not have significant experience in obtaining PMA approval or conducting these studies for our products.

The FDA has previously proposed changes for which FDA clearance to market would possibly require clinical data, more extensive manufacturing information and post market data. As part of the 510(k) reform, the FDA proposes to issue regulations defining grounds and procedures for rescission of 510(k) applications that have previously been cleared to market. Additionally, in April 2018, the FDA announced the Medical Device Safety Action Plan: Protecting Patients, Promoting Public Health in which the FDA has proposed limiting the age of predicate devices used in 510(k) applications, thus narrowing the field of available predicates for comparison in the 510(k) process. The FDA may also require the more extensive PMA process for certain products. Our ability to market our products outside the United States is also subject to regulatory approval, including our ability to demonstrate the safety and effectiveness of our products in the clinical setting. Even if regulatory approval or clearance of a product is granted, the approval or clearance could limit the uses or the claims for which the product may be labeled and promoted, which may limit the market for our products. If we do not obtain and maintain foreign regulatory or FDA approval with respect to our products, as applicable, we will not be able to sell our products, and our future growth will be significantly hampered.

If we or some of our suppliers fail to comply with the FDA’s Quality System Regulation and other applicable requirements, our manufacturing or processing operations could be disrupted, our sales and profitability could suffer, and we may become subject to a wide variety of FDA enforcement actions.

We are subject to inspection and marketing surveillance by the FDA to determine our compliance with all regulatory requirements. If the FDA finds that we have failed to comply with any regulatory requirements, it can institute a wide variety of enforcement actions.

We and some of our suppliers must comply with the FDA’s Quality System Regulation, which governs the methods used in, and the facilities and controls used for, the design, testing, manufacture, control, quality assurance, installation, servicing, labeling, packaging, storage, and shipping of medical devices. Our Fox River Grove operations must comply with the FDA’s current Good Tissue Practices, which are the FDA regulatory requirements for the processing of human tissue. The FDA enforces its regulations through pre-announced and unannounced inspections. We have been, and anticipate in the future being, subject to such inspections by the FDA and other regulatory bodies. The timing and scope of future audits is unknown and it is possible, despite our belief that our quality systems and the operation of our manufacturing facilities will remain in compliance with U.S, and non-U.S. regulatory requirements, that a future audit may result in one or more unsatisfactory results. If we or one of our suppliers fails an inspection, or if a corrective action plan adopted by us or one of our suppliers is not sufficient, the FDA may bring an enforcement action against us, and our operations could be disrupted and our manufacturing delayed.

We are also subject to the FDA’s general prohibition against promoting our products for unapproved or off-label uses and to the medical device reporting regulations that require us to report to the FDA if our products may have caused or contributed to a death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in a death or serious injury. We must also file reports with the FDA of some device corrections and removals, and we must adhere to the FDA’s rules on labeling and promotion. If we fail to comply with these or other FDA requirements or fail to take adequate corrective action in response to any significant compliance issue raised by the FDA, the FDA can take significant enforcement actions, which could harm our business, results of operations, and our reputation.

In addition, most other countries, such as Japan, require us to comply with manufacturing and quality assurance standards for medical devices that are similar to those in force in the U.S. before marketing and selling our products in those countries. If we fail to comply, we would lose our ability to market and sell our products in those foreign countries.

Even after our products have received marketing approval or clearance, our products and the tissue we process may be subject to product recalls. Licenses, registrations, approvals and clearances could be withdrawn or suspended due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval.

Our products, services, marketing, sales and development activities, and manufacturing processes are subject to extensive and rigorous regulation by the FDA, by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. These authorities have been increasing their scrutiny of our industry. If those regulatory bodies feel that we have failed to comply with regulatory standards or if we encounter unforeseen problems following initial approval, licensure or registration, there can be no assurance that any approval, licensure or registration will not be subsequently withdrawn, suspended or conditioned upon extensive post-market study requirements, even after having received marketing approval or clearance or licenses and registrations. Further, due to the increased scrutiny of our industry by the various regulatory agencies and the interconnectedness of the various regulatory agencies, particularly within the EU, there is also no assurance that withdrawal or suspension of any of our approvals, licenses or registrations by any single regulatory agency will not precipitate one or more additional regulatory agencies from also withdrawing or suspending their approval, license or registration.

In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA or foreign equivalent could require us to implement a recall of or prohibit the sale of, any of our products. For example, in March 2020 we conducted a worldwide recall of a substantial number of our TufTex over-the-wire embolectomy catheters due to a risk of the balloon catheter failing to deflate during use. We experienced backorders for these products while we addressed this issue. Recalls, whether voluntary or required, could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future.

With respect to our RestoreFlow allografts, we may voluntarily recall tissue, and in the event of non-compliance with the regulations governing human tissue, the FDA may issue a warning letter, order the recall and/or destruction of tissues and/or order the suspension or cessation of processing and preservation of new tissues.

Additionally, if someone is harmed by a malfunction or a product defect, we may experience product liability claims for such defects. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital and may harm our reputation and financial results. Future recalls or claims could also result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future.

Domestic and foreign legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors and cost containment measures could decrease the demand for products purchased by our customers, the prices that our customers are willing to pay for those products and the number of procedures using our devices.

Our products and our tissue preservation services are purchased principally by hospitals or physicians which typically bill various third-party payors, such as governmental programs (e.g., Medicare, Medicaid and comparable foreign programs), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain appropriate reimbursement for products and services from third-party payors is critical to the success of our products and services because it affects which products customers purchase and the prices they are willing to pay. Reimbursement varies by country and can significantly impact the acceptance of new technology. Implementation of healthcare reforms in the U.S. and in significant overseas markets such as Germany, Japan, France and other countries may limit, reduce or eliminate reimbursement for our products and services and adversely affect both our pricing flexibility and the demand for our products and services. Even when we develop or acquire a promising new product or service, we may find limited demand for the product or service unless reimbursement approval is obtained from private and governmental third-party payors.

Major third-party payors for hospital services in the U.S. and abroad continue to work to contain healthcare costs through, among other things, the introduction of cost containment incentives and closer scrutiny of healthcare expenditures by both private health insurers and employers. For example, in an effort to decrease costs, certain hospitals and other customers may resterilize our products intended for a single use or purchase reprocessed products from third-party reprocessors in lieu of purchasing new products from us.

Further legislative or administrative reforms to the reimbursement systems in the U.S. and abroad, or adverse decisions relating to our products by administrators of these systems in coverage or reimbursement, could reduce reimbursement for procedures using our medical devices or result in the denial of coverage for those procedures. Examples of these reforms or adverse decisions include price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements. Any of such reforms or adverse decisions resulting in restrictive reimbursement practices or denials of coverage could have an adverse impact on the acceptance of our products and the prices that our customers are willing to pay for them.

Risks Related to Intellectual Property

If we fail to adequately protect our intellectual property rights, or prevent use of our intellectual property by third parties, we could lose a significant competitive advantage and our business may suffer.

Our success depends in part on obtaining, maintaining, and enforcing our intellectual property rights, trademarks, and other proprietary rights, and our ability to avoid infringing on the proprietary rights of others. We take precautionary steps to protect our technological advantages and intellectual property. We rely upon patent, trade secret, copyright, know-how, and trademark laws, as well as license agreements and contractual provisions, to establish our intellectual property rights and protect our products. These measures may only afford limited protection and may not prevent our competitors from duplicating our products or services; prevent our competitors from gaining access to our proprietary information and technology; or permit us to gain or maintain a competitive advantage.

The issuance of a patent is not conclusive as to its validity or enforceability. Any patents we have obtained or will obtain in the future might also be invalidated or circumvented by third parties. In addition, any pending patent applications may not issue as patents or, if issued, may not provide commercially meaningful protection, as competitors may be able to design around our patents to produce alternative, non-infringing designs. Should such challenges to our patents be successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. Furthermore, patents expire after a certain duration, depending on the jurisdiction in which issued. To the extent any manufacturers are successful in challenging our patents or they enter the market following the expiration of our patents, this could have an adverse impact on our business and harm our sales and operating results.

Additionally, we may not be able to effectively protect our rights in unpatented technology, trade secrets, and confidential information. We have a policy of requiring key employees and consultants and corporate partners with access to trade secrets or other confidential information to execute confidentiality agreements. Our confidentiality agreements also require our employees to assign to us all rights to any inventions made or conceived during their employment with us. We also generally require our consultants to assign to us any inventions made during the course of their engagement by us. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for us in the event of unauthorized use, transfer, or disclosure of confidential information or inventions.

In addition, the laws of foreign countries may not protect our intellectual property rights effectively or to the same extent as the laws of the U.S.. If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products, or services and our competitors could commercialize similar technologies, which could result in a decrease in our sales and market share.

If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs, and we may have to redesign or discontinue selling the affected product.

The medical device industry is litigious with respect to patents and other intellectual property rights. Companies operating in our industry routinely seek patent protection for their product designs, and many of our principal competitors have large patent portfolios. Companies in the medical device industry have used intellectual property litigation to gain a competitive advantage. Whether a product infringes a patent or other intellectual property rights involves complex legal and factual issues, the determination of which is often uncertain. We face the risk of claims that we have infringed on third parties’ intellectual property rights, and we cannot assure you that our products or methods do not infringe the patents or other intellectual property rights of third parties. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any claims of patent or other intellectual property infringement, even those without merit, could:

It is also possible that a third party could claim that our manufacturing process violates an existing patent or other intellectual property rights. If we were unsuccessful in defending such a claim, we may be forced to stop production at one or more of our manufacturing facilities.

In addition, new patents obtained by our competitors could threaten a product’s continued life in the market even after it has already been introduced. If our business is successful, the possibility may increase that others will assert infringement claims against us.

If we believe our product is or may be the subject of a patent or other intellectual property rights of a third party, we may attempt to reach a license agreement with them to manufacture, market, and sell these products. If we fail to reach an agreement, we could be required to pay significant damages to third parties for past use of the asserted intellectual property and may be forced to cease making or selling products that incorporate the challenged intellectual property.

In addition, we may become subject to interference proceedings conducted in the United States Patent Office or opposition proceedings conducted in foreign patent offices challenging the priority of invention or the validity of our patents.

Risks Related to Our Common Stock and Outstanding Debt

Our stock price may be volatile, and an investment in our common stock could suffer a decline in value.

There can be significant volatility in the market price and trading volume of equity securities that is unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. Shareholders may not be able to resell their shares at or above the price at which they purchased them due to fluctuations in the market price of our common stock caused by changes in our operating performance or prospects, a reduced volume of trading in our common stock, and other factors.

Some factors that may have a significant effect on our common stock market price include:

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought. This litigation, if brought against us, could result in substantial costs and a diversion of our management’s attention and resources.

Our chief executive officer has significant voting power and may take actions that may not align with the interests of our other stockholders.

Our chief executive officer and the LeMaitre Family LLC collectively control approximately 14% of our outstanding common stock as of December 31, 2020. As a result, these stockholders, if they were to act together, could have significant influence on many matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock, and may not be fully aligned with the interests of other stockholders.

We have not established a minimum dividend payment level for our common stockholders and there are no assurances of our ability to pay dividends to common stockholders in the future.

In February 2011, our Board of Directors adopted a quarterly dividend program for the purpose of returning capital to our stockholders. However, we have not established a minimum dividend payment level for our common stockholders and our ability to pay dividends may be harmed by the risks and uncertainties described in this Annual Report on Form 10-K and in the other documents we file from time to time with the SEC. Future dividends, if any, will be authorized by our Board of Directors and declared by us based upon a variety of factors deemed relevant by our directors, including, among other things, our financial condition, liquidity, earnings projections and business prospects. In addition, financial covenants in our credit facility may restrict our ability to pay future quarterly dividends. We can provide no assurance of our ability to pay dividends in the future.

Our level of indebtedness could adversely affect our financial condition and make it more difficult for us to fund our operations.

As of December 31, 2020, we had $39.0 million of indebtedness outstanding under our credit facility. Our level of indebtedness could have important negative consequences to you and us, including:

Item  1B.         Unresolved Staff Comments

None.

Item 2.         Properties

Our principal worldwide executive, distribution, and manufacturing operations are located at five leased facilities with square footage totaling 109,354 in Burlington, Massachusetts. All five Burlington leases expire in December 2030. In connection with our acquisition of the Artegraft biologic graft business, we assumed a 16,732 square foot lease in North Brunswick, New Jersey, which expires in October 2029. In addition, our European operations are headquartered at a 16,470 square foot leased facility located in Sulzbach, Germany, with a lease expiring in August 2023. We also lease additional manufacturing, processing, distribution and sales offices in other U.S., Europe, U.K. and Asia/Pacific Rim locations. Based on our current operating plans, we believe our current facilities are adequate for our needs.

Item 3.          Legal Proceedings

In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, contractual, commercial, employment, and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of December 31, 2020, that, in the opinion of management, would be reasonably expected to have a material adverse effect on our financial position, results of operations or cash flows.

Item 4.         Mine Safety Disclosures

Not applicable.

PART II

Item  5.         Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is publicly traded on The Nasdaq Global Market under the symbol “LMAT”. Prior to our initial public offering on October 19, 2006, there was no public trading market for our common stock.

Holders of Record

On March 2, 2021, the closing price per share of our common stock was $51.38 as reported on The Nasdaq Global Market, and we had approximately 162 stockholders of record. In addition, we believe that a significant number of beneficial owners of our common stock hold their shares in street name.

Stock Price Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return on LeMaitre’s common stock with the Nasdaq US Composite Index, the Nasdaq Medical Equipment Index and a peer group for the period covering from December 31, 2015, through the end of LeMaitre’s fiscal year ended December 31, 2020. The graph assumes an investment of $100.00 made on December 31, 2015, in (i) LeMaitre’s common stock, (ii) the stocks comprising the Nasdaq US Composite Index, (iii) the stocks comprising the Nasdaq Medical Equipment Index and (iv) the stocks comprising our peer group. The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filings.

The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

LeMaitre’s fiscal year ends on the last day of December each year; data in the above table reflects market values for our stock and Nasdaq and peer group indices as of the close of trading on the last trading day of the year presented. The 2020 peer group includes the following companies: AngioDynamics, Inc., Cardiovascular Systems Inc., Cryolife Inc., Merit Medical Systems, Inc., Penumbra, Inc, Silk Road Medical, Inc, and Shockwave Medical, Inc.

Recent Sales of Unregistered Securities

Not Applicable.

Issuer Purchases of Equity Securities

Item 6.         Selected Financial Data

Omitted.

Item  7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K and in our other Securities and Exchange Commission filings. The following discussion may contain predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below.

The principal objectives of this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to enhance our overall financial disclosures by providing explanation and analysis of the Company’s financial results and condition, as viewed by our management.

Overview

We are a medical device company that develops, manufactures, and markets medical devices and implants largely used in the treatment of peripheral vascular disease. To a lesser extent, our devices are also used to treat diabetes and cardiovascular disease, and are used in neurosurgery applications. We also provide processing and cryopreservation services of peripheral vascular human tissue for implantation into patients. Our principal product offerings are sold throughout the world, primarily in the United States, Europe, the U.K., Canada and Asia/Pacific Rim. We estimate that the annual worldwide market for all of our devices exceeds $5 billion, within which our core product lines address roughly $750 million. We have grown our business using a three-pronged strategy: 1) pursuing a focused call point, 2) competing for sales of low-rivalry niche products, and 3) expanding our worldwide direct sales force while acquiring and developing complementary devices. We have used acquisitions as a primary means of further penetrating the peripheral vascular device market, and we expect to continue to pursue this strategy in the future. We currently manufacture most of our products in our Burlington, Massachusetts headquarters.

Our products are used primarily by vascular surgeons who treat peripheral vascular disease through both open surgery and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, vascular surgeons can perform both open surgery and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wide range of treatment options to patients.

Our principal product lines include the following: valvulotomes, biologic vascular patches, biologic vascular grafts, carotid shunts, embolectomy catheters, anastomotic clips, radiopaque marking tape, powered phlebectomy devices, synthetic vascular grafts and surgical glue. Through our RestoreFlow allografts business we also provide services related to the processing and cryopreservation of human vascular and cardiac tissue.

To assist us in evaluating our business strategies, we monitor long-term technology trends in peripheral vascular and other device markets. Additionally, we consider the information obtained from discussions with the medical community in connection with the demand for our products, including potential new product launches.

Historically we have experienced success in lower-rivalry niche segments, for example the markets for valvulotomes and carotid shunts. In the valvulotome market, our highly differentiated devices have historically allowed us to increase our selling prices while maintaining our unit share. In contrast, we have experienced less success in highly competitive markets such as our AlboGraft vascular graft product line, where we face strong competition from larger companies with greater resources. While we believe that these challenging market dynamics can be mitigated by our relationships with vascular surgeons, there can be no assurance that we will be successful in these highly competitive markets.

In recent years we have also experienced success in international markets, such as Europe, where we sometimes offer comparatively lower average selling prices. If we continue to seek growth opportunities outside of North America, we may experience downward pressure on our gross margin.

Our business opportunities include the following:

•          the long-term growth of our direct sales force in North America, Europe and Asia/Pacific Rim;

•          the addition of complementary products through acquisitions;

•          the introduction of our products in new territories upon receipt of regulatory approvals or registrations in these territories;

•          the updating of existing products and introduction of new products through research and development; and

•          the consolidation of manufacturing into our Burlington, Massachusetts corporate headquarters.

We sell our products and services primarily through a direct sales force. As of December 31, 2020 our sales force was comprised of 80 sales representatives in North America, Europe and Asia/Pacific Rim, including two export managers. Our worldwide headquarters is located in Burlington, Massachusetts, and we also have North American sales offices in Chandler, Arizona and Vaughan, Canada. Our European headquarters is located in Sulzbach, Germany, and we also have sales offices in Milan, Italy; Madrid, Spain; and Hereford, England. Our Asia/Pacific Rim headquarters is located in Singapore, and we have sales offices in Tokyo, Japan; Shanghai, China; and Kensington, Australia. During the years ended December 31, 2020 and 2019, approximately 95% and 94%, respectively, of our net sales were generated in territories in which we employ direct sales representatives. We also sell our products in other countries, including South Korea, Russia and Brazil, through distributors.

Because we believe that direct-to-hospital sales engender closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices into our direct sales organization:

Our strategy for growing our business includes the acquisition of complementary product lines and companies and occasionally the discontinuance or divestiture of products or activities that are no longer complementary:

In addition to relying upon acquisitions for growth, we also rely on internal product development efforts to bring differentiated technology and next-generation products to market:

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

Our execution of these transfers may affect the comparability of our financial results from period to period and may cause fluctuations as we incur process engineering and other charges.

Fluctuations in the exchange rates between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the year ended December 31, 2020, approximately 42% of our sales took place outside the U.S., largely in currencies other than the U.S. dollar. We expect foreign currencies will represent a significant percentage of future sales. Selling, marketing, and administrative costs related to these sales are also denominated in foreign currencies, thereby partially mitigating our bottom-line exposure to exchange rate fluctuations. However, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases we will record less revenue in U.S. dollars than we did before the exchange rate changed. For 2020, we estimate that the effects of changes in foreign exchange rates increased our reported sales by approximately $0.8 million, as compared to rates in effect for 2019.

Net Sales and Expense Components

The following is a description of the primary components of our net sales and expenses:

Net sales. We derive our net sales from the sale of our products and services, less discounts and returns. Net sales include the shipping and handling fees paid for by our customers. Most of our sales are generated by our direct sales force and are shipped and billed to hospitals or clinics throughout the world. In countries where we do not have a direct sales force, sales are primarily to distributors, who sell on to hospitals and clinics. In certain cases our products are consigned to a hospital or clinic prior to purchase; in those instances we recognize revenue at the time the product is used in surgery rather than at shipment.

Cost of sales. We manufacture the majority of the products that we sell. Our cost of sales consists primarily of manufacturing personnel, raw materials and components, depreciation of property and equipment, and other allocated manufacturing overhead, as well as freight expense we pay to ship products to customers.

Sales and marketing. Our sales and marketing expense consists primarily of salaries, commissions, stock-based compensation, travel and entertainment, attendance at vascular congresses, training programs, advertising and product promotions, direct mail and other marketing costs.

General and administrative. General and administrative expense consists primarily of executive, finance and human resource salaries, stock-based compensation, legal and accounting fees, information technology expense, intangible asset amortization expense and insurance expense.

Research and development. Research and development expense includes costs associated with the design, development, testing, enhancement and regulatory approval of our products, principally salaries, laboratory testing and supply costs. It also includes costs associated with design and execution of clinical studies, regulatory submissions and costs to register, maintain, and defend our intellectual property, and royalty payments associated with licensed and acquired intellectual property.

Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses).

Income tax expense. We are subject to federal and state income taxes for earnings generated in the U.S., which include operating losses or profits in certain foreign jurisdictions for certain years depending on tax elections made, and foreign taxes on earnings of our wholly-owned foreign subsidiaries. Our consolidated tax expense is affected by the mix of our taxable income (loss) in the U.S. and foreign subsidiaries, permanent items, discrete items, unrecognized tax benefits, and amortization of goodwill for U.S. tax reporting purposes.

Results of Operations

In March 2020, we began to experience negative effects on our revenues and operations as a result of the COVID-19 global pandemic. Our revenues increased 7% during the quarter ended March 31, 2020 as compared to the prior year quarter, but for the quarter ended June 30, 2020, sales decreased 16% versus the prior year quarter, with the largest sales impacts in the U.S., Germany, Italy and France. Some of our sales offices were closed during the second quarter of 2020, and in many cases our employees are still working remotely.

During the quarter ended September 30, 2020 revenues increased by $7.3 million, or 25%, compared to the quarter ended September 30, 2019; however, of that increase, $5.4 million was from our recently acquired Artegraft product line, and we estimate that approximately $0.5 million was from changes in foreign currency exchange rates. For the full year 2020 our sales were higher by 10%, or $12.1 million, as compared to 2019, with a substantial portion ($11.1 million) attributable to the Artegraft acquisition. We currently expect to see a continued negative impact from COVID-19 on our revenues, gross profit and gross margin in 2021, but it is difficult to estimate by how much, due to the uncertain duration and severity of the pandemic.

In April 2020, we initiated a plan to reduce our global workforce by approximately 13%, and to temporarily reduce base salaries for certain employees. The salary reduction program applied to all employees earning more than $40,000 per year and was applied outside of the U.S. to the extent permissible under applicable local laws and regulations. These salary reductions remained in place until August 31, 2020, at which point full base salaries were restored. In addition, we have subsequently begun to hire employees into many of the areas previously reduced, and we expect to add personnel in 2021. Annual salary and bonus increases for 2021, which normally occur in January of each year, were brought forward to November 2020.

For reasons described above, we expect that results will continue to be impacted in the near term. These financial statements and management’s discussion and analysis of financial condition and results of operations should be read in that context.

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019

The following tables set forth, for the periods indicated, our results of operations and the change between the specified periods expressed as a percentage increase or decrease:

Net sales. Net sales increased 10% or $12.1 million to $129.4 million for the year ended December 31, 2020, compared to $117.2 million for the year ended December 31, 2019. The increase was largely from recently acquired products including Artegraft bovine grafts of $10.8 million and CardioCel bovine cardiac patches of $5.3 million. We also had higher valvulotome sales of $3.9 million, including sales of Eze-Sit in the U.S., which we acquired in July 2019. These sales increases were partly offset by lower OEM sales of $2.2 million, lower sales of carotid shunts of $1.8 million, lower XenoSure bovine carotid patch sales of $1.1 million, lower TRIVEX sales of $1.0 million and lower AnastoClip sales of $0.8 million. All other products decreased on a net basis by $2.0 million. We estimate that changes in foreign exchange rates during the year ended December 31, 2020 increased net sales by $0.8 million.

Direct-to-hospital net sales were 95% of total sales for the year ended December 31, 2020 and 94% for the year ended December 31, 2019.

Net sales by geography. Net sales in the Americas increased $12.1 million or 17% for the year ended December 31, 2020. The increase was driven mainly by recently acquired products including Artegraft of $10.8 million and CardioCel of $3.5 million. We also had higher valvulotome sales of $2.8 million. These increases were partly offset by decreases across most product lines which, with the exception of OEM sales, we believe were due primarily to the impact of the COVID-19 pandemic. Product lines with the largest decreases included carotid shunts and OEM sales, each decreasing by $1.5 million, bovine carotid patches which decreased $0.7 million and vessel closure systems which decreased by $0.9 million. All other products combined decreased by $0.4 million.

Europe, Middle East and Africa net sales were relatively unchanged year-over-year, at $39.2 million for the year ended December 31, 2020 as compared to $39.5 million for the year ended December 31, 2019. Sales of CardioCel cardiac patches increased by $1.4 million and valvulotomes increased by $1.0 million, offset by declines in most other product lines. Products with larger decreases included Omniflow II grafts and OEM sales, which each decreased by $0.7 million, and bovine carotid patches, which decreased by $0.6 million. As discussed under Item 1A. Risk Factors, we have experienced a lapse in CE mark certifications for some products due to one of our Notified Bodies abandoning CE mark certifications services. This caused certain of our products to go on backorder starting in the quarter ended June 30, 2020, including bovine carotid patches and polyester grafts. We received temporary approvals in most European countries, which allowed us to resume sales of those products for a limited time period, pending recertification.

Asia/Pacific Rim net sales increased $0.4 million or 4% for the year ended December 31, 2020. Increased sales of CardioCel cardiac patches of $0.5 million, bovine carotid patches of $0.2 million and embolectomy catheters of $0.2 million were offset in part by declines in sales of TRIVEX of $0.6 million.

Gross Profit. Gross profit increased $4.8 million to $84.6 million for the year ended December 31, 2020, while gross margin decreased by 270 basis points to 65.4% in the period. The decrease in the gross margin was driven primarily by the impact of purchase accounting from the Artegraft acquisition and to a lesser extent by manufacturing inefficiencies, as well as a slightly less favorable product mix, including higher sales of CardioCel cardiac patches and embolectomy catheters.

Operating Expenses.

Sales and marketing. For the year ended December 31, 2020, sales and marketing expense decreased $6.6 million, or 22%, to $23.7 million. The decrease was driven mainly by expense reduction programs implemented in response to the COVID-19 global pandemic, including a reduction in force and temporary base salary cuts in place until August 31. The major components of the sales and marketing expense reduction were salaries and related expenses of $2.3 million, travel and related expenses of $1.9 million, and commission expense of $1.6 million. As a percentage of net sales, sales and marketing expense decreased to 22% for the year ended December 31, 2020 from 26% in the prior period.

General and administrative. For the year ended December 31, 2020, general and administrative expense increased $3.5 million, or 18%, to $22.5 million. Higher acquisition-related costs including consulting and other transaction costs of approximately $1.2 million and increased amortization expense of $2.6 million were partly offset by lower compensation-related costs from our reduction in force and temporary wage cuts of $0.6 million. Other expense categories increased by an additional $0.3 million on a net basis. As a percentage of net sales, general and administrative expense was 17% for 2020 and 16% for 2019.

Research and development. For the year ended December 31, 2020, research and development expense increased $0.8 million, or 9%, to $10.1 million.  Product development and process engineering expenses decreased $1.2 million or 22% on a combined basis, in large part due to completion of the manufacturing transfer of certain acquired products to our Burlington facilities. Clinical and regulatory expenses increased $2.3 million or 67%, as a result of consulting and other costs incurred in connection with reinstating or maintaining regulatory approvals, especially in Europe, as well as regulatory submissions for our products in geographies such as China and Japan, and testing related to our biologic products. Royalty expense decreased $0.3 million due to the expiration of underlying royalty agreements. As a percentage of sales, research and development expense were 8% for both 2020 and 2019.

Gain on sale of building. During the first quarter of 2020, in connection with our planned manufacturing transfer of Omniflow II to Burlington, we executed an agreement to sell our land and building in North Melbourne, Australia for A$2.9 million ($2.0 million). The sale closed in September 2020. The building had a net book value of A$1.9 million ($1.4 million). We recognized a $0.5 million gain on the sale, net of applicable sales taxes and administrative costs.

Other income (expense). Other income (expense) primarily includes interest income and expense, foreign currency gains (losses), and other miscellaneous gains (losses). Interest income was $0.2 million and $0.7 million, respectively for 2020 and 2019. The decrease was due to the liquidation of most of our interest-bearing investments to acquire Artegraft. We also incurred debt of $65.0 million in order to complete the acquisition, which generated $1.3 million of interest expense in 2020. Foreign exchange losses on settlements or remeasurement of receivables and payables denominated in foreign currencies were $0.3 million and $0.2 million in 2020 and 2019, respectively.

Income tax expense. We recorded a provision for taxes of $6.1 million on pre-tax income of $27.4 million in 2020 as compared to $3.7 million on pre-tax income of $21.7 million in 2019. The 2020 provision was comprised of a U.S. federal tax provision of $4.2 million, a state tax provision of $0.7 million, and a foreign tax provision of $1.2 million. The 2019 provision was comprised of a U.S. federal tax provision of $2.0 million, a state tax provision of $0.4 million, and a foreign tax provision of $1.3 million. Our effective tax rate differed from the U.S. statutory tax rate in 2020 principally because of stock option exercises, taxes on foreign earnings, valuation allowances, and certain permanent differences. While it is often difficult to predict the final outcome or timing of the resolution of any particular tax matter, we believe that our tax reserves reflect the probable outcome of known contingencies.

We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As of December 31, 2020, we have provided a valuation allowance of $1.8 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.

Refer to Note 9 to our consolidated financial statements for additional information about income tax expense (benefit) including information related to U.S. tax reform legislation.

Comparison of the year ended December 31, 2019 to the year ended December 31, 2018

The following tables set forth, for the periods indicated, our results of operations and the change between the specified periods expressed as a percentage increase or decrease:

Net sales. Net sales increased 11% or $11.7 million to $117.2 million for the year ended December 31, 2019, compared to $105.6 million for the year ended December 31, 2018. Sales increases were primarily driven by increased sales of our embolectomy catheters of $4.3 million, of which $3.4 million was from our 2018 acquisition of Syntel embolectomy catheters; valvulotomes of $1.6 million, of which $1.2 million was from our Eze-Sit and Chevalier acquisitions in 2019 and 2018, respectively; and polyester grafts of $1.5 million, of which $0.4 million was from our Cardial acquisition. We also had an increase in human tissue cryopreservation service revenues from our RestoreFlow allograft business of $1.4 million. Our recently acquired CardioCel and VascuCel products contributed combined sales of $1.2 million in 2019. These and other product line increases were partially offset by decreased sales of TRIVEX of $0.8 million.

Direct-to-hospital net sales were 94% for the year ended December 31, 2019 and 95% for the year ended December 31, 2018.

Net sales by geography. Net sales in the Americas increased $5.7 million or 9% for the year ended December 31, 2019. The increase was primarily driven by increased sales of embolectomy catheters of $2.6 million, in part due to our acquisition of the Syntel embolectomy catheters, and increased human tissue cryopreservation services of $1.4 million. We also increased sales of valvulotomes by $1.1 million, and our recently acquired CardioCel and VascuCel products contributed sales of $0.9 million in the Americas in 2019. These increases were partially offset by decreased sales of TRIVEX of $0.8 million.

Europe, Middle East and Africa net sales increased $4.2 million or 12% for the year ended December 31, 2019. The increase was primarily driven by increased sales of polyester grafts of $1.3 million, embolectomy catheters of $0.8 million, OEM sales of $0.7 million, valvulotomes of $0.6 million and Omniflow II grafts of $0.4 million.

Asia/Pacific Rim net sales increased $1.8 million or 27% for the year ended December 31, 2019. The increase was driven by increased sales of embolectomy catheters of $0.9 million, AnastoClips of $0.3 million, occlusion catheters of $0.2 million and biologic vascular patches of $0.2 million. These and other increases were offset in part by decreased valvulotome sales of $0.1 million.

Gross Profit. Gross profit increased $5.9 million to $79.9 million for the year ended December 31, 2019, while gross margin decreased by 190 basis points to 68.1% in the period. The gross margin was favorably impacted by higher average selling prices across most product lines, as well manufacturing efficiencies. These increases were more than offset, however, by an unfavorable product mix, including recently acquired products which typically have a lower gross margin prior to being integrated into our Burlington manufacturing operations. Foreign exchange rate changes also had an unfavorable impact in 2019.

Sales and marketing. For the year ended December 31, 2019, sales and marketing expense increased $3.0 million, or 11%, to $30.3 million. The increase was primarily driven by higher personnel costs, including compensation, commissions and travel expenses associated with expanding our sales force. We also had higher costs due to the implementation of customer relationship management software. As a percentage of net sales, sales and marketing expense was 26% in both 2019 and 2018.

General and administrative. For the year ended December 31, 2019, general and administrative expense increased $1.4 million, or 8%, to $19.1 million. General and administrative expense increases were primarily related to acquisition-related costs including amortization of intangible assets, professional fees, bank and credit card fees, bad debt expense and facilities costs. As a percentage of net sales, general and administrative expense was 16% for 2019 and 17% for 2018.

Research and development. For the year ended December 31, 2019, research and development expense increased $1.1 million, or 13%, to $9.3 million.  Product development and process engineering increased $0.8 million on a combined basis, in large part due to transitioning certain acquired products to our Burlington manufacturing operations. Clinical and regulatory expenses increased $0.3 million, related to regulatory submissions for new products in geographies such as China and Japan, and testing related to our biologic products.

Gain on divestitures and acquisitions. The 2018 gains on divestitures and acquisitions relate to the sale of our Reddick cholangiogram catheter and Reddick-Saye screw product lines to Symmetry Surgical, which resulted in a gain of $5.9 million, and also to our purchase of the Cardial assets from Becton Dickinson, which resulted in a bargain purchase gain of $1.6 million.

Other income (expense). Interest income was $0.7 million and $0.6 million, respectively for 2019 and 2018. Foreign exchange losses on settlements or remeasurement of receivables and payables denominated in foreign currencies were $0.2 million and $0.4 million in 2019 and 2018, respectively.

Income tax expense. We recorded a provision for taxes of $3.7 million on pre-tax income of $21.7 million in 2019 as compared to $5.5 million on pre-tax income of $28.4 million in 2018. The 2019 provision was comprised of a U.S. federal tax provision of $2.0 million, a state tax provision of $0.4 million, and a foreign tax provision of $1.3 million. The 2018 provision was comprised of a U.S. federal tax provision of $2.8 million, a state tax provision of $0.5 million and a foreign tax provision of $2.2 million. Our effective tax rate differed from the U.S. statutory tax rate in 2019 principally because of stock option exercises, taxes on foreign earnings, valuation allowances, and certain permanent differences. While it is often difficult to predict the final outcome or timing of the resolution of any particular tax matter, we believe that our tax reserves reflect the probable outcome of known contingencies.

We assess the likelihood that our deferred tax assets will be realized through future taxable income and record a valuation allowance to reduce gross deferred tax assets to an amount we believe is more likely than not to be realized. As of December 31, 2019, we had provided a valuation allowance of $1.4 million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are not expected to be realized.

Refer to Note 8 to our consolidated financial statements for additional information about income tax expense (benefit) including information related to U.S. tax reform legislation.

Liquidity and Capital Resources

At December 31, 2020, we held $26.8 million in cash and cash equivalents and $0.2 million in a short-term managed income mutual fund investment, as compared to $11.8 million in cash and cash equivalents and $20.9 million in the mutual fund investment at December 31, 2019. Our cash and cash equivalents are highly liquid investments with maturities of 90 days or less at the date of purchase, consist of money market funds, and are stated at cost, which approximates fair value. Our short-term marketable securities consist of a managed income mutual fund investing mainly in short-term investment grade, U.S.-dollar denominated fixed and floating-rate debt. All of our cash held outside of the U.S. is available for corporate use, with the exception of $2.6 million held by subsidiaries in jurisdictions for which earnings are planned to be permanently reinvested.

On February 23, 2021, our Board of Directors authorized the repurchase of up to $15.0 million of the Company’s common stock through transactions on the open market, in privately negotiated purchases or otherwise until February 22, 2022. The repurchase program may be suspended or discontinued at any time. To date we have not made any repurchases under this program.

In June 2020, in connection with the Artegraft acquisition, we incurred debt of $65 million including a five-year revolving line of credit of $25 million and a five-year term loan of $40 million. The loans bear interest at either the Base Rate as defined in the agreement plus an applicable margin of 1.25% to 1.75% depending on our consolidated leverage ratio, or the Eurodollar Rate plus an applicable margin of 2.25% to 2.75% depending on our consolidated leverage ratio. At December 31, 2020 all outstanding borrowings or $39.0 million were designated as Eurodollar loans and had an interest rate of 3.5%.

The term of the revolving line of credit is five years and allows re-borrowing up to $25 million during the term, with all outstanding amounts due on June 22, 2025. The term loan is repayable in increasing quarterly installments of from $0.5 million to $1.0 million commencing September 30, 2020 through March 31, 2025, with the remaining outstanding balance due on June 22, 2025. During the year ended December 31, 2020, we made scheduled principal payments on the term loan of $1.0 million and repaid the revolving line of credit in full.

Operating and Capital Expenditure Requirements

We require cash to pay our operating expenses, make capital expenditures, and pay our long-term liabilities. Since our inception, we have funded our operations through public offerings and private placements of equity securities, short-term and long-term borrowings, and funds generated from our operations.

We recognized operating income of $28.8 million for the year ended December 31, 2020, $21.2 million for the year ended December 31, 2019 and $28.2 million for the year ended December 31, 2018. We expect to fund any increased costs and expenditures from our existing cash and cash equivalents, though our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

Our cash balances may decrease as we continue to use cash to fund our operations, make acquisitions, repay outstanding debt, pay dividends, repurchase shares of our common stock and make deferred payments related to prior acquisitions. We believe that our cash, cash equivalents, investments and the interest we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next twelve months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond the next twelve months, we may seek to sell additional equity or debt securities, or access our available revolving credit facility. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities, such securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations and possibly our ability to pay dividends. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.

Cash Flows

Net cash provided by operating activities. Net cash provided by operating activities was $34.8 million for the year ended December 31, 2020, and consisted of $21.2 million net income, adjusted for non-cash items of $12.7 million (including primarily depreciation and amortization of $8.4 million, stock-based compensation of $3.0 million, provisions for inventory write-offs and doubtful accounts of $1.8 million, and fair value adjustments on contingent consideration for acquisitions of $0.2 million, offset by a benefit from deferred taxes of $0.3 million, and a gain on the sale of a building of $0.5 million) as well as cash from working capital of $0.9 million. The net cash generated from working capital was driven by increases in accounts payable and other liabilities of $4.3 million, offset by increases in inventory and other deferred costs of $2.6 million and accounts receivable of $0.9 million.

Net cash provided by operating activities was $14.2 million for the year ended December 31, 2019, and consisted of $17.9 million net income, adjusted for non-cash items of $10.1 million (including primarily depreciation and amortization of $5.4 million, stock-based compensation of $2.6 million, provisions for inventory write-offs and doubtful accounts of $1.1 million, a provision for deferred taxes of $0.8 million and fair value adjustments on contingent consideration for acquisitions of $0.2 million), as well as working capital uses of $13.6 million. The net cash used for working capital was driven by increases in inventory of $11.3 million, accounts receivable of $1.3 million, and other current assets of $0.7 million, as well as a decrease in accounts payable and other liabilities of $0.3 million.

Net cash provided by operating activities was $19.5 million for the year ended December 31, 2018, and consisted of $22.9 million net income, adjusted for non-cash items of $1.7 million (including primarily depreciation and amortization of $4.3 million, stock-based compensation of $2.3 million, and provisions for inventory write-offs and doubtful accounts of $1.0 million, offset by a benefit for deferred taxes of $2.2 million and gains on acquisitions and divestitures of $7.5 million), as well as working capital uses of $1.7 million. The net cash used for working capital was driven by increases in accounts receivable of $1.3 million, inventory of $4.3 million and other current assets of $0.4 million, offset by an increase in accounts payable and other liabilities of $4.3 million.

Net cash used in investing activities. Net cash used in investing activities was $52.9 million for the year ended December 31, 2020, including acquisition-related payments of $72.6 million primarily associated with the purchase of Artegraft and expenditures on property, equipment and technology of $3.0 million, offset by net sales and purchases of marketable securities of $20.7 million and proceeds from the sale of the North Melbourne, Australia building of $2.0 million.

Net cash used in investing activities was $24.1 million for the year ended December 31, 2019, driven by cash paid for acquisitions of $21.0 million, as well as purchases of property and equipment of $3.8 million primarily associated with biologic clean room build-outs in Burlington. These investments were in part offset by net sales of short-term investments of $0.9 million.

Net cash used in investing activities was $7.1 million for the year ended December 31, 2018, driven by cash paid for acquisitions of $12.3 million, as well as purchases of property and equipment of $3.1 million primarily associated with clean room build-outs in Burlington. These investments were in part offset by proceeds from the Reddick divestiture of $7.4 million and net sales of short-term investments of $0.9 million.

Net cash provided by (used in) financing activities. Net cash provided by financing activities was $32.2 million for the year ended December 31, 2020, consisting primarily of borrowings of $63.2 million net of debt issuance costs and stock option exercises proceeds of $5.4 million, net of shares repurchased to cover employee payroll taxes. These increases to cash were partly offset by dividend payments of $7.7 million, debt payments of $26.0 million and deferred payments for acquisitions of $2.8 million.

Net cash used in financing activities was $4.9 million for the year ended December 31, 2019, driven primarily by dividend payments of $6.7 million and payments related to prior acquisitions of $2.3 million. We had proceeds from stock option exercises of $4.9 million, offset by the acquisition of $0.7 million of treasury shares to cover minimum withholding taxes on restricted stock unit vestings.

Net cash used in financing activities was $4.4 million for the year ended December 31, 2018, driven primarily by dividend payments of $5.4 million and payments related to prior acquisitions of $1.2 million. We had proceeds from stock option exercises of $3.0 million, offset by the acquisition of $0.7 million of treasury shares to cover minimum withholding taxes on restricted stock unit vestings.

Dividends. In February 2011, our Board of Directors approved a policy for the payment of quarterly cash dividends on our common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors on a quarterly basis. The dividend activity for the periods presented is as follows: