Document

0001639691-19-000143.txt : 20191030 0001639691-19-000143.hdr.sgml : 20191030 20191030155627 ACCESSION NUMBER: 0001639691-19-000143 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 98 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191030 DATE AS OF CHANGE: 20191030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LivaNova PLC CENTRAL INDEX KEY: 0001639691 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 981268150 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37599 FILM NUMBER: 191179890 BUSINESS ADDRESS: STREET 1: 20 EASTBOURNE TERRACE CITY: LONDON STATE: X0 ZIP: W2 6LG BUSINESS PHONE: 4402033250662 MAIL ADDRESS: STREET 1: 20 EASTBOURNE TERRACE CITY: LONDON STATE: X0 ZIP: W2 6LG FORMER COMPANY: FORMER CONFORMED NAME: Sand Holdco Plc DATE OF NAME CHANGE: 20150420 FORMER COMPANY: FORMER CONFORMED NAME: Sand Holdco Ltd DATE OF NAME CHANGE: 20150415 10-Q 1 livn-20190930x10q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

Form 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 001-37599

LivaNova PLC

(Exact name of registrant as specified in its charter)

England and Wales ................... 98-1268150

(State or other jurisdiction of .......... (I.R.S. Employer

incorporation or organization) ........ Identification No.)

20 Eastbourne Terrace, London, United Kingdom, W2 6LG

(Address of principal executive offices) ....................... (Zip Code)

Registrant’s telephone number, including area code: (44) (0) 203 325-0660

Securities registered pursuant to Section 12(b) of the Act



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary Shares - £1.00 par value per share	LIVN	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑



Class	Outstanding at October 28, 2019
Ordinary Shares - £1.00 par value per share	48,400,468

LIVANOVA PLC

TABLE OF CONTENTS



	PART I. FINANCIAL INFORMATION	PAGE NO.
	Note About Forward Looking Statements	3
Item 1	Condensed Consolidated Financial Statements	5
	Condensed Consolidated Statements of Income (Loss)	5
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Balance Sheets	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to the Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	Controls and Procedures	42
	PART II. OTHER INFORMATION
Item 1	Legal Proceedings	44
Item 1A	Risk Factors	44
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3	Defaults Upon Senior Securities	44
Item 4	Mine Safety Disclosures	44
Item 5	Other Information	44
Item 6	Exhibits	45

In this Quarterly Report on Form 10-Q, “LivaNova,” “the Company,” “we,” “us” and “our” refer to LivaNova PLC and its consolidated subsidiaries.

This report may contain references to our proprietary intellectual property, including among others:


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


•	Trademarks for our Cardiopulmonary product systems: S5^® heart-lung machine, S3^® heart-lung machine, Inspire™, Heartlink™, XTRA^® Autotransfusion System, 3T Heater-Cooler^®, Connect™ and Revolution^®.

•

Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: Mitroflow^®, Crown PRT^®, Solo Smart™, Perceval^®, Miami Instruments™, Top Hat^®, Reduced Series Aortic Valves™, Carbomedics^® Carbo-Seal^®, Carbo-Seal Valsalva^®, Carbomedics^®Standard™, Orbis™ and Optiform^®, Memo 3D^®, Memo 3D^® ReChord™, MEMO 4D^®, MEMO 4D^® ReChord™, AnnuloFlo^®, AnnuloFlex^®, Bicarbon Slimline™, Bicarbon Filtline™ and Bicarbon Overline^®.


•	Trademarks for our advanced circulatory support systems: TandemLife^®, TandemHeart^®, TandemLung^®, ProtekDuo^®, and LifeSPARC™.


•	Trademarks for our obstructive sleep apnea system: ImThera^® and Aura6000^®.

These trademarks and trade names are the property of LivaNova or the property of our consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, our trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ^® or ^™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.

________________________________________

NOTE ABOUT FORWARD LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, LivaNova’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “should,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” “foresee” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by LivaNova and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, and include but are not limited to the risks and uncertainties summarized below:


•	changes in our common stock price;


•	changes in our profitability;


•	regulatory activities and announcements, including the failure to obtain regulatory approvals for our new products;


•	effectiveness of our internal controls over financial reporting;


•	fluctuations in future quarterly operating results;


•	failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, U.S. Food and Drug Administration (“FDA”) laws and regulations;


•	failure to establish, expand or maintain market acceptance of our products for the treatment of our approved indications;

•

any legislative or administrative reform to the healthcare system, including the U.S. Medicare or Medicaid systems or international reimbursement systems, that significantly reduces reimbursement for our products or procedures or denies coverage for such products or procedures or enhances coverage for competitive products or procedures, as well as adverse decisions by administrators of such systems on coverage or reimbursement issues relating to our products;


•	failure to maintain the current regulatory approvals for our products’ approved indications;


•	failure to obtain or maintain coverage and reimbursement for our products’ approved indications;


•	unfavorable results from clinical studies;


•	variations in sales and operating expenses relative to estimates;


•	our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;


•	product liability, intellectual property, shareholder-related, environmental-related, income tax and other litigation, disputes, losses and costs;


•	protection, expiration and validity of our intellectual property;


•	changes in technology, including the development of superior or alternative technology or devices by competitors;


•	competition from providers of alternative medical therapies, such as pharmaceutical companies and providers of cannabis;


•	cyber-attacks or other disruptions to our information technology systems;


•	failure to comply with applicable U.S. laws and regulations, including federal and state privacy and security laws and regulations;


•	failure to comply with applicable non-U.S. laws and regulations;


•	non-U.S. operational and economic risks and concerns;


•	failure to attract or retain key personnel;


•	failure of new acquisitions to further our strategic objectives or strengthen our existing businesses;


•	losses or costs from pending or future lawsuits and governmental investigations;


•	changes in accounting rules that adversely affect the characterization of our consolidated financial position, results of operations or cash flows;


•	changes in customer spending patterns;


•	continued volatility in the global market and worldwide economic conditions, including volatility caused by the implementation of Brexit and/or changes to existing trade agreements and relationships between the U.S. and other countries;


•	changes in tax laws, including changes related to Brexit, or exposure to additional income tax liabilities;


•	harsh weather or natural disasters that interrupt our business operations or the business operations of our hospital-customers; and


•	failure of the market to adopt new therapies or to adopt new therapies quickly.

Other factors that could cause our actual results to differ from our projected results are described in (1) “Part II, Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, (2) our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“2018 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our 2018 Form 10-K.

Financial Information and Currency of Financial Statements

All of the financial information included in this quarterly report has been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.” and such principles, “U.S. GAAP”). The reporting currency of our condensed consolidated financial statements is U.S. dollars.

________________________________________

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(In thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	268,610		$	272,082		$	796,580		$	809,978
Costs and expenses:
Cost of sales - exclusive of amortization	86,128			94,300			245,324			270,891
Product remediation	3,076			3,434			11,136			8,691
Selling, general and administrative	123,015			115,136			375,932			342,736
Research and development	45,904			42,417			124,023			108,384
Merger and integration expenses	6,716			12,659			14,345			20,028
Restructuring expenses	698			436			4,563			2,793
Impairment of intangible assets	—			—			50,295			—
Amortization of intangibles	11,146			9,457			29,690			28,075
Insurance recovery	(33,834		)	—			(33,834		)	—
Operating income (loss) from continuing operations	25,761			(5,757		)	(24,894		)	28,380
Interest income	151			184			624			863
Interest expense	(4,774		)	(2,633		)	(10,490		)	(7,750		)
Gain on acquisition	—			—			—			11,484
Foreign exchange and other gains (losses)	327			(727		)	(795		)	(1,070		)
Income (loss) from continuing operations before tax	21,465			(8,933		)	(35,555		)	31,907
Income tax (benefit) expense	(10,653		)	(2,660		)	(23,431		)	203
Losses from equity method investments	—			—			—			(627		)
Net income (loss) from continuing operations	32,118			(6,273		)	(12,124		)	31,077
Net (loss) income from discontinued operations, net of tax	—			(904		)	178			(9,915		)
Net income (loss)	$	32,118		$	(7,177	)	$	(11,946	)	$	21,162

Basic income (loss) per share:
Continuing operations	$	0.66		$	(0.13	)	$	(0.25	)	$	0.64
Discontinued operations	—			(0.02		)	—			(0.20		)
	$	0.66		$	(0.15	)	$	(0.25	)	$	0.44

Diluted income (loss) per share:
Continuing operations	$	0.66		$	(0.13	)	$	(0.25	)	$	0.63
Discontinued operations	—			(0.02		)	—			(0.20		)
	$	0.66		$	(0.15	)	$	(0.25	)	$	0.43

Shares used in computing basic income (loss) per share	48,395			48,637			48,329			48,484
Shares used in computing diluted income (loss) per share	48,820			48,637			48,329			49,427

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	32,118		$	(7,177	)	$	(11,946	)	$	21,162
Other comprehensive (loss) income:
Net change in unrealized (loss) gain on derivatives	(870		)	693			(665		)	237
Tax effect	209			(168		)	159			(57		)
Net of tax	(661		)	525			(506		)	180
Foreign currency translation adjustment	(27,775		)	1,863			(16,628		)	(45,738		)
Total other comprehensive (loss) income	(28,436		)	2,388			(17,134		)	(45,558		)
Total comprehensive income (loss)	$	3,682		$	(4,789	)	$	(29,080	)	$	(24,396	)

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share amounts)



	September 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	75,313		$	47,204
Accounts receivable, net of allowance of $12,247 at September 30, 2019 and $11,598 at December 31, 2018	243,179			256,135
Inventories	167,756			153,535
Prepaid and refundable taxes	38,093			46,852
Prepaid expenses and other current assets	22,505			29,571
Total Current Assets	546,846			533,297
Property, plant and equipment, net	179,507			191,400
Goodwill	945,544			956,815
Intangible assets, net	699,493			770,439
Operating lease assets (Note 11)	54,283			—
Investments	24,942			24,823
Deferred tax assets	53,577			68,146
Other assets	5,749			4,781
Total Assets	$	2,509,941		$	2,549,701
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt obligations	$	68,777		$	28,794
Accounts payable	75,522			76,735
Accrued liabilities and other	128,456			124,285
Current litigation provision liability	121,468			161,851
Taxes payable	10,128			22,530
Accrued employee compensation and related benefits	64,840			82,551
Total Current Liabilities	469,191			496,746
Long-term debt obligations	272,887			139,538
Contingent consideration	140,472			161,381
Litigation provision liability	31,500			132,210
Deferred tax liabilities	16,126			68,189
Long-term operating lease liabilities (Note 11)	44,724			—
Long-term employee compensation and related benefits	25,838			25,264
Other long-term liabilities	13,921			22,635
Total Liabilities	1,014,659			1,045,963
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Ordinary Shares, £1.00 par value: unlimited shares authorized; 49,380,570 shares issued and 48,399,097 shares outstanding at September 30, 2019; 49,323,418 shares issued and 48,205,783 shares outstanding at December 31, 2018	76,217			76,144
Additional paid-in capital	1,725,482			1,705,111
Accumulated other comprehensive loss	(41,610		)	(24,476		)
Accumulated deficit	(263,525		)	(251,579		)
Treasury stock at cost, 981,473 ordinary shares at September 30, 2019; 1,117,635 ordinary shares at December 31, 2018	(1,282		)	(1,462		)
Total Stockholders’ Equity	1,495,282			1,503,738
Total Liabilities and Stockholders’ Equity	$	2,509,941		$	2,549,701

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Operating Activities:
Net (loss) income	$	(11,946	)	$	21,162
Non-cash items included in net (loss) income:
Impairment of intangible assets	50,295			—
Amortization	29,690			28,052
Deferred tax benefit	(26,422		)	(13,488		)
Stock-based compensation	24,127			21,387
Depreciation	23,115			24,979
Amortization of operating lease assets	8,961			—
Amortization of income taxes payable on intercompany transfers of property	3,261			4,155
Gain on acquisition	—			(11,484		)
Other	1,952			453
Changes in operating assets and liabilities:
Accounts receivable, net	5,433			30,506
Inventories	(18,181		)	(7,622		)
Other current and non-current assets	6,627			(16,757		)
Accounts payable and accrued current and non-current liabilities	(28,964		)	12,895
Taxes payable	(14,367		)	4,993
Litigation provision liability	(140,823		)	—
Restructuring reserve	(6,766		)	368
Net cash (used in) provided by operating activities	(94,008		)	99,599
Investing Activities:
Purchases of property, plant and equipment	(16,801		)	(24,318		)
Acquisitions, net of cash acquired	(10,750		)	(279,863		)
Purchases of intangible assets	(3,186		)	(781		)
Proceeds from asset sales	505			13,872
Purchase of investment	(287		)	(3,000		)
Proceeds from the sale of CRM business franchise, net of cash disposed	—			186,682
Net cash used in investing activities	(30,519		)	(107,408		)
Financing Activities:
Proceeds from long-term debt obligations	193,490			60,000
Payment of contingent consideration	(17,989		)	(651		)
Repayment of long-term debt obligations	(12,330		)	(12,290		)
Shares repurchased from employees for minimum tax withholding	(6,183		)	(8,559		)
Debt issuance costs	(3,795		)	—
Proceeds from share issuances under ESPP	2,574			—
Change in short-term borrowing, net	(2,173		)	(31,281		)
Proceeds from exercise of stock options	331			4,177
Proceeds from short-term borrowing (maturities greater than 90 days)	—			240,000
Repayment of short-term borrowing (maturities greater than 90 days)	—			(240,000		)
Payment of deferred consideration - acquisition of Caisson Interventional, LLC	—			(14,073		)
Other	(184		)	(233		)
Net cash provided by (used in) financing activities	153,741			(2,910		)
Effect of exchange rate changes on cash and cash equivalents	(1,105		)	(2,948		)
Net increase (decrease) in cash and cash equivalents	28,109			(13,667		)
Cash and cash equivalents at beginning of period	47,204			93,615
Cash and cash equivalents at end of period	$	75,313		$	79,948

See accompanying notes to the condensed consolidated financial statements

LIVANOVA PLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Unaudited Condensed Consolidated Financial Statements

Basis of Presentation

The accompanying condensed consolidated financial statements of LivaNova as of, and for the three and nine months ended September 30, 2019 and 2018, have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated balance sheet of LivaNova at December 31, 2018 has been derived from audited financial statements contained in our 2018 Form 10-K, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of the operating results of LivaNova and its subsidiaries, for the three and nine months ended September 30, 2019, and are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our 2018 Form 10-K.

Reclassifications

We have reclassified certain prior period amounts for comparative purposes. These reclassifications did not have a material effect on our financial condition, results of operations or cash flows.

Gross profit, as previously presented for the nine months ended September 30, 2018, excluded amortization of certain intangible assets. For the nine months ended September 30, 2018, $10.7 million of such amortization expense should have been included in cost of sales. The Company has determined that this misclassification error was not material to any prior annual or interim periods. For comparability among periods, the Company no longer presents gross profit within its condensed consolidated statements of income (loss).

Significant Accounting Policies

Our significant accounting policies are detailed in “Note 2. Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies” and “Note 3. Revenue Recognition” of our 2018 Form 10-K. Changes to our accounting policies as a result of adopting the new lease accounting standard are discussed below.

On January 1, 2019, we adopted ASC Update (“ASU”) No 2016-02, Leases, including subsequent related accounting updates (collectively referred to as “Topic 842”), which supersedes the previous accounting model for leases. We adopted the standard using the modified retrospective approach with an effective date as of January 1, 2019. Prior year financial statements were not recast under the new standard. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward our historical assessment of whether contracts are or contain leases and lease classification. We also elected the practical expedient to account for lease and non-lease components together as a single combined lease component, which is applicable to all asset classes. We did not, however, elect the practical expedient related to using hindsight in determining the lease term as this was not relevant following our election of the modified retrospective approach.

In addition, we elect certain practical expedients on an ongoing basis, including the practical expedient for short-term leases pursuant to which a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a lease liability and operating lease asset for leases with a term of 12 months or less and that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. We have applied this accounting policy to all asset classes in our portfolio and will recognize the lease payments for such short-term leases within profit and loss on a straight-line basis over the lease term.

Furthermore, from a lessor perspective, certain of our agreements that allow the customer to use, rather than purchase, our medical devices will meet the criteria of being a lease in accordance with the new standard. While the amount of revenue and expenses recognized over the contract term will not be impacted, the timing of revenue and expense recognition will be impacted depending upon lease classification. We enacted appropriate changes to our business processes, systems and internal controls to support identification, recognition and disclosure of leases under the new standard.

We determine if an arrangement is or contains a lease at inception. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the latter of our lease standard effective date for adoption or the lease commencement date. Variable lease payments, such as common area rent

maintenance charges and rent escalations not known upon lease commencement, are not included in determination of the minimum lease payments and will be expensed in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. We used the incremental borrowing rate available nearest to our adoption date for leases that commenced prior to that date. The operating lease asset also includes any lease payments made in advance and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

For additional information refer to “Note 11. Leases.”

Note 2. Business Combinations

Miami Instruments

On June 12, 2019, we acquired the minimally invasive cardiac surgery instruments business from Miami Instruments, LLC (“Miami Instruments”) for cash consideration of up to $17.0 million. The related operations have been integrated into our Cardiovascular business franchise as part of our Heart Valves portfolio. Cash of $10.8 million was paid at closing with up to $6.0 million in contingent consideration based on achieving certain milestones. In connection with this acquisition, we recognized $14.7 million in developed technology and in-process research and development (“IPR&D”) intangible assets and $1.5 million in goodwill.

Note 3. Discontinued Operations

In November 2017, we concluded that the sale of our Cardiac Rhythm Management (“CRM”) business franchise represented a strategic shift in our business that would have a major effect on future operations and financial results. Accordingly, the operating results of CRM are classified as discontinued operations on our condensed consolidated statements of income (loss) for all the periods presented in this Quarterly Report on Form 10-Q.

We completed the CRM Sale on April 30, 2018 to MicroPort Cardiac Rhythm B.V. and MicroPort Scientific Corporation for total cash proceeds of $195.9 million, less cash transferred of $9.2 million, subject to a closing working capital adjustment. In conjunction with the sale, we entered into transition services agreements to provide certain support services generally for up to twelve months from the closing date of the sale. The services include, among others, accounting, information technology, human resources, quality assurance, regulatory affairs, supply chain, clinical affairs and customer support. For providing these services, during three and nine months ended September 30, 2019, we recognized income of $0.1 million and $0.9 million, respectively, and during the three and nine months ended September 30, 2018, we recognized income of $1.1 million and $2.0 million, respectively. Income recognized related to the transition services agreements is recorded as a reduction to the related expenses in the associated expense line items in the condensed consolidated statements of income (loss).

The following table represents the financial results of CRM presented as net (loss) income from discontinued operations in the condensed consolidated statements of income (loss) (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Net sales	$	—	$	—		$	—		$	77,366
Costs and expenses:
Cost of sales	—		—			(43		)	27,306
Selling, general and administrative expenses	—		543			26			43,441
Research and development	—		—			(161		)	16,577
Restructuring expenses	—		—			—			651
Revaluation gain on assets and liabilities held for sale	—		—			—			(1,213		)
Loss on sale of CRM	—		—			—			214
Operating (loss) income from discontinued operations	—		(543		)	178			(9,610		)
Foreign exchange and other gains	—		—			—			102
(Loss) income from discontinued operations, before tax	—		(543		)	178			(9,508		)
Income tax expense (benefit)	—		361			—			(804		)
Losses from equity method investments	—		—			—			(1,211		)
Net (loss) income from discontinued operations	$	—	$	(904	)	$	178		$	(9,915	)

Cash flows attributable to our discontinued operations are included in our condensed consolidated statements of cash flows. For the nine months ended September 30, 2018, CRM’s capital expenditures were $0.9 million and stock-based compensation expense was $2.1 million.

Note 4. Restructuring

We initiate restructuring plans to leverage economies of scale, streamline distribution and logistics and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these plans were reported as restructuring expenses in the operating results of our condensed consolidated statements of income (loss).

Our 2015 and 2016 Reorganization Plans (the “Prior Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the merger of Cyberonics, Inc. and Sorin S.p.A. in October 2015. The Prior Plans include the closure of the R&D facility in Meylan, France and consolidation of its R&D capabilities into the Clamart, France facility. We completed the Prior Plans during 2018.

In December 2018, we initiated a reorganization plan (the “2018 Plan”) in order to reduce manufacturing and operational costs associated with our Cardiovascular facilities in Saluggia and Mirandola, Italy and Arvada, Colorado. We estimate that the 2018 Plan will result in a net reduction of approximately 75 personnel and is expected to be completed by the end of 2019.

The following table presents the accruals, inventory obsolescence and other reserves, recorded in connection with our reorganization plans (in thousands):



	Employee Severance and Other Termination Costs			Other			Total
Balance at December 31, 2018	$	10,195		$	3,069		$	13,264
Charges	4,488			75			4,563
Cash payments and other	(13,147		)	(2,059		)	(15,206		)
Balance at September 30, 2019 ⁽¹⁾	$	1,536		$	1,085		$	2,621


(1)	Cumulatively, we have recognized a total of $103.8 million in restructuring expense inclusive of discontinued operations under the Prior Plans and the 2018 Plan.

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
Cardiovascular	$	783		$	354	$	1,521	$	2,093
Neuromodulation	(171		)	17		314		34
Other	86			65		2,728		666
Total	$	698		$	436	$	4,563	$	2,793

Note 5. Product Remediation Liability

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

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

In April 2017, we obtained CE Mark in Europe for the design change of the 3T device, and in May 2017 we completed our first vacuum canister and internal sealing upgrade on a customer-owned device. We are currently implementing the vacuum canister and internal sealing upgrade program in as many countries as possible until all devices are upgraded. On October 11, 2018, after review of information provided by us, the FDA concluded that we could commence the vacuum canister and internal sealing upgrade program in the U.S.

As part of the remediation plan, we continue to offer a no-charge deep disinfection service (deep cleaning service) for 3T device users as we receive the required regulatory approvals. The deep disinfection service was rolled out in Europe in the second half of 2015, and on April 12, 2018, the FDA agreed to allow us to move forward with the deep cleaning service in the U.S., thereby adding to the growing list of countries around the world in which we offer this service. Also, we are continuing to offer the loaner program for 3T devices, initiated in the fourth quarter of 2016, to provide existing 3T device users with a new loaner 3T device at no charge pending regulatory approval and implementation of the vacuum system addition and deep disinfection service worldwide. This loaner program began in the U.S., was rolled out in Europe shortly thereafter, and is being made available progressively on a global basis, prioritizing and allocating devices to 3T device users based on pre-established criteria.

Changes in the carrying amount of the product remediation liability are as follows (in thousands):



Balance at December 31, 2018	$	14,745
Adjustments	2,567
Remediation activity	(9,341		)
Effect of changes in foreign currency exchange rates	(527		)
Balance at September 30, 2019 ⁽¹⁾	$	7,444


(1)	At September 30, 2019, the product remediation liability balance is included within accrued liabilities and other on the condensed consolidated balance sheet.

We recognized product remediation expenses during the three and nine months ended September 30, 2019, of $3.1 million and $11.1 million, respectively, and $3.4 million and $8.7 million, respectively, during the three and nine months ended

September 30, 2018. Product remediation expenses include internal labor costs, costs to remediate certain inspectional observations made by the FDA at our Munich facility and costs associated with the incorporation of the modification of the 3T device design into the next generation 3T device. These costs and related legal costs are expensed as incurred and are not included within the product remediation liability presented above. At September 30, 2019, our balance sheet includes a $153.0 million provision related to litigation involving our 3T device. For further information, please refer to “Note 12. Commitments and Contingencies.”

Note 6. Intangible Assets

Intangible Asset Impairment

During the second quarter of 2019, we determined that there would be a delay in the estimated commercialization date of the Company’s obstructive sleep apnea product currently under development. This delay constituted a triggering event that required evaluation of the IPR&D asset arising from the ImThera Medical Inc. (“ImThera”) acquisition for impairment. Based on the assessment performed, we determined that the IPR&D asset was impaired and as a result, recorded an impairment of $50.3 million, which is included in our Neuromodulation segment. The carrying value of the IPR&D asset as of September 30, 2019 is $112.0 million. The estimated fair value of IPR&D was determined using the income approach. Future delays in commercialization or changes in management estimates could result in further impairment.

Intangible Asset Reclassification

During the third quarter of 2019, upon receiving FDA approval of the LifeSPARC system, we reclassified IPR&D assets of $107.5 million from the acquisition of CardiacAssist, Inc., doing business as TandemLife (“TandemLife”) to finite-lived developed technology intangible assets and began amortizing the intangible asset over a useful life of 15 years.

Note 7. Investments

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



Equity Investments Without Readily Determinable Fair Values	September 30, 2019		December 31, 2018
Respicardia Inc. ⁽¹⁾	$	17,706	$	17,706
Ceribell, Inc.	3,000		3,000
Rainbow Medical Ltd.	1,067		1,119
MD Start II	1,090		1,144
Highlife S.A.S.	1,034		1,084
Other	770		770
	24,667		24,823
Equity method investments ⁽²⁾	275		—
	$	24,942	$	24,823

(1)

Respicardia Inc. (“Respicardia”) is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea by transvenously stimulating the phrenic nerve. We have a loan outstanding to Respicardia, with a carrying amount of $0.6 million as of September 30, 2019 and December 31, 2018, which is included in prepaid expenses and other current assets in the condensed consolidated balance sheet.


(2)	During the second quarter of 2019, we invested in equity securities that we account for under the equity method of accounting due to our deemed ability to exercise significant influence. We initially invested $0.3 million and are required to fund up to a total of approximately €5.0 million (approximately $5.5 million as of September 30, 2019) based on cash calls.

Note 8. Fair Value Measurements

We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2019 and 2018.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



	Fair Value as of September 30, 2019		Fair Value Measurements Using Inputs Considered as:
	Fair Value as of September 30, 2019		Level 1		Level 2		Level 3
Assets:
Derivative assets - freestanding instruments (FX)	$	1,213	$	—	$	1,213	$	—
	$	1,213	$	—	$	1,213	$	—

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	1,458	$	—	$	1,458	$	—
Derivative liabilities - designated as cash flow hedges (interest rate swaps)	519		—		519		—
Derivative liabilities - freestanding instruments (FX)	1,869		—		1,869		—
Contingent consideration ⁽¹⁾	165,274		—		—		165,274
	$	169,120	$	—	$	3,846	$	165,274



	Fair Value as of December 31, 2018		Fair Value Measurements Using Inputs Considered as:
	Fair Value as of December 31, 2018		Level 1		Level 2		Level 3
Assets:
Derivative assets - freestanding instruments (FX)	$	236	$	—	$	236	$	—
	$	236	$	—	$	236	$	—