XNAS:VASC Vascular Solutions Inc Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
OR

  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________

Commission File Number: 0-27605


VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

Minnesota
 
41-1859679
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

6464 Sycamore Court
Minneapolis, Minnesota 55369
(Address of principal executive offices, including zip code)

 (763) 656-4300
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer   o
Smaller Reporting Company o

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

The registrant had 16,316,369 shares of common stock, $.01 par value per share, outstanding as of October 15, 2012.



 
 

 

VASCULAR SOLUTIONS, INC.
 
TABLE OF CONTENTS
 
 
Page
   
PART 1. FINANCIAL INFORMATION
2
     
Item 1.
2
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
16
     
Item 3.
23
     
Item 4.
24
   
PART II.  OTHER INFORMATION
23
     
Item 1.
24
     
Item 1A.
24
     
Item 2.
25
     
Item 3.
25
     
Item 4.
25
     
Item 5.
25
     
Item 6.
25

 
Page 1


PART 1. FINANCIAL INFORMATION

Financial Statements

VASCULAR SOLUTIONS, INC.

Consolidated Balance Sheets

   
September 30, 2012
   
December 31, 2011
 
   
(unaudited)
   
(see note)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 13,913,000     $ 13,726,000  
Accounts receivable, net of reserves of $155,000 and $150,000 in 2012 and 2011, respectively
    13,889,000       11,728,000  
Inventories
    13,738,000       14,788,000  
Prepaid expenses
    1,905,000       1,624,000  
Current portion of deferred tax assets
    5,500,000       5,500,000  
Total current assets
    48,945,000       47,366,000  
                 
Property and equipment, net
    6,559,000       5,607,000  
Goodwill
    10,095,000       8,117,000  
Intangible assets, net
    12,426,000       7,948,000  
Deferred tax assets, net of current portion and liabilities
    3,811,000       7,445,000  
Total assets
  $ 81,836,000     $ 76,483,000  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 3,461,000     $ 2,843,000  
Accrued compensation
    3,813,000       3,430,000  
Accrued expenses
    1,832,000       1,406,000  
Accrued royalties
    274,000       560,000  
Current portion of deferred revenue and contingent consideration
    307,000       477,000  
Total current liabilities
    9,687,000       8,716,000  
                 
Long-term deferred revenue and contingent consideration, net of current portion
    876,000       1,061,000  
                 
Shareholders’ equity:
               
Common stock, $0.01 par value: Authorized shares – 40,000,000 Issued and outstanding shares – 16,316,369 – 2012; 16,378,205 – 2011
    163,000       164,000  
Additional paid-in capital
    81,724,000       83,962,000  
Accumulated other comprehensive earnings
    (257,000 )     (204,000 )
Accumulated deficit
    (10,357,000 )     (17,216,000 )
Total shareholders’ equity
    71,273,000       66,706,000  
Total liabilities and shareholders’ equity
  $ 81,836,000     $ 76,483,000  
 
See accompanying notes.
 
Note:  The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date.
 
 
Page 2

 
VASCULAR SOLUTIONS, INC.

Consolidated Statements of Earnings

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
                         
Revenue:
                       
Product revenue
  $ 24,465,000     $ 21,450,000     $ 72,821,000     $ 64,580,000  
License revenue
    87,000       2,854,000       262,000       3,279,000  
Total revenue
    24,552,000       24,304,000       73,083,000       67,859,000  
                                 
Product costs and operating expenses:
                               
Cost of goods sold
    8,183,000       7,463,000       24,252,000       22,262,000  
Research and development
    2,936,000       2,808,000       8,964,000       7,541,000  
Clinical and regulatory
    1,022,000       1,104,000       3,326,000       3,327,000  
Sales and marketing
    6,188,000       5,831,000       19,279,000       18,318,000  
General and administrative
    1,714,000       881,000       5,013,000       3,660,000  
Amortization of purchased technology and intangibles
    359,000       212,000       1,032,000       621,000  
Total product costs and operating expenses
    20,402,000       18,299,000       61,866,000       55,729,000  
                                 
Operating earnings
    4,150,000       6,005,000       11,217,000       12,130,000  
                                 
Other earnings (expenses):
                               
Interest earnings
          4,000             12,000  
Interest expense
    (3,000 )     (3,000 )     (10,000 )     (10,000 )
Foreign exchange gain (loss)
    9,000       (9,000 )     (11,000 )     117,000  
                                 
Earnings before income taxes
    4,156,000       5,997,000       11,196,000       12,249,000  
                                 
Income tax expense
    (1,591,000 )     (2,287,000 )     (4,338,000 )     (4,669,000 )
Net earnings
  $ 2,565,000     $ 3,710,000     $ 6,858,000     $ 7,580,000  
                                 
Net earnings per share – basic
  $ 0.16     $ 0.22     $ 0.43     $ 0.46  
Net earnings per share – diluted
  $ 0.16     $ 0.22     $ 0.42     $ 0.44  

See accompanying notes.
 
 
Page 3


VASCULAR SOLUTIONS, INC.

Consolidated Statements of Comprehensive Earnings

   
Three Months Ended
    Nine Months Ended  
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
     (unaudited)  
                         
Net earnings
  $ 2,565,000     $ 3,710,000     $ 6,858,000     $ 7,580,000  
Other comprehensive earnings (loss), net of tax: Foreign currency translation adjustments
    78,000       (221,000 )     (53,000 )     (110,000 )
Comprehensive earnings
  $ 2,643,000     $ 3,489,000     $ 6,805,000     $ 7,470,000  

See accompanying notes.
 
 
Page 4


VASCULAR SOLUTIONS, INC.

Consolidated Statements of Cash Flows

   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
   
(unaudited)
 
Operating activities
           
Net earnings
  $ 6,858,000     $ 7,580,000  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
    1,578,000       1,563,000  
Amortization
    1,032,000       621,000  
Stock-based compensation
    2,221,000       1,792,000  
Deferred taxes, net
    3,634,000       4,161,000  
Change in fair value of contingent consideration
    (96,000 )     (586,000 )
Gain on the sale of property and equipment
    (1,000 )      
Change in allowance for doubtful accounts
    5,000       (15,000 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,168,000 )     (377,000 )
Inventories
    1,062,000       (2,491,000 )
Prepaid expenses
    (282,000 )     (28,000 )
Accounts payable
    621,000       875,000  
Accrued compensation and expenses
    (205,000 )     15,000  
Amortization of deferred license fees and other deferred revenue
    (259,000 )     (3,260,000 )
Net cash provided by operating activities
    14,000,000       9,850,000  
                 
Investing activities
               
Purchase of property and equipment
    (2,370,000 )     (1,742,000 )
Cash paid for acquisitions and license
    (7,000,000 )     (5,721,000 )
Proceeds from the sale of property and equipment
    10,000        
Net cash used in investing activities
    (9,360,000 )     (7,463,000 )
                 
Financing activities
               
Repurchase of common shares
    (5,413,000 )     (2,606,000 )
Proceeds from the exercise of stock options and sale of stock, net of expenses
     954,000        801,000  
Net cash used in financing activities
    (4,459,000 )     (1,805,000 )
Increase in cash and cash equivalents
    181,000       582,000  
Effect of exchange rate changes on cash and cash equivalents
    6,000       (95,000 )
Cash and cash equivalents at beginning of period
    13,726,000       17,360,000  
Cash and cash equivalents at end of period
  $ 13,913,000     $ 17,847,000  
                 
Supplemental disclosure of cash flow
               
Cash paid for interest
  $ 10,000     $ 9,000  
Cash paid for taxes
  $ 751,000     $ 462,000  
 
See accompanying notes.

 
Page 5

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements

(1)
Basis of Presentation

The accompanying unaudited consolidated financial statements of Vascular Solutions, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included.  The consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.  Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods.

(2)
Net Earnings per Share

In accordance with Accounting Standards Codification (“ASC”) 260-10-55, basic net earnings per share for the three and nine months ended September 30, 2012 and 2011 is computed by dividing net earnings by the weighted average common shares outstanding during the periods presented.  Diluted net earnings per weighted average common share is computed by dividing net earnings by the weighted average common shares outstanding during the period, increased to include dilutive potential common shares issuable relating to outstanding restricted stock, and upon the exercise of stock options and awards that were outstanding during the period.

Weighted average common shares outstanding for the three and nine months ended September 30, 2012 and 2011 was as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
             
Weighted average shares outstanding – basic
    15,885,000       16,643,000        15,960,000        16,654,000  
Weighted average shares outstanding – diluted
    16,389,000       17,239,000       16,341,000       17,223,000  
 
(3)
Revenue Recognition
       
In the United States the Company sells its products and services directly to hospitals and clinics.  Revenue is recognized in accordance with generally accepted accounting principles as outlined in ASC 605-10-S99, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered.  The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers.  The Company negotiates credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price.  All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.
 
 
Page 6

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
In all international markets, the Company sells its products to international distributors which subsequently resell the products to hospitals and clinics.  The Company has agreements with each of its distributors which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor.  The Company warrants that its products are free from manufacturing defects at the time of shipment to the distributor.  Revenue is recognized upon shipment of products to distributors following the receipt and acceptance of a distributor’s purchase order.  Allowances are provided for estimated returns and warranty costs at the time of shipment.

The Company also generates revenues from license agreements and recognizes the revenue when earned.  In accordance with ASC 605, for revenues which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller.  Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit.  Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily ASC 605-10-S99.

Starting in January 2012, the Company began to generate revenue from selling a reprocessing service for ClosureFast® radiofrequency catheters.  In accordance with ASC 605-45, the Company recognizes this revenue gross, with the amount paid to the supplier of the reprocessing service reflected as cost of sales.

In accordance with ASC 605-45-45, the Company includes shipping and handling revenues in net revenue, and shipping and handling costs in cost of sales.

(4) 
Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market.  Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.  Inventories are comprised of the following:

 
 
September 30,
2012
   
December 31, 2011
 
   
(unaudited)
       
             
Raw materials
  $ 6,725,000     $ 7,107,000  
Work-in process
    823,000       1,369,000  
Finished goods
    6,190,000       6,312,000  
    $ 13,738,000     $ 14,788,000  

 
Page 7

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued

(5) 
Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and acquired intangible assets for the nine months ended September 30, 2012 are as follows:

   
Goodwill
   
Acquired
Intangibles
 
   
(unaudited)
 
       
Balance at December 31, 2011
  $ 8,117,000     $ 7,948,000  
Amortization
          (1,032,000 )
Purchased licenses & acquisitions
    2,006,000       5,530,000  
Foreign currency translation adjustments
    (28,000 )     (20,000 )
Balance at September 30, 2012
  $ 10,095,000     $ 12,426,000  

(6) 
Credit Risk and Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay.  The Company does not accrue interest on past due accounts receivable.  Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer.  At both September 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $120,000.

All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.  The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet.  At September 30, 2012 and December 31, 2011, the sales and return allowance was $35,000 and $30,000, respectively.

Accounts receivable are shown net of the combined total of the allowance for doubtful accounts and allowance for sales returns of $155,000 and $150,000 at September 30, 2012 and December 31, 2011, respectively.

(7)
Concentrations of Credit and Other Risks

In the United States the Company sells its products and services directly to hospitals and clinics.  In all international markets, the Company sells its products to distributors who, in turn, sell to hospitals and clinics.

With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral.  No single customer represented greater than 10% of gross accounts receivable as of either September 30, 2012 or December 31, 2011.  There have been no material losses on customer receivables.

 
Page 8

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
Revenue by geographic destination as a percentage of total net revenue for both of the nine month periods ended September 30, 2012 and 2011 was 84% in the United States and 16% in international markets, respectively.  No single customer represented greater than 10% of the total net revenue for the three and nine months ended September 30, 2012 and 2011.

(8)
Dependence on Key Suppliers

The Company purchases certain key components from single-source suppliers.  Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company’s financial condition and results of operations.

King Pharmaceuticals

The Company purchases its requirements for thrombin (a component in the Hemostat products) under a Thrombin-JMI® Supply Agreement entered into with King Pharmaceuticals, Inc. (“King”) on January 9, 2007.  King was acquired by Pfizer, Inc. on February 28, 2011.  Under the terms of the Thrombin-JMI Supply Agreement, King agrees to manufacture and supply thrombin to the Company on a non-exclusive basis.  The Thrombin-JMI Supply Agreement does not contain any minimum purchase requirements.  King agrees to supply the Company with such quantity of thrombin as the Company may order at a fixed price throughout the term of the Thrombin-JMI Supply Agreement as adjusted for inflation, variations in potency and other factors.  The Thrombin-JMI Supply Agreement has an initial term of 10 years, followed by successive automatic one-year extensions, subject to termination by the parties under certain circumstances, including: (i) termination by King without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to the Company, and (ii) termination by the Company without cause any time after the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon five years prior written notice to King provided that the Device Supply Agreement, which the Company also entered into with King on January 9, 2007, has expired on its terms or the parties have agreed to terminate it.

(9)
Commitments and Contingencies

Governmental Proceedings

On June 28, 2011, the Company received a subpoena from the U.S. Attorney’s Office for the Western District of Texas under the Health Insurance Portability & Accountability Act of 1996 (HIPAA) requesting the production of documents related to the Company’s Vari-Lase products, and in particular the use of the Vari-Lase® Short Kit for the treatment of perforator veins.  The Vari-Lase Short Kit has been sold under a 510(k) clearance for the treatment of incompetence and reflux of superficial veins in the lower extremity since 2007 with total U.S. sales through September 30, 2012 of approximately $432,000 (0.1% of the Company’s total U.S. sales) and has not been the subject of any reported serious adverse clinical event.  On August 14, 2012, the U.S. District Court for the Western District of Texas unsealed a qui tam complaint that had been filed on November 19, 2010 by Desalle Bui, a former sales employee of the Company, which is the basis for the U.S. Attorney’s investigation, to which the federal government, after three extensions of time, has elected to intervene.  The complaint contains allegations of off-label promotion of Vari-Lase products for the treatment of perforator veins, re-use of single-use Vari-Lase products and Company-provided kickbacks to physicians, resulting in alleged damages to the government of approximately $20 million.  The Company believes the allegations are factually inaccurate and without merit, and therefore the Company intends to both fully comply with the U.S. Attorney’s investigation and defend the litigation.

 
Page 9

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
From time to time, the Company is involved in additional legal proceedings arising in the normal course of business.  As of the date of this report the Company is not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on the Company’s results of operations or financial condition.

King Agreements

On January 9, 2007, the Company entered into three separate agreements with King: a License Agreement, a Device Supply Agreement and a Thrombin-JMI Supply Agreement (See Note 8).  King was acquired by Pfizer, Inc. on February 28, 2011.  Under the License Agreement, the Company licensed the exclusive rights to the Company’s products Thrombi-Pad®, Thrombi-Gel® and Thrombi-Paste® to King in exchange for a one-time license fee of $6,000,000.  Under the Device Supply Agreement, the Company agreed to manufacture the licensed products for sale to King in exchange for two separate $1,000,000 milestone payments; one upon the first commercial sale of Thrombi-Gel (which was received on May 31, 2007), and one upon the first commercial sale of Thrombi-Paste (which has not been received and is not expected to be received).  The Company was amortizing the $6,000,000 license fee on a straight-line basis over 10 years.  The Company was amortizing the $1,000,000 milestone payment that was received on May 31, 2007 over the remaining 10-year license period.

Under the Device Supply Agreement the Company agreed to pursue on behalf of King a surgical indication for the use of the Thrombi-Gel and Thrombi-Paste products from the FDA.  The Device Supply Agreement requires the Company to make a one-time payment of $2,500,000 to King if the FDA does not approve the surgical indication of Thrombi-Gel and a one-time payment of $2,500,000 to King if the FDA does not approve the surgical indication of Thrombi-Paste after performing a clinical study and submitting the application.  In 2009, King suspended further development of the Thrombi-Paste products.  In 2010, King suspended further work on the pursuit of a surgical indication for the Thrombi-Gel products.

On July 6, 2011, King notified the Company that King was terminating the development of the Thrombi-Paste products and terminating efforts to obtain the surgical indication for the Thrombi-Gel products.  As a result of King making the decision to not proceed, the Company is not required to make either of the $2,500,000 payments to King, and instead the Company recognized revenue of $2,762,000 in the third quarter of 2011 as the remaining deferred license revenue originally allocated to the Thrombi-Paste products and the surgical indication of the Thrombi-Gel products as part of the King agreements.  Amortization of the deferred revenue is $51,000 per quarter for the remainder of the 10-year license period, reflecting the remaining amortization allocated to the topical use indication of the Thrombi-Gel and Thrombi-Pad® products.  The unamortized license fee was $866,000 and $1,019,000 at September 30, 2012 and December 31, 2011, respectively.  The amortization of license fee was $153,000 and $3,171,000 for the nine months ended September 30, 2012 and 2011, respectively.

Nicolai GmbH Agreement

Effective April 1, 2008 the Company entered into a five-year distribution agreement with Nicolai GmbH.  As a result of entering into this distribution agreement, the Company no longer maintains a direct sales force in Germany.  In connection with this distribution agreement, the Company received 500,000 Euros from Nicolai GmbH, which was deferred and is being recognized ratably over the five-year term of the distribution agreement.

 
Page 10

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
The agreement also includes provisions requiring the Company to pay Nicolai GmbH specific amounts if the Company terminates the distribution agreement prior to the end of the five-year term.  The Company does not intend to terminate the distribution agreement and, as such, has not recorded a liability relating to these potential future payments to Nicolai GmbH.  The unamortized license fee was $73,000 and $182,000 at September 30, 2012 and December 31, 2011, respectively.  The amortization of license fee was $109,000 and $108,000 for the nine months ended September 30, 2012 and 2011, respectively.

Radius Medical Technologies, Inc. Contingent Consideration

On October 20, 2010, the Company acquired the assets related to the snare and retrieval product line business from Radius Medical Technologies, Inc. and Radius Medical, LLC (collectively, “Radius”).  Under the terms of the agreement the Company paid Radius a total of $6,449,000, consisting of $5,000,000 paid in cash at October 20, 2010 and $1,449,000 which was paid on June 9, 2011 upon the successful completion of the transfer of the manufacturing processes from Radius to the Company along with all fixed assets and inventory.  In addition, Radius is entitled to receive an annual cash contingent consideration payment based on 25% of the net sales of the acquired products which exceed $2.0 million, $2.5 million, and $3.0 million for the calendar years ending December 31, 2011, 2012 and 2013, respectively.  The range of possible contingent consideration payments is from $-0- if no sales are made in excess of the thresholds, to an undeterminable amount as the agreement does not contain a cap on the payment amounts.  In accordance with ASC 805, a reduction of $96,000 and $586,000 in the liability amount was recorded at March 31, 2012 and September 30, 2011, respectively, and recognized as a gain in operating expenses within the general and administrative expenses.  At September 30, 2012 and December 31, 2011, the Company has recorded a liability for these contingent consideration payments in the amount of $214,000 and $310,000, respectively.

(10)
Lines of Credit

On December 21, 2011 the Company modified and extended its secured asset-based revolving credit agreement with U.S. Bank National Association dated December 21, 2009 (as amended on December 21, 2010).  The revolving credit agreement is a one-year, $10,000,000 facility with availability based primarily on eligible customer receivables, inventory and property and equipment.  The revolving credit agreement bears interest equal to the one-month LIBOR rate plus 1.60% and is secured by a first security interest on all of the Company’s assets.  The revolving credit agreement requires a quarterly payment based on an annual fee of 0.125% of the average unused portion of the committed revolving line as determined by the bank and reviewed by management.

The revolving credit agreement includes one covenant that the Company cannot have a maximum cash flow leverage ratio greater than 2.5 to 1.  The calculation of this covenant is determined by multiplying annual lease expense times six and adding any loans, then dividing this amount by the sum of earnings before interest, taxes, depreciation, amortization and annual operating lease payments.  The covenant is computed quarterly based on a rolling 12-month period.  The Company was in compliance with the covenant as of September 30, 2012.

As of September 30, 2012, the Company had no outstanding balance against the revolving credit agreement.  Based on the Company’s eligible customer receivables, inventory, property and equipment and cash balances, $10,000,000 was available for borrowing as of September 30, 2012.
 
 
Page 11

 
 VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
(11)
Income Taxes

The Company is subject to income tax in numerous jurisdictions and at various rates and the use of estimates is required in determining the provision for income taxes.  For the nine month periods ended September 30, 2012 and 2011, the Company recorded a provision for taxes of $4,338,000 and $4,669,000 on earnings before tax of $11,196,000 and $12,249,000, resulting in an effective income tax rate of 39%, respectively.  The difference between the effective tax rate of 39% and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of state income taxes.

The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable earnings.  The Company considers projected future taxable earnings and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized.

The Company adopted accounting provisions that now form part of ASC 740, Income Taxes, and which clarify the accounting for uncertainty in tax positions recognized in the financial statements. These provisions create a single model to address uncertainty in tax positions and clarify the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company has recorded an unrecognized tax benefit of $1,020,000 as of September 30, 2012 and December 31, 2011.  The impact of tax related interest and penalties is recorded as a component of income tax expense.  For the nine months ended September 30, 2012, the Company has recorded $-0- for the payment of tax related interest and there were no tax penalties or interest recognized in the statements of operations.

The Company is subject to income tax examinations in the U.S. Federal jurisdiction, as well as in the Republic of Ireland and various state jurisdictions.  Remaining open tax years at September 30, 2012 are 2009 through 2011.

(12)
Business Combinations and Asset Acquisitions

St. Jude Medical, Cardiology Division, Inc.

On August 16, 2012, the Company acquired the assets related to the Venture® Wire Control Catheter business from St. Jude Medical, Cardiology Division, Inc. (“St. Jude”).  Under the terms of the agreement, the Company agreed to pay St. Jude a total of $3,000,000, consisting of $2,250,000 paid in cash at August 16, 2012 and $750,000 payable in cash upon the successful completion of the transfer of the manufacturing processes from St. Jude to the Company.  The Venture Wire Control Catheter is used as a deflectable tip catheter for steering an .014 inch guidewire via the arterial system to the coronary or peripheral vasculature.  This acquisition provides the Company with additional products that are sold directly into the Company’s existing customer base to generate incremental revenue.
 
 
Page 12

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
The Company accounted for the transaction as a business combination in the third quarter of 2012.   In accordance with ASC 805 the purchase price is being allocated based on estimates of the fair value of assets acquired, as no liabilities were assumed.

The purchase price was allocated as follows:

Inventory and equipment
  $ 206,000  
Purchased technology
    850,000  
Other intangibles
    500,000  
Goodwill
    1,444,000  
    $ 3,000,000  

The purchased technology and other intangible assets have an estimated useful life of 9 - 10 years.  The Company will start amortizing the intangible assets once the Company starts selling the products, currently estimated to start during the second quarter of 2013.

Accumed Systems, Inc.

On June 11, 2012, the Company acquired the assets related to the AccumedTM wrist positioning splint business from Accumed Systems, Inc. (“Accumed”).  Under the terms of the agreement, the Company paid Accumed a total of $1,500,000 at closing and no additional payments are required to be made.  The Accumed wrist positioning splint product consists of a plastic molded brace that simplifies arterial access by holding the wrist and forearm in an appropriate, comfortable position.  This acquisition provides the Company with an additional product that is sold directly into the Company’s existing customer base to generate incremental revenue.

The Company accounted for the transaction as a business combination in the second quarter of 2012.   In accordance with ASC 805 the purchase price is being allocated based on estimates of the fair value of assets acquired, as no liabilities were assumed.

The purchase price was allocated as follows:

Inventory and equipment
  $ 8,000  
Purchased technology
    740,000  
Other intangibles
    190,000  
Goodwill
    562,000  
    $ 1,500,000  

The purchased technology and other intangible assets have an estimated useful life of 9 - 10 years.

Dr. Pedro Silva and Affiliates

On January 6, 2012, the Company entered into an agreement with Dr. Pedro Silva and his affiliates, whereby the Company paid $3,250,000 for the rights, patents and intellectual property relating to a two-lumen catheter for distal protection and material extraction used in the Company’s Pronto catheters.  Upon payment, the existing License Agreement between N.G.C. Medical S.p.A. and the Company has been deemed paid-in-full, and no future royalties will be owed on any sale of a Pronto catheter after December 31, 2011.

The Company has accounted for the transaction as a non-business license acquisition in the first quarter of 2012.   In accordance with ASC 805, the purchase price was assigned to a license intangible asset equivalent to the cash amount paid on January 6, 2012, and is being amortized over a period of 10 years.  No goodwill was recognized as part of the transaction.

 
Page 13

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued

Northeast Scientific

On December 22, 2011, the Company entered into a license agreement with Northeast Scientific, Inc. (NES), a FDA-registered reprocessor of medical devices, whereby the Company acquired the exclusive rights to NES’ reprocessing services for the ClosureFast radiofrequency catheter in the United States for a term of five years.  The ClosureFast catheter is owned and marketed by VNUS Medical Technologies, Inc., a subsidiary of Covidien, and is used in the treatment of varicose veins.  Under the reprocessing service, the customer sends its used ClosureFast catheters to NES, where they are inspected, cleaned, tested, repackaged, resterilized and shipped back to the customer. In exchange for the exclusive rights, the Company paid a total of $900,000 to NES and a former third party distributor on December 22, 2011.

The Company accounted for the transaction as a non-business asset acquisition in the fourth quarter of 2011.  In accordance with ASC 805 the purchase price was assigned to an intangible asset and no goodwill was recognized.  The Company is amortizing the license intangible asset on a straight-line basis over the five-year term of the agreement.

Zerusa Limited

On January 27, 2011, the Company entered into an asset purchase agreement of substantially all the assets of Zerusa Limited (“Zerusa”), a Galway, Ireland based medical device company engaged in the manufacture and distribution of the Guardian® hemostasis valves.  Under the terms of the agreement the Company paid Zerusa a total of 3,121,000 Euros ($4,272,000), consisting of 2,850,000 Euros ($3,882,000) paid in cash at January 27, 2011 and 271,000 Euros ($390,000) which was paid on September 2, 2011.  The final payment amount was subject to adjustment based upon the value of inventory transferred.  The Guardian hemostasis valves are designed to maintain hemostasis during interventional catheterization procedures through a novel sealing system which allows simple introductions and removal of interventional devices while providing the option to lock guidewires in place.

The Company accounted for the transaction as a business combination in the first quarter of 2011.   In accordance with ASC 805 the purchase price was allocated based on estimates of the fair value of assets acquired, as no liabilities were assumed.

The purchase price was allocated as follows:

Inventory and equipment
  $ 48,000  
Purchased technology
    1,000,000  
Other intangibles
    800,000  
Goodwill
    2,424,000  
    $ 4,272,000  

The purchased technology and other intangible assets have an estimated useful life of 11 years.
 
 
Page 14

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
Unaudited Supplemental Pro Forma Financial Information
 
The following unaudited supplemental pro forma information combines the Company’s results with those of St. Jude, Accumed and Zerusa as if the acquisitions had occurred at the beginning of each of the periods presented.  This unaudited pro forma information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported for the periods presented had the acquisition been completed at the beginning of each of the periods presented, and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition:
 
   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue
  $ 24,615,000     $ 25,132,000     $ 73,710,000     $ 70,410,000  
Net earnings
    2,527,000       3,601,000       6,694,000       7,307,000  
Net earnings per share
                               
 Basic
  $ 0.16     $ 0.22     $ 0.42     $ 0.44  
 Diluted
  $ 0.15     $ 0.21     $ 0.41     $ 0.42  

Certain pro forma adjustments have been made to reflect the impact of the purchase transaction, primarily consisting of amortization of intangible assets with determinable lives and income taxes to reflect the Company’s effective tax rate for the periods presented.
 
(13)
Products and Services

Our broad offering of products is divided into three product categories:
 
 
·
Catheter products, principally consisting of catheters used in minimally invasive medical procedures for the diagnosis or treatment of vascular conditions, such as the Pronto® extraction catheters used in treating acute myocardial infarction, and also including products used in connection with gaining percutaneous access to the vasculature to perform minimally invasive procedures, such as micro-introducer kits;
 
·
Hemostat (blood clotting) products, principally consisting of the D-Stat® Dry hemostat, a topical thrombin-based pad with a bandage used to control surface bleeding, and the D-Stat Flowable, a thick yet flowable thrombin-based mixture for preventing bleeding in subcutaneous pockets; and
 
·
Vein products and services, principally consisting of the Vari-Lase® endovenous laser, a laser console and procedure kit used for the treatment of varicose veins, and a reprocessing service for radiofrequency vein ablation catheters.

 
Page 15

 
VASCULAR SOLUTIONS, INC.
Notes to Unaudited Consolidated Financial Statements - Continued
 
The following tables set forth, for the periods indicated, net revenue by product category along with the percent change from the previous period:

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
   
Net
Revenue
   
Percent
Change
   
Net
Revenue
   
Percent
Change
 
                         
Catheter products
  $ 45,621,000       16 %   $ 39,344,000       31 %
Hemostat products
    17,236,000       (2 %)     17,542,000       (6 %)
Vein products
    9,964,000       29 %     7,694,000       (5 %)
Total product revenue
    72,821,000       13 %     64,580,000       14 %
License and collaboration
    262,000       (92 %)     3,279,000       304 %
Total revenue
  $ 73,083,000       8 %   $ 67,859,000       18 %
 
Management’s Discussion and Analysis of Financial Condition and Results of  Operations

Executive Level Overview

     Vascular Solutions, Inc. (“we”, “us” or “Vascular”) is a medical device company focused on bringing solutions to interventional cardiologists and interventional radiologists.  As a vertically-integrated medical device company, we generate ideas and create new interventional medical devices, and then deliver those products directly to the physician through our direct domestic sales force and international distribution network.  We continue to develop new products and new applications for our existing products.

             We believe the overall worldwide market for endovascular devices will continue to grow as the demand for minimally invasive treatment of vascular diseases and disorders continues to increase.  We have capitalized and intend to continue to capitalize on this market opportunity through the introduction of new products.  We have originated and expect to continue to originate these new products primarily through our internal research and development efforts, while supplementing these development efforts with targeted acquisitions or other external collaborations.  Additionally, our growth has been, and will continue to be, impacted by our expansion and penetration into new geographic markets, the expansion and penetration of our sales organization in existing geographic markets, and our continuing focus on increasing the efficiency of our sales organization.

             Our product portfolio includes a broad spectrum of over 70 products and services consisting of over 600 stock keeping units (SKUs) covering a wide array of devices used in vascular procedures.  Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations in three product categories – catheter products, hemostat products and vein products – based on similarities in the products.  We have corporate infrastructure and direct sales capabilities in the United States and have established distribution relationships in most major international markets.  In order to drive sales growth, we have invested not only in the expansion of our global distribution system, but also in new product development and additional regulatory approvals.  A significant portion of our net sales growth historically has been, and we expect to continue to be, attributable to new and enhanced products.

The interventional medical device industry is characterized by intense competition, rapidly-evolving technology, and a high degree of government regulation.  To grow our business, we have focused on continually developing and commercializing new products.  Looking ahead, we expect our business may be impacted by the following trends and opportunities:
 
 
Page 16

 
 
·
Changing regulatory approval requirements for newly-developed products.  Any new product that we develop must be approved by the Food and Drug Administration (FDA) in the United States and by similar regulatory bodies in other countries before they can be sold.  The requirements for obtaining product approval have undergone change, and in 2011 the FDA proposed additional changes to the product approval process.  We monitor the changing regulatory landscape and modify our regulatory submissions as necessary to obtain product approvals.
 
 
·
Successfully integrating acquired products into our existing operations.  The acquisition of products and services complementary to our existing product portfolio and customer call point provides an additional business opportunity, but is dependent on the successful integration of the acquired products into our existing business structure.  In August 2012, we acquired the Venture® Wire Control Catheter (Venture) from St. Jude Medical, Cardiology Division, Inc. (“St. Jude”) (see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).  In June 2012, we acquired the AccumedTM wrist positioning splint business from Accumed Systems, Inc. (Accumed) (see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).  In December 2011, we acquired exclusive 5-year rights to sell reprocessing services for the radiofrequency vein ablation catheters in the United States from Northeast Scientific, Inc. (NES) (see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).  In January 2011, we acquired the Guardian® hemostasis valve products from Zerusa Limited (Zerusa) (see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q) and have established a subsidiary in the Republic of Ireland to continue the manufacturing of the products.  In October 2010, we acquired the snare and retrieval products from Radius Medical Technologies, Inc. (Radius) and integrated those products into our operations.  In April 2010 we acquired the SmartNeedle® and pdACCESS needle access products from Escalon Vascular Access, Inc. (Escalon) and integrated those products into our operations.
 
 
·
Managing intellectual property.  The interventional medical device industry is characterized by numerous patent filings and litigation claims made to protect new and evolving product ideas.  To maximize the profitability of new product ideas, we seek patent protection for those product design and method concepts which we believe have the potential to provide substantial product revenue.  While we are not currently involved in any material intellectual property litigation, we have been so in the recent past (See “Legal Proceedings” In Item 3 of Part I of our Form 10-K for the year ended December 31, 2011).  Managing intellectual property assets and claims is a significant challenge for our business.
 
 
Page 17


Results of Operations

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
                       
Product revenue
    100 %     88 %     100 %     95 %
License revenue
    -       12 %     -       5 %
Total revenue
    100 %     100 %     100 %     100 %
                                 
Product costs and operating expenses:
                               
Cost of goods sold
    33 %     31 %     33 %     33 %
Research and development
    12 %     11 %     12 %     11 %
Clinical and regulatory
    4 %     4 %     5 %     5 %
Sales and marketing
    25 %     24 %     26 %     27 %
General and administrative
    7 %     4 %     7 %     5 %
Amortization of purchased technology and intangibles
    2 %     1 %     2 %     1 %
Total product costs and operating expenses
    83 %     75 %     85 %     82 %
Operating earnings
    17 %     25 %     15 %     18 %
Other earnings and expenses, net
    -       -       -       -  
Earnings before income taxes.
    17 %     25 %     15 %     18 %
Income taxes
    7 %     10 %     6 %     7 %
Net earnings
    10 %     15 %     9 %     11 %

Three and nine months ended September 30, 2012, compared to three and nine months ended September 30, 2011

Net revenue increased 1% to $24,552,000 for the quarter ended September 30, 2012 from $24,304,000 for the quarter ended September 30, 2011.  This increase in revenue is comprised of the following components:

   
% Change
 
Volume of existing product and service revenue
    10 %
New product or service introductions, which consist of any product or service that had no revenue in the comparable period in 2011
    6 %
Product and service pricing
    (3 %)
Decline in licensing revenue
    (12 %)
      1 %

Approximately 84% of our net revenue was earned in the United States and 16% of our net revenue was earned in international markets for each of the three month periods ended September 30, 2012 and September 30, 2011.
 
 
Page 18

 
Net revenue increased 8% to $73,038,000 for the nine months ended September 30, 2012 from $67,859,000 for the nine months ended September 30, 2011.  This increase in revenue is comprised of the following components:

   
% Change
 
Volume of existing product and service revenue
    11 %
New product or service introductions, which consist of any product or service that had no revenue in the comparable period in 2011
    4 %
Product and service pricing
    (2 %)
Decline in licensing revenue
    (5 %)
      8 %

Approximately 84% of our net revenue was earned in the United States and 16% of our net revenue was earned in international markets for each of the nine month periods ended September 30, 2012 and September 30, 2011.
 
We recognized $87,000 and $2,854,000 of licensing revenue during the three month periods ending September 30, 2012 and 2011, respectively, and $262,000 and $3,279,000 of licensing revenue during the nine month periods ending September 30, 2012 and 2011, respectively, due to our License and Device Supply Agreements with King and our distribution agreement with Nicolai.  The decline in the amount of licensing revenue recognized in 2012 is due to King terminating the development of the Thrombi-Paste products and terminating efforts to obtain the surgical indication for the Thrombi-Gel products in 2011.  As a result of King making the decision not to proceed, we recognized revenue of $2,762,000 in the third quarter of 2011 which represented the remaining deferred license revenue originally allocated to the Thrombi-Paste products and the surgical indication of the Thrombi-Gel products as part of the King agreements.

Gross margin decreased to 66.7% for the quarter ended September 30, 2012, compared to 69.3% for the quarter ended September 30, 2011.  The decrease in gross margin is the result of the additional license revenue recognized in the third quarter of 2011, as discussed above.  Product only gross margins increased to 66.6% for the quarter ended September 30, 2012, compared to 65.2% for the quarter ended September 30, 2011.  The increase in product only gross margin primarily resulted from our acquisition of the intellectual property related to our Pronto® extraction catheters in January 2012, which eliminated the royalties paid on sales of the product after December 31, 2011 (see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).  We expect gross margins to be in the range of 66.5% to 67.0% for the fourth quarter of 2012, subject to variations in our selling mix between U.S. and international markets and between our lower margin products such as the Vari-Lase products and our higher margin products such as the D-Stat Dry.  Gross margin decreased to 66.8% for the nine months ended September 30, 2012, compared to 67.2% for the nine months ended September 30, 2011.  Product only gross margins increased to 66.7% for the nine months ended September 30, 2012, compared to 65.5% for the nine months ended September 30, 2011.

Research and development expense for the third quarter of 2012 totaled $2,936,000, or 12% of revenue, compared to $2,808,000, or 11% of revenue, for the third quarter of 2011.  Research and development expense for the nine month period ending September 30, 2012 totaled $8,964,000, or 12% of revenue, compared to $7,541,000, or 11% of revenue, for the nine month period ending September 30, 2011.  Research and development expenses have increased as we have hired additional employees to improve the through-put of our new product development projects.  We expect our continuing research and development expenses to be approximately 11% to 12% of revenue in the fourth quarter of 2012.
 
 
Page 19

 
Clinical and regulatory expense for the third quarter of 2012 totaled $1,022,000, or 4% of revenue, compared to $1,104,000, or 4% of revenue, for the third quarter of 2011.  Clinical and regulatory expense for the nine month period ending September 30, 2012 totaled $3,326,000, or 5% of revenue, compared to $3,327,000, or 5% of revenue, for the nine month period ending September 30, 2011.  Clinical and regulatory expenses have remained relatively constant on a dollar basis and as a percentage of revenue compared to the three and nine month periods ending September 30, 2011.  We expect clinical and regulatory expenses to continue to be approximately 4% of revenue in the fourth quarter of 2012.

Sales and marketing expense for the third quarter of 2012 totaled $6,188,000, or 25% of revenue, compared to $5,831,000, or 24% of revenue, for the third quarter of 2011.  Sales and marketing expense for the nine month period ending September 30, 2012 totaled $19,279,000, or 26% of revenue, compared to $18,318,000, or 27% of revenue, for the nine month period ending September 30, 2011.  The increase in sales and marketing expenses as a percentage of revenue for the third quarter of 2012 was due to the fact no commissions were paid on the additional $2,762,000 of license revenue recognized in the third quarter of 2011.  Sales and marketing expense has decreased as a percentage of revenue for the nine months ended September 30, 2012 primarily as a result of maintaining our direct U.S. sales force at approximately 91 full-time employees while continuing to grow revenue.  We expect to maintain the same relative size of our direct U.S. sales force for the remainder of 2012.  We expect our sales and marketing expenses to continue to be approximately 25% of revenue in the fourth quarter of 2012.

General and administrative expense for the third quarter of 2012 totaled $1,714,000, or 7% of revenue, compared to $881,000, or 4% of revenue, for the third quarter of 2011.  General and administrative expense for the nine month period ending September 30, 2012 totaled $5,013,000, or 7% of revenue, compared to $3,660,000, or 5% of revenue, for the nine month period ending September 30, 2011.  General and administrative expenses have increased in the first nine months of 2012 because in accordance with accounting rules (ASC 805), we recognized an adjustment of $586,000 to the Radius earn-out on September 30, 2011 which reduced general and administrative expenses by a corresponding amount.  The Radius earn-out liability was created as part of the Radius acquisition and we continue to assess the liability balance and make any necessary adjustments as conditions warrant.  In addition, for the nine month period ended September 30, 2012 compared to the nine month period ended September 30, 2011, we have incurred an additional $197,000 of legal expenses responding to the subpoena issued by the U.S. Attorney’s office in June 2011 (See Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).  We expect our general and administrative expenses to continue to be approximately 6% to 7% of revenue in the fourth quarter of 2012.

Amortization of purchased technology and other intangibles was $359,000 and $212,000 for the three months ended September 30, 2012 and 2011, respectively.  Amortization of purchased technology and other intangibles was $1,032,000 and $621,000 for the nine months ended September 30, 2012 and 2011, respectively.  The amortization resulted from our purchase of the Escalon SMARTNEEDLE and pdACCESS products in April 2010; the Radius snare products in October 2010; the Zerusa Guardian hemostasis valves in January 2011; the reprocessing license in December 2011; the Pronto license in January 2012; and the Accumed wrist positioning splint business in June 2012.  In connection with the purchase of these assets, we allocated a total of $13,300,000 to purchased technology and other intangibles that is being amortized over various periods ranging from 5 – 11 years.  For a complete discussion of the recent acquisitions, see Note 12 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q.  We expect amortization expense to be approximately $360,000 in the fourth quarter of 2012.

Income tax expense was $1,591,000 and $4,338,000 for the three and nine month periods ending September 30, 2012, respectively, on earnings before tax of $4,156,000 and $11,196,000, respectively, resulting in an effective income tax rate of 39%.  The difference between the effective tax rate of 39% and the U.S. federal statutory income tax rate of 34% was due mainly to the impact of state income taxes.  For the three and nine month periods ending September 30, 2011, income tax expense was $2,287,000 and $4,669,000, respectively, on earnings before tax of $5,997,000 and $12,249,000, respectively, resulting in an effective income tax rate of 39%.
 
 
Page 20


Liquidity and Capital Resources

Our cash and cash equivalents totaled $13,913,000 at September 30, 2012 compared to $13,726,000 in cash and cash equivalents at December 31, 2011, an increase of $187,000.  The majority of our cash is maintained in our operating accounts.  A portion of our cash equivalents are invested in a money market fund invested in high quality, short-term money market instruments denominated in U.S. dollars such as debt instruments guaranteed by the governments of the United States, Western Europe, Australia, Japan and Canada, high quality corporate issuers and bank obligations.  The money market fund’s assets are rated in the highest short-term category by nationally recognized rating agencies, such as Moody’s or Standard & Poor’s.

Cash provided by operations.  We generated $14,000,000 of cash from operations for the nine months ended September 30, 2012, primarily resulting from our earnings before taxes of $11,196,000 because virtually all of our income taxes are offset by our deferred tax assets.  In the nine months ending September 30, 2012 we increased our accounts receivable by $2,168,000, which was in line with our revenue growth projections and expectations.  With continued emphasis on process improvement, we were able to reduce our inventory levels by $1,062,000, while continuing to grow revenue for the nine months ending September 30, 2012.  In addition, we incurred $4,831,000 of non-cash depreciation, amortization and stock compensation; and $259,000 of non-cash charges relating to the amortization of deferred license fees and other deferred revenue.

Cash used for investing activities.  We used $9,360,000 of cash in investing activities for the nine months ended September 30, 2012, consisting of $3,250,000 of cash to purchase the intellectual property relating to our Pronto catheters, $1,500,000 of cash to purchase the assets relating to the Accumed wrist positioning splint business, $2,250,000 of cash used to purchase the Venture catheter business and $2,370,000 of cash for capital expenditures relating to our purchase of additional manufacturing and research and development equipment.

Cash used in financing activities.  We used $4,459,000 of cash in financing activities for the nine months ended September 30, 2012, consisting of $4,762,000 of cash to repurchase 425,135 common shares at an average price of $11.20 per share on the open market under our stock repurchase plan, and $651,000 of cash to repurchase 59,106 shares that vested under outstanding restricted stock awards to satisfy income tax withholding obligations.  These purchases were offset by our receipt of $510,000 in exchange for the sale of common stock pursuant to our Employee Stock Purchase Plan and $444,000 upon the exercise of outstanding stock options.

We have a $10 million revolving line of credit with US Bank, which has a 12-month term, bears interest at the rate of LIBOR plus 1.60% and is secured by a first security interest in all of our assets.  As of September 30, 2012, we were in compliance with the financial covenant under the line of credit and we had no outstanding balance on the revolving line of credit with an availability of $10 million.

We currently anticipate that we will experience positive cash flow from our normal operating activities for the foreseeable future.  We currently believe that our working capital of $39.3 million at September 30, 2012 will be sufficient to meet all of our operating and capital requirements for the foreseeable future.  However, our actual liquidity and capital requirements will depend upon numerous factors, including the amount of revenue from sales of our existing and new products; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; and other factors.

 
Page 21


Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2012.

Contractual Obligations

The following table summarizes our contractual cash commitments as of September 30, 2012:

   
Payments Due by Period
 
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1 - 3 years
   
3 - 5 years
   
More than
5 years
 
Facility operating leases
  $ 2,679,000     $ 975,000     $ 1,704,000     $ -     $ -  
Total
  $ 2,679,000     $ 975,000     $ 1,704,000     $ -     $ -  

Not included in the table above are the expected payments for contingent consideration related to our acquisition of the Radius snare products in October 2010.  These contingent consideration payments are in the amount of 25% of the net sales of the snare and retrieval products which exceed $2.5 million and $3.0 million for the calendar years ending December 31, 2012 and 2013, respectively.  In addition, not included in the table above is the $750,000 payable in cash upon the successful completion of the transfer of the manufacturing processes from St. Jude relating to the Venture.  These amounts were not included in the table above due to our inability to predict the amount and timing of the cash portion of the payments (See Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q).

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

Critical Accounting Policies

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

The material accounting policies that we believe are most critical to an investor’s understanding of our financial results and condition and which require complex management judgment are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under the caption “Critical Accounting Policies.”
 
 
Page 22


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

The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will likely,” “is expected,” “will continue,” “is anticipated,” “believe,” “estimate,” “projected,” “forecast,” or similar expressions are intended to identify forward-looking statements within the meaning of the Act.  Forward-looking statements such as these are based on management’s current expectations as of the date of this report but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements.   We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: risks associated with defense of patent infringement lawsuits, adoption of our new products, limited profitability, exposure to possible product liability claims, the development of new products by others, dependence on third party distributors in international markets, doing business in international markets, the availability of third party reimbursement, actions by the FDA related to our products, the loss of key vendors, and those factors set forth under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011.  This list is not exhaustive, and we may supplement this list in any future filing with the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement.   We undertake no obligation to and do not intend to revise or update publicly any forward-looking statement for any reason.

Quantitative and Qualitative Disclosures about Market Risk

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

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

In the United States we sell our products and services directly to hospitals and clinics.  In international markets, we sell our products to independent distributors who, in turn, sell to hospitals.  Sales to independent distributors are denominated in United States dollars, with the exception of sales to Germany, where sales are denominated in Euros.  Sales to distributors out of our subsidiary in Ireland are denominated in Euros.

We distribute certain products on behalf of certain U.S. and international manufacturers.  We pay for all distributed products in United States dollars.

We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.  A change of 0.1 in the Euro exchange rate would result in an increase or decrease of approximately $52,000 in the amount of United States dollars we receive in payment on the accounts receivable denominated in Euros with our subsidiary in Ireland and our German distributor Nicolai GmbH.  Under our current policies, we do not use foreign currency derivative instruments to manage exposure to fluctuations in the Euro exchange rate.

 
Page 23


We currently have no indebtedness, but if we were to borrow amounts from our revolving credit line, we would be exposed to changes in interest rates.  Advances under our revolving credit line bear interest at an annual rate indexed to LIBOR.  We thus would be exposed to interest rate risk with respect to amounts outstanding under the line of credit to the extent that interest rates rise.  As we had no amounts outstanding on the line of credit at September 30, 2012, we have no exposure to interest rate changes on this credit facility.  Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.  Additionally, we will be exposed to declines in the interest rates paid on deposited funds.  A 0.1% decline in the current market interest rates paid on deposits would result in interest earnings being reduced by approximately $14,000 on an annual basis.

Controls and Procedures

Evaluation of disclosure controls and procedures.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
 
Changes in internal control over financial reporting.
 
        During the fiscal quarter ended September 30, 2012, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Legal Proceedings

        The description of litigation and government proceedings included in Note 9 to the Unaudited Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q is incorporated into this Item 1 of Part II by reference.

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

Risk Factors

Item 1A (“Risk Factors”) of our most recently filed Annual Report on Form 10-K for the year ended December 31, 2011 sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results.  There have been no material changes from the Risk Factors described in Annual Report on Form 10-K for the year ended December 31, 2011; however, those Risk Factors continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such Risk Factors in making any investment decision with respect to our securities. An investment in our securities continues to involve a high degree of risk.

 
Page 24


Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchase of Equity Securities by the Issuer and Affiliated Purchasers:

 
Period
 
Total Number
of Shares
Purchased
   
Average
Price Paid per Share
   
Total Number of
Shares Purchased
as Part of a Publicly
Announced Plans or
Programs(2)
   
Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs
 
July 1 – 31, 2012
    793 (1)   $ 13.48       -       574,865  
August 1 – 31, 2012
    -       -       -       574,865  
September 1 – 30, 2012
    -       -       -       574,865  

(1)  At the request of our employees and pursuant to the terms of their Restricted Stock Awards, we purchased 793 shares of common stock in July, all at the fair market value of the common stock on the day the employees’ awards vested, to satisfy income tax withholding obligations for those employees.

(2)  On February 1, 2012, we announced that our Board of Directors had approved a Common Stock Repurchase Plan (the “Repurchase Plan”), whereby we have the option to repurchase up to a maximum of 1,000,000 shares of our common stock on the open market at the current market price.  The Repurchase Plan expires on December 31, 2012.

Defaults Upon Senior Securities

None.

Mine Safety Disclosures

Not applicable.

Other Information

 None.

Exhibits

Exhibit
Number
 
 
Description
     
3.1
 
Amended and Restated Articles of Incorporation of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 to Vascular Solutions’ Form 10-Q for the quarter ended September 30, 2000).
3.2
 
Amended and Restated Bylaws of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 of Vascular Solutions’ Form 8-K dated October 19, 2007).
4.1
 
Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)).
 
Asset Purchase Agreement dated August 16, 2012 by and between Vascular Solutions, Inc. and St. Jude Medical, Cardiology Division, Inc.
 
Vascular Solutions, Inc. Amended and Restated Stock Option and Stock Award Plan, as amended through July 27, 2012.
 
Vascular Solutions, Inc. Restricted Stock Award Program for Non-Employee Directors.
 
 
Page 25

 
 
Form of Restricted Stock Award Agreement for Non-Employee Directors.
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Page 26

 
SIGNATURES

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

  VASCULAR SOLUTIONS, INC.  
       
Date:  October 18, 2012
By:
/s/ Howard Root
 
   
Howard Root
 
   
Chief Executive Officer and Director
 
   
(principal executive officer)
 
 
 
By:
/s/ James Hennen
 
   
James Hennen
 
   
Senior Vice President of Finance and Chief Financial Officer
 
   
(principal financial officer)
 
 
 
By:
/s/ Timothy Slayton
 
   
Timothy Slayton
 
   
Controller
 
   
(principal accounting officer)
 
 
 
Page 27

 

XNAS:VASC Vascular Solutions Inc Quarterly Report 10-Q Filling

Vascular Solutions Inc XNAS:VASC Stock - Get Quarterly Report SEC Filing of Vascular Solutions Inc XNAS:VASC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:VASC Vascular Solutions Inc Quarterly Report 10-Q Filing - 9/30/2012
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