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, 2016
 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
Commission file number: 001-37599
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11207252&doc=15
LivaNova PLC
(Exact name of registrant as specified in its charter)
England and Wales
98-1268150
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5 Merchant Square, North Wharf Road
London, United Kingdom
W2 1AY
(Address of principal executive offices)

(Zip Code)

(44) 203 786 5275
 
Registrant’s telephone number, including area code:

 
_____________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Ordinary Shares — £1.00 par value per share
 
The NASDAQ Stock Market LLC and the London Stock Exchange
Title of Each Class of Stock
 
Name of Each Exchange on Which Registered
_____________________________________________________________________________________________________________
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 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 ☑    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
 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, 2016
Ordinary Shares - £1.00 par value per share
48,774,669

1



EXPLANATORY NOTE
LivaNova PLC, a public limited company organized under the laws of England and Wales (“LivaNova”) was formed on February 20, 2015, for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation (“Cyberonics”), and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). On October 19, 2015, as further described herein, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market and admitted to listing on the standard segment of the United Kingdom Financial Conduct Authority’s Official List and to trading on the Main Market of the London Stock Exchange under the trading symbol “LIVN.” In this Quarterly Report on Form 10-Q, in accordance with generally accepted accounting principles in the United States, we are reporting the consolidated results of LivaNova for the quarterly period July 1, 2016 to September 30, 2016 and the year-to-date period January 1, 2016 to September 30, 2016. LivaNova, as the successor company to Cyberonics is utilizing as a comparative prior reporting period the historical results for Cyberonics and its consolidated subsidiaries for the transitional and final quarterly period July 25, 2015 to October 18, 2015 and for the transitional and final year-to-date period January 24, 2015 to October 18, 2015. These periods are equivalent to twelve weeks and thirty-eight weeks as compared to the normal Cyberonics’ thirteen and thirty-nine weeks and are considered transitional because on October 19, 2015 LivaNova became the successor organization to Cyberonics and has a fiscal year ending December 31. The period October 19, 2015 to December 31, 2015 represents post-Merger activity of Cyberonics and Sorin combined and the activity during this period was reported in the 10-KT for LivaNova for the period April 25, 2015 to December 31, 2015.



2



LIVANOVA PLC
TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 

 
 
 
 

 
 
 
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 generators products: Model 102 (Pulse™), Model 102R (Pulse Duo™), Model 103 (Demipulse®), Model 104 (Demipulse Duo®), Model 105 (AspireHC®) and the Model 106 (AspireSR®).
Trademarks for our Oxygenators product systems: Inspire™, Heartlink™ and Connect™.
Trademarks for our line of surgical tissue and mechanical valve replacements and repair products: MitroflowTM, Crown PRTTM, Solo SmartTM, PercevalTM, Top HatTM, Reduced Series Aortic ValvesTM, Carbomedics Carbo-SealTM, Carbo-Seal ValsalvaTM, Carbomedics StandardTM, OrbisTM and OptiformTM, and Mitral valve repair products: Memo 3DTM, Memo 3D ReChordTM, AnnuloFloTM and AnnuloFlexTM.
Trademarks for our implantable cardiac pacemakers and associated services: REPLY 200TM, ESPRITTM, KORA 100TM, KORA 250TM, SafeRTM, the REPLY CRT-PTM, the remedé® System.
Trademarks for our Implantable Cardioverter Defibrillators and associated technologies: the INTENSIATM, PLATINIUMTM, and PARADYMTM product families.
Trademarks for our cardiac resynchronization therapy devices, technologies services: SonRTM, SonRtipTM, SonR CRTTM, the INTENSIATM, PARADYM RFTM, PARADYM 2TM and PLATINIUMTM product families and the Respond CRTTM clinical trial.
Trademarks for heart failure treatment product: Equilia™.
Trademarks for our bradycardia leads: BEFLEX™ (active fixation) and XFINE™ (passive fixation).
These trademarks and tradenames 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.
________________________________________

3



“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
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 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, statements about the benefits of the business combination of Sorin and Cyberonics, 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:
Risks related to the Mergers:
failure to effectively integrate and/or manage newly acquired businesses, and the cost, time and effort required to integrate newly acquired businesses, all of which may be greater than anticipated;
operating costs, customer loss or business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, distributors or suppliers) being greater than expected following the Mergers;
failure to retain certain key legacy employees of the Cyberonics or Sorin businesses; and
changes in tax laws or interpretations that could increase our consolidated tax liabilities following the Mergers, including the risk that we could be treated as a domestic corporation for United States federal tax purposes (for further information, refer to “Note 20. Income Tax” to the consolidated financial statements accompanying this Quarterly Report on Form 10-Q).
Risks related to our business:
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 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 insurance 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;

4



product liability, intellectual property disputes, shareholder related matters, environmental proceedings, income tax disputes, and other related 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;
failure to comply with applicable U.S. domestic laws and regulations, including federal and state privacy and security laws and regulations;
failure to comply with non-U.S. law and regulations;
non-U.S. operational and economic risks and concerns;
failure to attract or retain key personnel;
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, in particular the implementation of Brexit will likely cause increased economic volatility;
changes in tax laws, including changes due 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
the adoption of new therapies by the market requires significant time and expense and cannot be guaranteed.
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 2015 Form 10-KT, (3) our reports and registration statements filed and furnished from time to time with the 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 consolidated financial statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2016 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 2015 Form 10-KT.
Financial Information and Currency of Financial Statements
All of the financial information included in this quarterly report has been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The reporting currency of our consolidated financial statements is U.S. dollars.


5



PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30, 2016
 
Twelve Weeks Ended October 18, 2015
 
Nine Months Ended September 30, 2016
 
Thirty-Eight Weeks Ended October 18, 2015
Net sales
 
$
295,268

 
$
67,521

 
$
903,284

 
$
222,603

Cost of sales
 
106,454

 
9,536

 
360,675

 
26,564

Gross profit
 
188,814

 
57,985

 
542,609

 
196,039

Operating expenses:
 
 
 
 
 
 

 
 
Selling, general and administrative
 
107,553

 
41,186

 
343,309

 
104,581

Research and development
 
32,175

 
14,739

 
94,076

 
35,233

Merger and Integration expenses
 
7,576

 
27,902

 
20,537

 
43,143

Restructuring expenses
 
4,381

 

 
37,219

 

Amortization of intangibles
 
11,775

 
510

 
33,959

 
1,452

Litigation related expenses
 
2,369

 

 
4,678

 

Total operating expenses
 
165,829

 
84,337

 
533,778

 
184,409

Income (loss) from operations
 
22,985

 
(26,352
)
 
8,831

 
11,630

Interest income
 
(585
)
 
(39
)
 
(1,119
)
 
(124
)
Interest expense
 
3,495

 
125

 
6,665

 
154

Impairment of investment
 

 

 

 
2,064

Foreign exchange and other - (gain) loss
 
(1,216
)
 
109

 
2

 
1

Income (loss) before income taxes
 
21,291

 
(26,547
)
 
3,283

 
9,535

Income tax (benefit) expense
 
9,731

 
(1,456
)
 
16,891

 
11,693

Losses from equity method investments
 
13,129

 

 
19,382

 

Net loss
 
$
(1,569
)
 
$
(25,091
)
 
$
(32,990
)
 
$
(2,158
)
 
 
 
 
 
 
 
 
 
Basic loss per share
 
$
(0.03
)
 
$
(0.96
)
 
$
(0.67
)
 
$
(0.08
)
Diluted loss per share
 
$
(0.03
)
 
$
(0.96
)
 
$
(0.67
)
 
$
(0.08
)
Shares used in computing basic loss per share
 
49,075

 
26,025

 
49,016

 
26,015

Shares used in computing diluted loss per share
 
49,075

 
26,025

 
49,016

 
26,015


See accompanying notes to the condensed consolidated financial statements
6



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
 
 
Three Months Ended September 30, 2016
 
Twelve Weeks Ended October 18, 2015
 
Nine Months Ended September 30, 2016
 
Thirty-Eight Weeks Ended October 18, 2015
Net loss
 
$
(1,569
)
 
$
(25,091
)
 
$
(32,990
)
 
$
(2,158
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net change in unrealized loss on derivatives
 
2,042

 

 
(5,224
)
 

Tax effect
 
(673
)
 

 
1,513

 

Net of tax
 
1,369

 

 
(3,711
)
 

Foreign currency translation adjustment, net of tax
 
(1,805
)
 
569

 
32,598

 
256

Total other comprehensive income (loss)
 
(436
)
 
569

 
28,887

 
256

Total comprehensive loss
 
$
(2,005
)
 
$
(24,522
)
 
$
(4,103
)
 
$
(1,902
)


See accompanying notes to the condensed consolidated financial statements
7



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
 
 
September 30, 2016
 
December 31, 2015
 
 

 
 
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
63,632

 
$
112,613

Short-term Investments
 

 
6,997

Accounts receivable, net
 
284,345

 
272,352

Inventories
 
197,649

 
212,448

Prepaid taxes
 
49,854

 
42,425

Prepaid expenses and other current assets
 
51,850

 
26,579

Total Current Assets
 
647,330

 
673,414

Property, plant and equipment, net
 
245,120

 
244,587

Goodwill
 
731,144

 
745,356

Intangible assets, net
 
650,366

 
658,942

Investments
 
67,435

 
77,486

Deferred tax assets, net
 
6,010

 
153,509

Other assets
 
149,555

 
5,445

Total Assets
 
$
2,496,960

 
$
2,558,739

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Current debt obligations
 
$
53,617

 
$
82,513

Accounts payable
 
104,549

 
109,588

Accrued liabilities
 
62,046

 
63,047

Income taxes payable
 
16,655

 
26,699

Accrued employee compensation and related benefits liability
 
80,028

 
77,274

Total Current Liabilities
 
316,895

 
359,121

Long-term debt obligations
 
90,938

 
91,791

Deferred income taxes liability
 
213,062

 
235,483

Long-term employee compensation and related benefits liability
 
32,008

 
31,139

Other long-term liabilities
 
27,170

 
29,743

Total Liabilities
 
680,073

 
747,277

Commitments and contingencies (Note 16)
 

 

Stockholders’ Equity:
 
 
 
 
Ordinary Shares, £1.00 par value: unlimited shares authorized; 48,924,009 and 48,868,305 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
75,538

 
75,444

Additional paid-in capital
 
1,751,466

 
1,742,032

Accumulated other comprehensive loss
 
(25,341
)
 
(54,228
)
Retained earnings
 
15,224

 
48,214

Total Stockholders’ Equity
 
1,816,887

 
1,811,462

Total Liabilities and Stockholders’ Equity
 
$
2,496,960

 
$
2,558,739


See accompanying notes to the condensed consolidated financial statements
8



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
 
 
 
 
 
 
Additional
 
Accumulated Other
 
Accumulated
 
Total
 
 
Ordinary
 
Paid-In
 
Comprehensive
 
Earnings
 
Stockholders’
 
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
(Loss)
 
Equity
Balance at December 31, 2015
 
48,868

 
$
75,444

 
$
1,742,032

 
$
(54,228
)
 
$
48,214

 
$
1,811,462

Stock-based compensation plans
 
269

 
374

 
22,018

 

 

 
22,392

Shares repurchased
 
(213
)
 
(280
)
 
(12,584
)
 

 

 
(12,864
)
Net loss
 

 

 

 

 
(32,990
)
 
(32,990
)
Other comprehensive income
 

 

 

 
28,887

 

 
28,887

Balance at September 30, 2016
 
48,924

 
$
75,538

 
$
1,751,466

 
$
(25,341
)
 
$
15,224

 
$
1,816,887


See accompanying notes to the condensed consolidated financial statements
9



LIVANOVA PLC AND SUBSIDIARIES’
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 
Nine Months Ended September 30, 2016
 
Thirty-Eight Weeks Ended October 18, 2015
Cash Flows From Operating Activities:
 
 

 
 

Net loss
 
$
(32,990
)
 
$
(2,158
)
Non-cash items included in net loss:
 
 
 
 
Depreciation
 
30,193

 
4,570

Amortization
 
33,959

 
1,004

Stock-based compensation
 
15,575

 
21,281

Deferred income tax expense (benefit)
 
(10,224
)
 
4,638

Loss from investments
 
19,382

 
2,064

Other
 
8,765

 
912

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(11,040
)
 
1,431

Inventories
 
20,607

 
(4,849
)
Other current and non-current assets
 
(23,142
)
 
(3,771
)
Restructuring reserve
 
14,961

 

Accounts payable and accrued current and non-current liabilities
 
(16,698
)
 
40,507

Net cash provided by operating activities
 
49,348

 
65,630

Cash Flow From Investing Activities:
 
 
 
 
Purchase of short-term investments
 
(7,054
)
 
(6,995
)
Maturities of short-term investments
 
14,051

 
27,033

Purchase of property, plant and equipment and other
 
(26,772
)
 
(4,272
)
Intangible assets purchases
 
(1,934
)
 
(1,000
)
Purchases of equity and cost method investments
 
(8,059
)
 

Net cash provided by (used in) investing activities
 
(29,768
)
 
14,766

Cash Flows From Financing Activities:
 
 
 
 
Short-term borrowing
 
6,060

 

Short-term repayments
 
(39,891
)
 

Proceeds from long-term debt obligations
 
7,994

 

Repayment of long-term debt obligations
 
(11,354
)
 

Repayment of trade receivable advances
 
(23,848
)
 

Loans to equity method investees
 
(6,595
)
 

Proceeds from exercise of options for common stock
 
7,888

 
5,305

Realized excess tax benefits - stock-based compensation
 
1,208

 
4,531

Purchase of ordinary stock
 
(11,053
)
 

Purchase of treasury stock
 

 
(15,700
)
Cash settlement of compensation-based stock units
 

 
(1,092
)
Net cash used in financing activities
 
(69,591
)
 
(6,956
)
Effect of exchange rate changes on cash and cash equivalents
 
1,030

 
122

Net increase (decrease) in cash and cash equivalents
 
(48,981
)
 
73,562

Cash and cash equivalents at beginning of period
 
112,613

 
116,215

Cash and cash equivalents at end of period
 
$
63,632

 
$
189,777

 
 
 
 
 
Supplementary Disclosures of Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
5,442

 
$
19

Cash paid for income taxes
 
$
38,947

 
$
8,272

Supplementary Disclosure of a Non-Cash Operating Transaction:
 
 
 
 
Decrease to APIC related to share-based compensation options cashed out
 
$

 
$
(4,814
)
Increase to liabilities related to share-based compensation options cashed-out
 
$

 
$
4,814

Supplementary Disclosure of a Non-Cash Financing Transaction:
 
 
 
 
Decrease to Ordinary shares at par value and APIC related to shares repurchased and unsettled
 
$
(1,811
)
 
 
Increase to Current debt obligations related to unsettled shares
 
$
1,811

 
 

See accompanying notes to the condensed consolidated financial statements
10



LIVANOVA PLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1.  Nature of Operations
Background. LivaNova PLC and its subsidiaries (collectively, the “Company”, “LivaNova”, “we” or “our”) was organized under the laws of England and Wales on February 20, 2015 for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation (“Cyberonics”) and Sorin S.p.A., a joint stock company organized under the laws of Italy (“Sorin”). As a result of the business combination, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin. This business combination became effective on October 19, 2015, at which time LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market (“NASDAQ”) and on the London Stock Exchange (the “LSE”) as a standard listing under the trading symbol “LIVN.” LivaNova PLC is headquartered in London, United Kingdom (“U.K.”).
Description of the Business. We are a global medical device company focused on the development and delivery of important therapeutic solutions for the benefit of patients, healthcare professionals and healthcare systems throughout the world. Working closely with medical professionals throughout the world in the field of Cardiac Surgery, Neuromodulation and Cardiac Rhythm Management, we design, develop, manufacture and sell innovative therapeutic solutions that are consistent with our mission to improve our patients’ quality of life, increase the skills and capabilities of healthcare professionals and minimize healthcare costs.
Description of the Mergers. On October 19, 2015, pursuant to the terms of a definitive Transaction Agreement entered into by LivaNova, Cyberonics, Sorin and Cypher Merger Sub (the “Merger Sub”), dated March 23, 2015, (the “Merger Agreement”) Sorin merged with and into LivaNova, with LivaNova continuing as the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova (the “Mergers”). Upon the consummation of the Mergers, the historical financial statements of Cyberonics became the Company’s historical financial statements. Accordingly, the historical financial statements of Cyberonics are included in the comparative prior periods.
The issuance of LivaNova ordinary shares in connection with the Mergers was registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Registration Statement on Form S-4 (File No. 333-203510), as amended, filed with the United States Securities and Exchange Commission (the “SEC”) by LivaNova and declared effective on August 19, 2015. Further, pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), LivaNova is deemed to be a “successor” issuer to Cyberonics. As such, the ordinary shares of LivaNova are deemed to be registered under Section 12(b) of the Exchange Act, and LivaNova is subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder.
Note 2.  Basis of Presentation, Use of Accounting Estimates and Significant Accounting Policies
The Mergers: On October 19, 2015, as further described herein, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed for trading on the NASDAQ Global Market and admitted to listing on the standard segment of the United Kingdom Financial Conduct Authority’s Official List and to trading on the Main Market of the London Stock Exchange under the trading symbol “LIVN.” Based on the structure of the Mergers, management determined that Cyberonics is considered to be the accounting acquirer and predecessor for accounting purposes.
The purchase price allocation recorded and reported in the Transition Report on Form 10-KT for the fiscal period that began April 25, 2015 and ended December 31, 2015, as amended (the “2015 Form 10-KT”), was based on a preliminary acquisition valuation and includes the use of estimates based on information that was available to management at the time. The finalization of appraisals and estimates resulted in a change in the valuation of assets acquired, liabilities assumed, goodwill recognized and the related impact on deferred taxes and cumulative translation adjustments. During the quarters ended June 30, 2016 and September 30, 2016, we recorded adjustments to the estimated fair values of the assets acquired and liabilities assumed in the Mergers as a result of analysis of the facts and circumstances that existed at the time of the acquisition. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed can materially impact the results of operations. Refer to “Note 3. Business Combinations” for further information regarding the adjustments.

11



Basis of Presentation. The accompanying condensed consolidated financial statements of LivaNova have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.” and such principles, “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, 2015 has been derived from audited financial statements contained in our transitional report on form 10-KT for the period ended December 31, 2015, but do 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 normal recurring adjustments) considered necessary for a fair presentation of the operating results of LivaNova and its subsidiaries, for the three and nine months ended September 30, 2016, and are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. The financial information presented herein should be read in conjunction with the audited consolidated financial statements and notes thereto accompanying our Transition Report on Form 10-KT for the fiscal period that began April 25, 2015 and ended December 31, 2015, as amended.
Fiscal Year-End.  Prior to the Mergers, Cyberonics, LivaNova’s predecessor, utilized a 52/53-week fiscal year that ended on the last Friday in April. After the Mergers that consummated on October 19, 2015, Cyberonics, as a subsidiary of LivaNova PLC, changed to a calendar year ending December 31st.
Reporting Periods. In this Quarterly Report on Form 10-Q, we are reporting the results of our operations for the three and nine months ended September 30, 2016, which consist of the combined results of operations of Cyberonics and Sorin. Since LivaNova is the successor company to Cyberonics, we are presenting the results of Cyberonics’ operations for the twelve and thirty-eight weeks ended October 18, 2015, as the prior year equivalent periods. The twelve and thirty-eight weeks ended October 18, 2015 were selected for comparative purposes as they were the closest periods to the three and nine months ended September 30, 2016 (with approximately a two week difference) as it was impracticable and cost prohibitive to recast Cyberonics’ prior year financial information in order to present the three and nine months ended September 30, 2016.
Foreign Currency Translation and Remeasurement. We translate the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in AOCI in shareholders’ equity. Our subsidiaries that use the U.S. dollars as their functional currency remeasure their assets and liabilities that are denominated in a currency other than the U.S. dollars, at exchange rates in effect at the end of each period, while their inventories, property and nonmonetary assets and liabilities denominated in a currency other than the U.S. dollars, at historical rates.
Consolidation.  The accompanying condensed consolidated operating statements for the three and nine months ended September 30, 2016, include the operating results for LivaNova PLC and the LivaNova PLC Employee Benefit Trust (the “Trust”), which consist of the combined results of operations of Cyberonics and Sorin. The accompanying condensed consolidated operating results for the twelve and thirty-eight weeks ended October 18, 2015 include the results of operations for Cyberonics and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in such financial statements and accompanying notes. These estimates are based on management’s best knowledge of current events and actions we may undertake in the future. Estimates are used in accounting for, among other items, valuation and amortization of intangible assets, goodwill, amortization of intangible assets, measurement of deferred tax assets and liabilities, uncertain income tax positions, stock-based compensation, obsolete and slow-moving inventories, allowance for doubtful accounts, and in general, allocations to provisions and the fair value of assets and liabilities recorded in a business combination. Actual results could differ materially from those estimates.
Merger, Integration and Restructuring Charges. As a result of the Mergers, we incurred merger, integration and restructuring charges and reported merger and integration expenses and restructuring expenses separately as operating expenses in the consolidated statements of income (loss).
Merger Expenses. Merger expenses consisted of expenses directly related to the Mergers, such as professional fees for legal services, accounting services, due diligence, a fairness opinion and the preparation of registration and regulatory filings in the United States and Europe, as well as investment banking fees.
Integration Expenses. Integration expenses consisted primarily of consultancy fees with regard to: our systems integration, organization structure integration, finance, synergy and tax planning, the transition to U.S. GAAP for Sorin activity, our LSE listing and certain re-branding efforts.

12



Restructuring Expenses. After the consummation of the Mergers between Cyberonics and Sorin in October 2015, we initiated several restructuring plans (the “Restructuring Plans”) to combine our business operations. We identify costs incurred and liabilities assumed for the Restructuring Plans. The Restructuring Plans are intended to leverage economies of scale, eliminate duplicate corporate expenses and streamline distributions, logistics and office functions in order to reduce overall costs.
Reclassifications. The following reclassifications have been made to conform the prior period consolidated financial statements to current year presentations:
Amortization Expense. Amortization expense of $0.5 million and $1.5 million for the twelve and thirty-eight weeks ended October 18, 2015 were reclassified and reported separately in the consolidated statement of income (loss) rather than included with Research and Development expense.
Accrued Employee Compensation and Related Benefits. In the consolidated balance sheet, accruals amounting to $17.5 million in total were reclassified from Other Current Liabilities to Accrued Employee Compensation and Related Benefit Liability.
Cash and Cash Equivalents. We consider all highly liquid investments with an original maturity of three months or less, consisting of demand deposit accounts and money market mutual funds, to be cash equivalents and are carried in the balance sheet at cost, which approximated their fair value. We carried $41.1 million in money market mutual funds at December 31, 2015 and none at September 30, 2016.
U.S. Medical Device Excise Tax (“MDET”). Section 4191 of the Internal Revenue Code enacted by the Health Care and Education Reconciliation Act of 2010, in conjunction with the Patient Protection and Affordable Care Act, established a 2.3% excise tax on medical devices sold domestically beginning on January 1, 2013, with this excise tax now suspended from January 1, 2016 through December 31, 2017. We included the cost of MDET in cost of sales on the consolidated statements of income for the applicable reporting periods. The MDET tax expense amounted to $0.9 million and $2.9 million for the twelve and thirty-eight weeks ended October 18, 2015.
Italian Medical Device Payback (“IMDP”). The Italian Parliament introduced new rules for entities that supply goods and services to the Italian National Healthcare System. The new healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology sector that sell medical devices in Italy. A key provision of the law is a ‘payback’ measure, requiring companies selling medical devices in Italy to make payments to the Italian state if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. Our current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. We account for the estimated cost of the IMDP as a deduction from revenue. The estimated cost of the IMDP amounted to $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively.
Income Taxes. LivaNova, organized as a public limited company under the laws of England and Wales, operates through various subsidiaries in a number of countries throughout the world. Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. We use significant judgment and estimates in accounting for our income taxes. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statements basis and the tax basis of our assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense compared to pre-tax income yields an effective tax rate.
Segments. Prior to the Mergers, Cyberonics had one operating and reportable segment. Upon completion of the Mergers, we reorganized our reporting structure and aligned our segments and the underlying divisions and businesses. We currently function in three operating segments; the historical Cyberonics operations are included in the Neuromodulation segment while the historical Sorin businesses comprise the Cardiac Surgery (“CS”) and the Cardiac Rhythm Management (“CRM”) segments. Refer to “Note 22. Geographic and Segment Information” for additional information.

13



Note 3. Business Combination
On October 19, 2015, and pursuant to the terms of the Merger Agreement, Sorin merged with and into LivaNova, with LivaNova continuing as the surviving company, immediately followed by the merger of Merger Sub with and into Cyberonics, with Cyberonics continuing as the surviving company and as a wholly owned subsidiary of LivaNova. Following the completion of the Mergers, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin, and LivaNova’s ordinary shares were listed, under the ticker symbol “LIVN,” on NASDAQ and admitted for listing on the standard segment of the U.K. Financial Authority’s Official List and trading on the LSE.
The estimated fair value of the assets acquired and liabilities assumed in the Mergers, as adjusted in the table below, are based on information that became available during the measurement period. We recognized adjustments to the provisional amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments were determined.
The measurement period ended and the fair values of the Mergers were finalized by October 19, 2016.
Goodwill is calculated as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed. Goodwill represents growth opportunities and expected cost synergies of the combined company. We assigned goodwill arising from the Mergers to the Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation reporting units. This assignment was made by taking into consideration market participant rates of return for each acquired reporting unit, Cardiac Surgery and Cardiac Rhythm Management, in order to assess their respective fair values. The remaining goodwill, allocated to Neuromodulation, which is the accounting acquirer’s existing business unit, is supported by the synergies derived from the Mergers.
The following table summarizes the fair value of the assets acquired and liabilities assumed in the Mergers on October 19, 2015, including the measurement period adjustments recognized since the fair values were presented in our report on Form 10-K/T for the transitional period ended December 31, 2015 (in thousands):
 
 
October 19, 2015
 
Adjustments
 
October 19, 2015 (as adjusted)
Total fair value of consideration transferred
 
$
1,589,083

 
$

 
$
1,589,083

Estimated Fair Value of Assets Acquired and Liabilities Assumed:
 
 
 
 
 
 
Cash and cash equivalents
 
12,495

 

 
12,495

Accounts receivable
 
224,466

 

 
224,466

Inventories
 
233,832

 

 
233,832

Other current assets
 
60,674

 
(84
)
 
60,590

Property, plant and equipment
 
207,639

 
(1,121
)
 
206,518

Intangible assets
 
688,729

 

 
688,729

Equity investments
 
67,059

 
(72
)
 
66,987

Other assets
 
7,483

 
(1,328
)
 
6,155

Deferred tax assets
 
135,370

 
(121,234
)
 
14,136

Total assets acquired
 
1,637,747

 
(123,839
)
 
1,513,908

Current portion of debt and other obligations
 
110,601

 

 
110,601

Other current liabilities
 
237,855

 
830

 
238,685

Long-term debt
 
128,458

 

 
128,458

Deferred tax liabilities
 
279,328

 
(148,640
)
 
130,688

Other long-term liabilities
 
55,567

 

 
55,567

Total liabilities assumed
 
811,809

 
(147,810
)
 
663,999

Goodwill
 
$
763,145

 
$
(23,971
)
 
$
739,174

The measurement period adjustments shown in the table above were recorded in the quarters ended June 30, 2016 and September 30, 2016, and reflect changes in the estimated fair values of certain assets and liabilities, primarily related to deferred income taxes as a result of new information on facts and circumstances that existed at the time of acquisition. Adjustments were made to deferred income taxes as a result of the allocation of fair value to the legal entities. In addition, deferred income taxes were aggregated and presented on a net basis by jurisdiction.

14



We recorded reductions or (increases) to the following expenses due to the measurement period adjustments that were recorded during the nine months ended September 30, 2016 (in thousands):
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Amortization of intangible assets
 
$
193

 
$
1,844

Depreciation
 
1,539

 
2,790

Other costs
 

 
(40
)
Income tax
 
(3,232
)
 
(3,756
)
Net
 
$
(1,500
)
 
$
838

The valuation of the intangible assets acquired in the Mergers and related amortization periods are as follows (in thousands, except years):
 
 
Valuation as of October 19, 2015
 
Amortization period in years
Customer relationships
 
$
464,019

 
16-18
Developed technology
 
211,091

 
9-15
Sorin trade-name
 
13,619

 
4
 
 
$
688,729

 
 
Proforma results of operations
The following pro forma information presents the results of LivaNova as if the Mergers were consummated on April 26, 2014 and had been included in our consolidated statement of income (loss) for the twelve and thirty-eight weeks ended October 18, 2015 (in thousands, except per share data):
 
 
Twelve Weeks Ended October 18, 2015
 
Thirty-Eight Weeks Ended October 18, 2015
Net Sales
 
$
295,099

 
$
901,493

Net Loss
 
(51,984
)
 
(81,433
)
Basic and diluted net loss per share
 
$
(1.07
)
 
$
(1.68
)
The unaudited pro forma combined results of operations for the twelve and thirty-eight weeks ended October 18, 2015 have been prepared by adjusting the historical results of Cyberonics for these same periods to include the historical results of Sorin. The unaudited pro forma information included for Sorin for the twelve weeks ended October 18, 2015 is based on the accounts of Sorin for the three months ended September 30, 2015 and the information for the thirty-eight weeks ended October 18, 2015 includes the accounts of Sorin for the nine months ended September 30, 2015.
The unaudited pro forma information reflects the effect of purchase accounting adjustments and the elimination of merger-related transactions expenses, among other items. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on April 26, 2014, and it is not indicative of any future results.
Note 4. Reorganization Plans
Our 2015 and 2016 Reorganization Plans (the “Plans”) were initiated October 2015 and March 2016, respectively, in conjunction with the completion of the Mergers. These Plans are intended 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 consolidated statement of income (loss). We expect to complete these plans in the first half of fiscal year 2018. There were no restructuring expenses in the comparative prior year periods.
We estimate that the Plans will result in a net reduction of approximately 190 personnel of which 115 have occurred as of September 30, 2016. The Plans also include the closure of our R&D facility in Meylan, France and consolidation of its research and development (“R&D”) capabilities into our Clamart, France facility.

15



The Reorganization Plans’ accrual detail is as follows (in thousands):
 
 
Employee severance and other termination costs
 
Other
 
Total
Balance as of December 31, 2015
 
$
6,919

 
$

 
$
6,919

Restructuring charges
 
34,288

 
2,931

 
37,219

Cash payments
 
(21,066
)
 
(591
)
 
(21,657
)
Balance as of September 30, 2016
 
$
20,141

 
$
2,340

 
$
22,481

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

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Cardiac Surgery
 
$
916

 
$
5,878

Cardiac Rhythm Management
 
571

 
16,592

Neuromodulation
 
2,882

 
7,017

Other
 
12

 
7,732

Total
 
$
4,381

 
$
37,219

Note 5. Accounts Receivable and Allowance for Bad Debt
Accounts receivable, net, consisted of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Trade receivables from third parties
$
291,620

 
$
274,005

Allowance for bad debt
(7,275
)
 
(1,653
)
 
$
284,345

 
$
272,352

During the nine months ended September 30, 2016, we increased our allowance for bad debt primarily due to certain receivables in Greece whose probability of recoverability became doubtful during the quarter ended June 30, 2016.
Note 6. Inventories
Inventories consisted of the following (in thousands):

September 30, 2016
 
December 31, 2015
Raw materials
$
52,658

 
$
52,482

Work-in-process
40,725

 
44,369

Finished goods
104,266

 
115,597

 
$
197,649

 
$
212,448

The step-up in inventory basis of $35.0 million that resulted from the Mergers was fully amortized as of June 30, 2016 and is recorded in cost of sales in the consolidated statement of net income (loss). Inventories are reported net of the provision for obsolescence, which totaled $7.5 million and $3.6 million at September 30, 2016 and December 31, 2015, respectively. The provision reflects normal obsolescence and inventory turnover while the comparatively lower provision as of December 31, 2015 was positively conditioned by Sorin inventories which were fair valued as of the acquisition date.

16



Note 7. Property, Plant and Equipment (“PP&E”)
PP&E consisted of the following (in thousands):

 
September 30, 2016
 
December 31, 2015
Land
 
$
16,321

 
$
15,662

Building and building improvements
 
101,898

 
82,014

Machinery equipment, software, furniture and fixtures
 
175,000

 
140,364

Capital investment-in-process
 
21,668

 
42,210

Other
 
7,896

 
8,634

Total
 
322,783

 
288,884

Accumulated depreciation
 
(77,663
)
 
(44,297
)
 
 
$
245,120

 
$
244,587

Depreciation expense for LivaNova was $10.7 million and $30.2 million for the three and nine months ended September 30, 2016, respectively, and $1.6 million and $4.6 million for legacy Cyberonics for the twelve and thirty-eight weeks ended October 18, 2015, respectively. During the nine months ended September 30, 2016, the increases in our investments in PP&E were primarily due to costs associated with manufacturing and office facilities, R&D equipment, in addition to general infrastructure and information technology system improvements.
Note 8. Goodwill and Intangible Assets
Detail of finite-lived and indefinite-lived intangible assets is as follows (in thousands):

 
September 30, 2016
 
December 31, 2015
Finite-lived intangible assets:
 
 
 
 
Developed technology
 
$
216,334

 
$
213,873

Customer relationships
 
461,966

 
444,472

Trademarks and trade names
 
13,393

 
13,030

Other intangible assets
 
2,104

 
11

Total
 
693,797

 
671,386

Accumulated amortization
 
(43,431
)
 
(12,444
)
Net
 
$
650,366

 
$
658,942

Indefinite-lived intangible assets:
 
 
 
 
Goodwill
 
$
731,144

 
$
745,356

The amortization periods for our finite-lived intangible assets as of September 30, 2016
 
 
Minimum life in years
 
Maximum life in years
Developed technology
 
7
 
15
Customer relationships
 
16
 
18
Trademarks and trade names
 
4
 
4
Other intangible assets
 
5
 
10

17



The estimated future aggregate amortization of our finite-lived intangible assets remaining at September 30, 2016 is as follows (in thousands):
Year ending December 31,
 
2016
$
11,845

2017
47,661

2018
47,665

2019
47,665

2020
47,664

Thereafter
447,866

Detail of goodwill movements by segment is as follows (in thousands):
 
 
Neuromodulation
 
Cardiac Surgery
 
Cardiac Rhythm Management
 
Total Goodwill
Balance as of December 31, 2015
 
$
315,943

 
$
412,541

 
$
16,872

 
$
745,356

Measurement period adjustments, net
 

 
(25,728
)
 
1,757

 
(23,971
)
Effect of changes in currency exchange rates
 

 
10,040

 
(281
)
 
9,759

Balance as of September 30, 2016
 
$
315,943

 
$
396,853

 
$
18,348

 
$
731,144

We assigned goodwill arising from the Mergers to the Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation reporting units.
We test goodwill for impairment on an annual basis or when events or changes in circumstances indicate that a potential impairment exists. If our operating performance or our anticipated business outlook deteriorates, our reporting units’ estimated fair value could decline below their carrying value, resulting in an impairment of goodwill. Likewise, if the market conditions or anticipated performance for our Cardiac Rhythm Management reporting unit deteriorates, it is possible that the estimated fair value of this reporting unit could be less than its carrying value when we perform our annual impairment analysis in our fourth quarter of 2016.
Factors that could have a negative impact on the fair value of our reporting units include, but are not limited to:
Decreases in revenue as a result of the inability of our sales force to effectively market and promote our products;
Increased competition, patent expirations or new technologies or treatments;
Declines in anticipated growth rates;
The outcome of litigation, legal proceedings, investigations or other claims resulting in significant cash outflows;
Sustained decline in our stock price
Adverse changes in one or more of these factors could reduce the estimated fair value of our reporting unit below its carrying value in future periods.


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Note 9. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
 
 
September 30, 2016
 
December 31, 2015
Restructuring related expense
 
$
22,481

 
$
6,919

Derivatives
 
6,267

 
1,815

Provisions for agents, returns and other
 
7,490

 
7,199

Advances received on customer receivables
 
1,329

 
24,494

Product warranty obligations
 
2,124

 
2,119

Royalty costs
 
2,152

 
1,316

Clinical study costs
 
1,815

 
2,004

Insurance
 
114

 
2,566

Other
 
18,274

 
14,615

 
 
$
62,046

 
$
63,047

Note 10. Product Warranties
We include warranty obligations with current accrued liabilities in the consolidated balance sheet. Changes in the carrying amount of our warranty obligation consisted of the following (in thousands):
 

As of December 31, 2015
$
2,119

Product warranty accrual
247

Settlements
(266
)
Effect of changes in currency exchange rates
24

As of September 30, 2016
$
2,124

Note 11. Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):

 
September 30, 2016
 
December 31, 2015
Uncertain tax positions
 
$
13,358

 
$
13,048

Government grant deferred revenue
 
4,027

 
3,918

Earnout for contingent payments (1)
 
1,435

 
3,457

Unfavorable operating leases (2)
 
1,932

 
2,513

Financial derivatives (3)
 
1,929

 
1,793

Other
 
4,489

 
5,014

 
 
$
27,170

 
$
29,743

(1)
The earnout for contingent payments represents contingent payments we assumed during the Mergers for two acquisitions completed by Sorin prior to the Mergers. The first acquisition, in September 2015, was of Cellplex PTY Ltd. in Australia; the second acquisition was of the commercial activities of a local distributor in Colombia. The contingent payments for the first acquisition are based on achievement of sales targets by the acquiree through June 30, 2018 and the contingent payments for the second acquisition are based on sales of cardiopulmonary disposable products and heart lung machines of the acquiree through December 2019. Refer to “Note 13. Fair Value Measurements.”
(2)
The unfavorable operating leases represents the adjustment to recognize Sorin’s future lease obligations at their estimated fair value in conjunction with the Mergers.
(3)
Financial derivatives represent forward interest rate swap contracts, which hedge our long-term European Investment Bank debt. Refer to “Note 15. Derivatives and Risk Management.”

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Note 12. Investments 
Short-Term Investments. As of December 31, 2015 our short-term investment consisted of $7.0 million held-to-maturity commercial paper with maturities over three months but less than twelve months which were carried at cost plus accrued interest. The commercial paper matured during the quarter ended September 30, 2016, and was not rolled over, as a result, we had no short-term investments at quarter end.
Cost-Method Investments.  Our cost-method investments are shown in long-term assets in the consolidated balance sheets and consist of our equity positions in the following privately-held companies (in thousands):
 
 
September 30, 2016
 
December 31, 2015
ImThera Medical, Inc. - convertible preferred shares and warrants (1)
 
$
12,000

 
$
12,000

Rainbow Medical Ltd.(2)
 
3,950

 
3,847

MD Start II
 
560

 

Total
 
$
16,510

 
$
15,847

 
(1)
ImThera Medical, Inc. is a private U.S. company developing a neurostimulation device system for the treatment of obstructive sleep apnea.
(2)
Rainbow Medical Ltd. is a private Israeli venture capital company that seeds and grows companies developing medical devices in a diverse range of medical fields.
Equity Method Investments. Our equity-method investments are shown in long-term assets of our condensed consolidated balance sheets and consist of our equity position in the following entities (in thousands, except for percent ownership):
 
 
% Ownership (1)
 
September 30, 2016
 
December 31, 2015
Caisson Interventional LLC (2)
 
49.1
%
 
$
17,629

 
$
13,712

Highlife S.A.S. (2)
 
38.0
%
 
7,002

 
8,363

MicroPort Sorin CRM (Shanghai) Co. Ltd.
 
49.0
%
 
6,516

 
8,959

Respicardia, Inc. (3)
 
19.6
%
 
19,761

 
30,586

Other
 
 
 
17

 
19

Total (4)
 
 
 
$
50,925

 
$
61,639

(1)
Ownership percentages as of September 30, 2016.
(2)
We have outstanding loans to Caisson Interventional LLC and to Highlife S.A.S that amount to $9.1 million, which are included in Other Assets (long-term) on the consolidated balance sheet. We invested an additional $7.5 million in Caisson Series B Preferred Units upon achievement of a previously agreed upon milestone.
(3)
Respicardia is a privately funded U.S. company developing an implantable device designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea ("CSA") by transvenously stimulating the phrenic nerve.
(4)
The total difference between the carrying amount of the investments and the amount of underlying equity in the net assets of the investees was $47.1 million at September 30, 2016.

20



Respicardia. During the quarter ended September 30, 2016, we declined to exercise or extend our option to purchase all of the issued and outstanding shares of Respicardia held by other investors as we preferred to continue as a minority investor instead of becoming a strategic acquirer as taken into consideration with our overall portfolio management program. Our analysis indicated that our carrying value in Respicardia might not be recoverable and the decrease in value of our investment was other than temporary. We estimated the fair value of our investment in Respicardia using information about past events, current conditions, and forecasts and an estimate of future cash flows. The estimated fair value was below our carrying cost and we impaired our investment in Respicardia by $9.2 million, which essentially represents the purchase option’s carrying value on the date we declined to exercise our option. This loss is included in Losses from Equity Method Investments in the consolidated statement of income (loss). In addition, during the quarter ended September 30, 2016, we started the process that will result in the cancellation of our distributor agreement with Respicardia in the fourth quarter ending December 31, 2016. The distributor agreement is a key component in the determination of whether our influence over Respicardia is significant. We accounted for Respicardia as an equity method investment through September 30, 2016 and will reevaluate our accounting method as of the date of the complete cancellation of the distributor agreement.
Caisson. In July 2016, we invested $7.5 million in Caisson Series B Preferred Units upon their achievement of a previously agreed upon milestone. This investment raised our interest in Caisson by 5.4% to 49.1%. There were no other changes with respect of our interest in, and control of, Caisson, therefore we continue to account for this investment under the equity method of accounting.
We adjusted the carrying amount of our equity-method investments for our share of the investees’ losses and amortization of basis differences in the amount of $3.9 million and $10.1 million during the three and nine months ended September 30, 2016, respectively. In addition, we adjusted the carrying amount of certain of our equity-method investments for foreign currency translation gains of $0.3 million and $1.4 million during the three and nine months ended September 30, 2016, respectively, which are reflected in the consolidated statements of other comprehensive income (loss). Our share of the investee losses, the amortization of basis differences and the impairment of Respicardia were reflected in “Losses from equity method investments” in the consolidated statements of income (loss).
Other Assets. “Other assets” in the long-term section of the consolidated balance sheet includes $136.8 million in deferred tax expense related to the inter-company sale of intangible assets which is discussed further in “Note 20. Income Taxes”. Other assets also include the cash surrender value of company-owned life insurance policies, which are based on the fair values in a mutual fund portfolio, amounting to $1.8 million and $1.8 million at September 30, 2016 and December 31, 2015, respectively.
Note 13. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, categorizing the inputs used to measure fair value. The hierarchy can be described as follows:
Level 1. Observable inputs such as quoted prices in active markets.
Level 2. Inputs other than the quoted prices in active markets that are observable either directly or indirectly. To measure the fair value of its derivative transactions (transactions to hedge exchange risk and interest rate risk), we calculate the mark-to-market of each transaction using prices quoted in active markets (e.g., the spot exchange rate of a currency for forward exchange transactions) and observable market inputs processed for the measurement (e.g., the fair value of an interest rate swap using the interest rate curve), or the measurement of an exchange rate option (with the processing of listed prices and observable variables such as volatility). For all level 2 valuations, we use the information provided by a third-party as a source for obtaining quoted observable prices and to process market variables.
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The fair value of assets using Level 3 input are based on our own judgments about the assumptions that market participants would use in pricing the asset and on observable market data, when available. We generally consider: (a) sale prices for similar assets, (b) discounted estimated future cash flows using an appropriate discount rate and/or (c) estimated replacement cost.
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, 2016 or the thirty-eight weeks ended October 18, 2015.

21



Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis
The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
Fair Value
as of
 
Fair Value Measurements Using Inputs Considered as:

September 30, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivative Assets - freestanding hedges (FX)
$
1,249

 
$

 
$
1,249

 
$

Total assets
$
1,249

 
$

 
$
1,249

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative Liabilities - designated as cash flow hedges (FX)
$
3,943

 
$

 
$
3,943

 
$

Derivative Liabilities - designated as cash flow hedges (interest rate swaps)
2,994

 

 
2,994

 

Derivative Liabilities - freestanding hedges (FX)
1,259

 

 
1,259

 

Earnout for contingent payments (1)
1,435

 

 

 
1,435

Total Liabilities
$
9,631

 
$

 
$
8,196

 
$
1,435


 
Fair Value
as of
 
Fair Value Measurements Using Inputs Considered as:
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivative Assets - designated as cash flow hedges (FX)
$
839

 
$

 
$
839

 
$

Total Assets
$
839

 
$

 
$
839

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivative Liabilities - designated as cash flow hedges (interest rate swaps)
$
2,876

 
$

 
$
2,876

 
$

Derivative Liabilities - freestanding hedges (interest rate swaps)
24

 

 
24

 

Derivative Liabilities - freestanding hedges (FX)
1,547

 

 
1,547

 

Earnout for contingent payments (1)
3,457

 

 

 
3,457

Total Liabilities
$
7,904

 
$

 
$
4,447

 
$
3,457

(1)
This contingent payment arose as a result of acquisitions by Sorin, prior to the Mergers, see “Note 11. Other Long-Term Liabilities” for further information.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our investment in entities accounted for under the cost-method and the equity method have no quoted market prices. These investments and our non-financial assets such as: goodwill, intangible assets, and PP&E, are remeasured at fair value if there is an indication of impairment and recorded at fair value only when the impairment is recognized. We classify the measurement input for these assets as Level 3 inputs within the fair value hierarchy.
During the quarter ended September 30, 2016, we recorded a $9.2 million impairment of our equity-method investment in Respicardia, Inc. Refer to “Note 12. Investments” for further information.

22



During the thirty-eight weeks ended October 18, 2015, we fully impaired certain finite-lived intangible assets and PP&E for a loss of $0.4 million and $0.6 million, respectively, which was primarily related to R&D projects that no longer factored into our future product plans.
Short-Term Financial Instruments Not Measured at Fair Value
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these items. The balance of our investments in short-term securities consisted of commercial paper carried at cost plus accrued interest which approximates its fair value. Refer to “Note 12. Investments” for further information.
The carrying value of our long-term debt including the short-term portion, as of September 30, 2016, was $113.0 million which we believe approximates fair value.
Note 14. Financing Arrangements
The outstanding principal amount of long-term debt consisted of the following (in thousands, except interest rates):
 
 

 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
 
Maturity
 
Interest Rate
European Investment Bank (1)
 
$
92,925

 
$
99,426

 
June 2021
 
0.98
%
Banca del Mezzogiorno (2)
 
8,170

 
8,851

 
December 2019
 
0.50
%
Mediocredito Italiano
 
7,278

 

 
December 2023
 
0.50
%
Bpifrance (ex-Oséo) (3)
 
2,190

 
2,621

 
October 2019
 
2.58
%
Novalia SA (Vallonie) (4)
 
844

 
1,192

 
March 2020 - June 2033
 
0.00% - 3.42%

Mediocredito Italiano - mortgages (5)
 
846

 
944

 
September 2021-2026
 
0.87% - 1.37%

Mediocredito Italiano - Intesa Sanpaolo
 
719

 

 
December 2023
 
0.50% - 3.07%

Total long-term facilities
 
112,972

 
113,034

 
 
 
 
Less current portion of long-term debt
 
22,034

 
21,243

 
 
 
 
Total long-term debt
 
$
90,938

 
$
91,791

 
 
 
 
(1)
In July 2014, Sorin obtained a European Investment Bank (“EIB”) loan to support product development projects in Italy and France for the Cardiac Surgery (the “CS”) and Cardiac Rhythm Management (the “CRM”) Business Units, and in addition, for the support of New Ventures therapeutic solutions aimed at treating heart failure and mitral valve regurgitation. The interest rate for the EIB loan is reset by the lender each quarter based on the Euribor. Interest payments are quarterly and principal payments are at six months. The variable interest rate for this debt was hedged with interest rate swap agreements. Refer to “Note 15. Derivatives and Risk Management.”
(2)
In January 2015, Sorin obtained loans to support R&D projects as a part of the Large Strategic Project program of the Italian Ministry of Education, Universities and Research. One loan is subsidized by Cassa Depositi e Prestiti, at a fixed rate of 0.5%, and a second loan provided by GE Capital Interbanca, at a floating interest rate of the 6-month Euribor rate plus 3.3%.
(3)
In 2012, Sorin obtained a loan with Bpifrance, a French government entity that provides financial support for R&D.
(4)
In 2010, Sorin obtained loans, at various fixed interest rates, from Novalia SA, a finance company in the Wallonia Region in Belgium, to support several R&D projects.
(5)
In 2014, Sorin assumed real estate mortgage loans with the acquisition of the cannulae business. The loans are due to Mediocredito Italiano and are secured by a mortgage on our building located at our Cantù manufacturing site in Italy.
During the quarter, we entered into two term loans as part of the Fondo Innovazione Tecnologica program implemented by the Italian Ministry of Education, University and Research through Mediocredito Italiano Bank. The first loan, has a fixed interest rate of 0.50% per annum, with principal and interest payments due half yearly, starting December 31, 2016 and ending December 31, 2023. The second loan has a floating interest rate using the six month Euribor rate plus 3.30%, with principal and accumulated interest due half yearly starting June 30, 2021 and ending December 31, 2023.


23



The outstanding principal amount of short-term debt (revolving credit agreements) consisted of the following (in thousands, except interest rates):
 
 

 
 
 
 
September 30, 2016
 
December 31, 2015
 
Interest Rate
Intesa San Paolo Bank
 
$
7,813

 
$
20,630

 
0.300
%
BNL BNP Paribas
 
3,348

 
18,459

 
0.250
%
Unicredit Banca
 
12,277

 
15,201

 
0.194
%
BNP Paribas (Brazil)
 
3,164

 
2,225

 
14.13
%
French Government
 
2,088

 
2,030

 

Banco de Bogota
 
802

 

 
2.95
%
Other short-term facilities
 
2,091

 
2,725

 


Total short-term facilities
 
31,583

 
61,270

 
 
Current portion of long-term debt
 
22,034

 
21,243

 
 
Total current debt
 
53,617

 
82,513

 
 
Total debt
 
$
144,555

 
$
174,304

 
 
Note 15. Derivatives and Risk Management
Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. In addition, due to certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments. We enter into foreign currency exchange rate (“FX”) forward contracts and interest rate swap contracts to reduce the impact of foreign currency rate and interest rate fluctuations on net revenues and cash flow. We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities in the consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings. If a derivative is designated as a hedging instrument and qualifies for hedge accounting then, depending on hedge effectiveness, we account for changes in the fair value of the derivative either immediately in earnings, for the ineffective portion, or in other comprehensive income for the effective portion. Accumulated hedge gains and losses in other comprehensive income are transferred to earnings upon settlement, termination or cancellation of the hedge contract. We measure hedge effectiveness each quarter end and if a derivative that qualified for hedge accounting is later determined to be ineffective, in whole or in part, due to changes in the underlying hedged transaction, the fair value of the portion of the derivative determined to be ineffective will be recognized as a gain or loss in earnings for the applicable period.
Freestanding Derivative Foreign Currency Forward Contracts
The gross notional amount of derivative FX forward contracts, not designated as hedging instruments, outstanding at September 30, 2016 and December 31, 2015 was $422.4 million and $254.4 million, respectively. These contracts are FX forward contracts designed to offset the FX effects in earnings of intercompany loans denominated in a variety of foreign currencies versus the euro, which settle monthly or quarterly, and are renewed or not in accordance with the underlying outstanding intercompany loan amounts.
The amount and location of the net gains (losses) in the condensed consolidated statements of income (loss) related to open and settled freestanding FX contracts (in thousands):
Derivatives Not Designated as Hedging Instruments
 
Location of gains / (losses) in the statement of net income (loss)
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
FX forward contracts (1)
 
Foreign exchange and other
 
$
(1,802
)
 
$
428

(1)
There were no derivative FX contracts opened or settled during the thirty-eight weeks ended October 18, 2015.

24



Cash Flow Hedges
Foreign Currency Risk
We utilize foreign currency exchange rate (“FX”) derivative contracts designed to hedge the variability of cash flows associated with our 12 month forecast of revenues denominated in British Pound and Japanese Yen. These contracts are settled when the earnings process has completed and the receivables collected. These contracts are designated as cash flow hedges.
There was no hedge ineffectiveness and there were no components of the FX derivative contracts excluded in the measurement of hedge effectiveness during the nine months ended September 30, 2016.
During the nine months ended September 30, 2016, we discontinued and settled certain of our FX derivative contracts due to changes in our foreign currency revenue forecast that resulted in a gain of $0.2 million reclassified to earnings from accumulated other comprehensive income.
Interest Rate Risk
In July 2014, Sorin entered into a European Investment Bank (“EIB”) long-term loan agreement that matures in June 2021 with variable interest payments due quarterly based on the Euribor 3 month floating interest rate. To minimize the impact of changes in the interest rate we entered into an interest rate swap agreement program to swap the EIB floating-rate interest payments for fixed-rate interest payments. The interest rate swap contracts qualify for, and are designated as, cash flow hedges.
There was no interest rate swap hedge ineffectiveness or component of the swap contract excluded in the measurement of hedge effectiveness during the nine months ended September 30, 2016.
The notional amount of interest rate swap contracts designated as cash flow hedges is as follows (in thousands):
Notional amounts:
 
September 30, 2016
 
December 31, 2015
Foreign currency exchange rate contracts
 
$
90,087

 
$
66,900

Interest rate swap contracts
 
74,407

 
79,625

Total
 
$
164,494

 
$
146,525

After-tax net gain (loss) associated with open FX cash flow hedging contracts recorded in the ending balance of AOCI and the net amount expected to be reclassed to earnings in the next 12 months:
 
 
September 30, 2016
 
Net amount expected to be reclassed to earnings in next 12 months
Foreign currency exchange rate contracts
 
$
(3,003
)
 
$
(3,003
)
Interest rate swap contracts
 
180

 
38

Total
 
$
(2,823
)
 
$
(2,965
)
There were no FX or interest rate swap derivative contracts outstanding for the thirty-eight weeks ended October 18, 2015.

25



Gains (losses) posted to other comprehensive income (“OCI”) and the amount reclassified to earnings for derivative contracts designated as cash flow hedges is as follows (in thousands):
 
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Description of derivative contract
 
Location in earnings of reclassified gain or loss
Gains (Losses) Recognized in OCI
 
Gains (Losses) Reclassified from OCI to Earnings:
 
Gains (Losses) Recognized in OCI
 
Gains (Losses)Reclassified from OCI to Earnings:
FX derivative contracts
 
Foreign Exchange and Other
$
2,535

 
$
2,795

 
$
(5,932
)
 
$
2,943

FX derivative contracts
 
SG&A

 
(1,876
)
 

 
(3,437
)
Interest rate swap contracts
 
Interest expense
263

 
(163
)
 
(38
)
 
(252
)
Total
 
 
$
2,798

 
$
756

 
$
(5,970
)
 
$
(746
)
The following tables present the fair value on a gross basis, and the location of, derivative contracts reported in the consolidated balance sheet (in thousands):
September 30, 2016
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments
 
Balance Sheet Location
 
Fair Value (1)
 
Balance Sheet Location
 
Fair Value (1)
Interest rate contracts
 
Prepaid expenses and other current assets
 
$

 
Accrued liabilities
 
$
1,065

Interest rate contracts
 
Other assets (long term)
 

 
Other long-term liabilities
 
1,929

Foreign currency exchange rate contracts
 
Prepaid expenses and other current assets
 

 
Accrued liabilities
 
3,943

Total derivatives designated as hedging instruments
 

 

 

 
6,937

Derivatives not designated as hedging instruments
 

 

 

 

Foreign currency exchange rate contracts
 
Prepaid expenses and other current assets
 
1,249

 
Accrued liabilities
 
1,259

Total derivatives not designated as hedging instruments
 

 
1,249

 

 
1,259

Total derivatives
 

 
$
1,249

 

 
$
8,196


26



December 31, 2015
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments
 
Balance Sheet Location
 
Fair Value (1)
 
Balance Sheet Location
 
Fair Value (1)
Interest rate contracts
 
Prepaid expenses and other current assets
 
$

 
Accrued liabilities
 
$
1,083

Interest rate contracts
 
Other assets (long term)
 

 
Other long-term liabilities
 
1,793

Foreign currency exchange rate contracts
 
Prepaid expenses and other current assets
 
839

 
Accrued liabilities
 

Total derivatives designated as hedging instruments
 
 
 
839

 
 
 
2,876

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other current assets
 

 
Accrued liabilities
 
24

Foreign currency exchange rate contracts
 
Prepaid expenses and other current assets
 

 
Accrued liabilities
 
1,547

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
1,571

Total derivatives
 
 
 
$
839

 
 
 
$
4,447

(1)
For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 13. Fair Value Measurements.”
Note 16.  Commitments and Contingencies
3T Heater Cooler
FDA Warning Letter. On December 31, 2015, LivaNova received a Warning Letter (the “Warning Letter”) dated December 29, 2015 from the U.S. Food and Drug Administration (“FDA”) alleging certain violations of FDA regulations applicable to medical device manufacturers at the Company’s Munich, Germany and Arvada, Colorado facilities.
The FDA inspected the Munich facility from August 24, 2015 to August 27, 2015 and the Arvada facility from August 24, 2015 to September 1, 2015. On August 27, 2015, the FDA issued a Form 483 identifying two observed non-conformities with certain regulatory requirements at the Munich facility. We did not receive a Form 483 in connection with the FDA’s inspection of the Arvada facility. Following the receipt of the Form 483, we provided written responses to the FDA describing corrective and preventive actions that were underway or to be taken to address the FDA’s observations at the Munich facility. The Warning Letter responded in part to our responses and identified other alleged violations not previously included in the Form 483.
The Warning Letter further stated that our 3T Heater Cooler devices and other devices we manufactured at our Munich facility are subject to refusal of admission into the United States until resolution of the issues set forth by the FDA in the Warning Letter. The FDA has informed us that the import alert is limited to the 3T Heater Cooler devices, but that the agency reserves the right to expand the scope of the import alert if future circumstances warrant such action. The Warning Letter did not request that existing users cease using the 3T Heater Cooler device, and manufacturing and shipment of all of our products other than the 3T Heater Cooler remain unaffected by the import limitation. To help clarify these issues for current customers, we issued an informational Customer Letter in January 2016, and that same month agreed with the FDA on a process for shipping 3T Heater Cooler devices to existing U.S. users pursuant to a certificate of medical necessity program.
Lastly, the Warning Letter stated that premarket approval applications for Class III devices to which certain Quality System regulation deviations identified in the Warning Letter are reasonably related will not be approved until the violations have been corrected. However, the Warning Letter only specifically names the Munich and Arvada facilities in this restriction, which do not manufacture or design devices subject to premarket approval.
We are continuing to work diligently to remediate the FDA’s inspectional observations for the Munich facility as well as the additional issues identified in the Warning Letter. We take these matters seriously and intend to respond timely and fully to the FDA’s requests.

27



The Warning Letter had no impact on our consolidated financial position, results of operations or cash flows in our fiscal year ended December 31, 2015, and the impact on our consolidated financial position, results of operations or cash flows for the nine months ended September 30, 2016 was not material. Although we have started to see an impact to sales outside the U.S., we continue to believe that the Warning Letter and the FDA’s concerns will be resolved without a material impact on our consolidated financial position, results of operations or cash flows for our fiscal year 2016.
CDC and FDA Safety Communications and Company Field Safety Notice Update. On October 13, 2016 the Centers for Disease Control and Prevention (“CDC”) and FDA separately released safety notifications regarding the 3T Heater-Cooler devices. The CDC’s Morbidity and Mortality Weekly Report (“MMWR”) and Health Advisory Notice (“HAN”) reported that tests conducted by CDC and its affiliates indicate that there appears to be genetic similarity between both patient and heater-cooler strains of the non-tuberculous mycobacterium (“NTM”) bacteria M. chimaera isolated in hospitals in Iowa and Pennsylvania. Citing the geographic separation between the two hospitals referenced in the investigation, the report asserts that 3T heater-cooler devices manufactured prior to August 18, 2014 could have been contaminated during the manufacturing process. The CDC’s HAN and FDA’s Safety Communication, issued contemporaneously with the MMWR report, each assess certain risks associated with heater-cooler devices and provide guidance for providers and patients. The CDC notification states that the decision to use the 3T Heater-Cooler during a surgical operation is to be taken by the surgeon based on a risk approach and on patient need. Both the CDC’s and FDA’s communications confirm that heater-cooler devices are critical medical devices and enable doctors to perform life-saving cardiac surgery procedures.
Also on October 13, 2016, the Company issued a Field Safety Notice Update for US users of 3T heater-cooler devices to proactively and voluntarily contact facilities to facilitate implementation of the CDC and FDA recommendations. Discussions regarding the execution of the Field Safety Notice Update continue with FDA. Pending the outcome of those discussions, the Company is currently unable to determine the outcome or impact of the CDC and FDA safety communications on its future revenues, results of operations, earnings, cash flows or financial condition.
Baker, Miller et al v. LivaNova PLC. On February 12, 2016, LivaNova was alerted that a class action complaint had been filed in the U.S. District Court for the Middle District of Pennsylvania with respect to the Company’s 3T Heater Cooler devices, naming as evidence, in part, the Warning Letter issued by the FDA in December 2015. The named plaintiffs to the complaint are two individuals who underwent open heart surgeries at WellSpan York Hospital and Penn State Milton S. Hershey Medical Center in 2015, and the complaint alleges that: (i) patients were exposed to a harmful form of bacteria, known as nontuberculous mycobacterium (“NTM”), from LivaNova’s 3T Heater Cooler devices; and (ii) LivaNova knew or should have known that design or manufacturing defects in 3T Heater Cooler devices can lead to NTM bacterial colonization, regardless of the cleaning and disinfection procedures used (and recommended by the Company). Named plaintiffs seek to certify a class of plaintiffs consisting of all Pennsylvania residents who underwent open heart surgery at WellSpan York Hospital and Penn State Milton S. Hershey Medical Center between 2011 and 2015 and who are currently asymptomatic for NTM infection (approximately 3,600 patients).
The putative class action, which has not been certified, seeks: (i) declaratory relief finding the 3T Heater Cooler devices are defective and unsafe for intended uses; (ii) medical monitoring; (iii) general damages; and (iv) attorneys’ fees. On March 21, 2016, the plaintiffs filed a First Amended Complaint adding Sorin Group Deutschland GmbH and Sorin Group USA, Inc. as defendants. On September 29, 2016 the Court dismissed LivaNova PLC from the case, and on October 11, 2016, the Court denied the Company’s motion to dismiss Sorin Group Deutschland GmbH and Sorin Group USA, Inc. from the lawsuit.
The Company has recently been served with additional similar lawsuits related to surgical cases in which a 3T Heater Cooler device was allegedly used. Six complaints have been filed in Pennsylvania State Court in York, PA (five against the Company and Wellspan York Hospital, and one solely against the Company, all related to surgical cases at York Hospital), one complaint has been filed in Pennsylvania State Court in Dauphin County, PA against the Company and Milton S. Hershey Medical Center related to a surgical case at Hershey Medical Center and one complaint has been filed in Pennsylvania State Court against the Company and University of Pennsylvania related to a surgical case at Penn Presbyterian Hospital. Nine complaints have been filed in the U.S. District Court for the District of South Carolina related to surgical cases at Greenville Health System Hospital in Greenville, SC. One additional case has been filed against the Company in the U.S. District Court for the Southern District of Iowa related to a surgical case at the University of Iowa Hospital. Finally, on October 30, 2016, the Company learned of a class action petition brought against the Montreal Heart Institute and LivaNova PLC in the Province of Quebec, Canada related to surgical cases at the Montreal Heart Institute. The Company has not yet been served with the complaint in this case.

28



At LivaNova, patient safety is of the utmost importance, and significant resources are dedicated to the delivery of safe, high-quality products. We intend to vigorously defend each of these claims. Given the early stage of this matters, we cannot, however, give any assurances that additional legal proceedings making the same or similar allegations will not be filed against LivaNova PLC or one of its subsidiaries, nor that the resolution of these complaints or other related litigation in connection therewith will not have a material adverse effect on our business, results of operations, financial condition and/or liquidity.
Other Matters
SNIA Litigation. Sorin S.p.A. was created as a result of a spin-off (the “Sorin spin-off”) from SNIA S.p.A. (“SNIA”). The Sorin spin-off, which spun off SNIA’s medical technology division, became effective on January 2, 2004. Pursuant to the Italian Civil Code, in a spin-off transaction, the parent and the spun-off company can be held jointly liable up to the actual value of the shareholders’ equity conveyed or received (we estimate that the value of the shareholders’ equity received was approximately €573 million) for certain indebtedness or liabilities of the pre-spin-off company:
for “debt” (debiti) of the pre-spin-off company that existed at the time of the spin-off (this joint liability is secondary in nature and, consequently, arises only when such indebtedness is not satisfied by the company owing such indebtedness);
for “liabilities” (elementi del passivo) whose allocation between the parties to the spin-off cannot be determined based on the spin-off plan.
Sorin believes and has argued before the relevant fora that Sorin is not jointly liable with SNIA for its alleged SNIA debts and liabilities. Specifically, between 1906 and 2010, SNIA’s subsidiaries Caffaro Chimica S.r.l. and Caffaro S.r.l. and their predecessors (the “SNIA Subsidiaries”), conducted certain chemical operations (the “Caffaro Chemical Operations”), at sites in Torviscosa, Brescia and Colleferro, Italy (the “Caffaro Chemical Sites”). These activities allegedly resulted in substantial and widely dispersed contamination of soil, water and ground water caused by a variety of hazardous substances released at the Caffaro Chemical Sites. In 2009 and 2010, SNIA and the SNIA Subsidiaries filed for insolvency. In connection with SNIA’s Italian insolvency proceedings, the Italian Ministry of the Environment and the Protection of Land and Sea (the “Italian Ministry of the Environment”), sought compensation from SNIA in an aggregate amount of €3.4 billion for remediation costs relating to the environmental damage at the Caffaro Chemical Sites allegedly caused by the Caffaro Chemical Operations. The amount was based on certain clean-up activities and precautionary measures set forth in three technical reports prepared by ISPRA, the technical agency of the Ministry of Environment. In addition to disputing liability, the Company also disputes the amount being claimed and the basis for its estimation by Italian authorities, and that issue also remains in dispute. No final remediation plan has been approved at any time by the Italian authorities.
In September 2011, the Bankruptcy Court of Udine, and in July 2014, the Bankruptcy Court of Milan each held (in proceedings to which our Company is not part) that the Italian Ministry of the Environment and other Italian government agencies (the “Public Administrations”) were not creditors of either SNIA or its SNIA Subsidiaries in connection with their claims in the context of their Italian insolvency proceedings. LivaNova (as the successor to Sorin in the litigation) believes these findings are and will be influential (although not formally binding) upon other Italian courts, including civil courts. Public Administrations have appealed both decisions in those insolvency proceedings: in January 2016 the Court of Udine rejected the appeal brought by the Italian Public Administrations. The Public Administrations have appealed that second loss in pending proceedings before the Italian Supreme Court. The appeal by the Public Administrations before the Court of Milan remains pending.
In January 2012, SNIA filed a civil action against Sorin in the Civil Court of Milan asserting provisions of the Italian Civil Code relating to potential joint liability of a parent and a spun-off company in the context of a spin-off, as described above. Those proceedings seek to determine Sorin’s joint liability with SNIA for damages allegedly related to the Caffaro Chemical Operations (as described below). SNIA’s civil action against Sorin also named the Public Administrations Italian Ministry of the Environment and other Italian government agencies, as defendants, in order to have them bound to the final ruling. The Public Administrations that had also sought compensation from SNIA for alleged environmental damage subsequently counterclaimed against Sorin, seeking to have Sorin declared jointly liable towards those Public Administrations alongside SNIA, and on the same legal basis. SNIA and the Public Administrations also requested the court to declare inapplicable to the Sorin spin-off the cap on potential joint liability of parties to a spin-off otherwise provided for by the Italian Civil Code. The cap, if applied, would limit any joint liability to the actual value of the shareholders’ equity received. The Public Administrations have argued before the court that the Sorin spin-off was planned prior to the date such caps were enacted under the Italian Civil Code (although executed after such caps were introduced into Italian law) and should therefore not be applied to the Sorin spin-off.

29



Sorin has vigorously contested all of SNIA’s claims against Sorin as well as those claims brought by the Public Administrations. A favorable decision pertaining to the case was delivered in Judgment No. 4101/2016 on April 1, 2016 (the “Decision”). In its Decision, the Court of Milan dismissed all legal actions of SNIA and of the Public Administrations against Sorin (now LivaNova), further requiring the Public Administrations to pay Sorin €300,000, as legal fees (of which €50,000 jointly with SNIA).
On June 21, 2016, the Public Administrations filed an appeal against the above decision before the Court of Appeal of Milan. To date SNIA has not filed an appeal in this case. The first hearing of the appeal proceedings was scheduled for November 22, 2016; the Court of Appeals afterwards adjourned the first hearing to December 20, 2016.
LivaNova (as successor to Sorin in the litigation) continues to believe that the risk of material loss relating to the SNIA litigation is not probable as a result of the reasoning contained in, and legal conclusions reached in, the recent court decisions described above. We also believe that the amount of potential losses relating to the SNIA litigation is, in any event, not estimable given that the underlying damages, related remediation costs, allocation and apportionment of any such responsibility, which party is responsible for which time period, all remain issues in dispute and that no final decision on a remediation plan has been approved. As a result, LivaNova has not made any accrual in connection with the SNIA litigation.
Pursuant to European Union, United Kingdom and Italian cross-border merger regulations applicable to the Mergers, legacy Sorin liabilities, including any potential liabilities arising from the claims against Sorin relating to the SNIA litigation, are assumed by LivaNova as successor to Sorin. Although LivaNova believes the claims against Sorin in connection with the SNIA litigation are without merit and continues to contest them vigorously, there can be no assurance as to the outcome. A finding during any appeal or novel proceedings that Sorin or LivaNova is liable for relating to the environmental damage at the Caffaro Chemical Sites or its alleged cause(s) could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental Remediation Order. On July 28, 2015, Sorin and other direct and indirect shareholders of SNIA received an administrative order from the Italian Ministry of the Environment (the “Environmental Remediation Order”), directing them to promptly commence environmental remediation efforts at the Caffaro Chemical Sites (as described above). LivaNova believes that the Environmental Remediation Order is without merit. LivaNova (as successor to Sorin) believes that it should not be liable for damages relating to the Caffaro Chemical Operations pursuant to the Italian statute on which the Environmental Remediation Order relies because, inter alia, the statute does not apply to activities occurring prior to 2006, the date on which the statute was enacted (Sorin was spun off from SNIA in 2004). Additionally, LivaNova believes that Sorin should not be subject to the Environmental Remediation Order because Italian environmental regulations only permit such an order to be imposed on an “operator” of a remediation site, and Sorin has never operated any activity of whatsoever nature at any of the industrial sites concerned and, further, has never been identified in any legal proceeding as an operator at any of these Caffaro Chemical Sites, and could not and in fact did not cause any environmental damage at any of the Caffaro Chemical Sites.
Accordingly, LivaNova (as successor to Sorin) alongside other parties, challenged the Environmental Remediation Order before the Administrative Court of Lazio in Rome (the “TAR”). A hearing was held on February 3, 2016.
On March 21, 2016 the TAR issued several judgments, annulling the Environmental Remediation Order, one for each of the addressees of the Environmental Remediation Order, including LivaNova. Those judgments were based on the fact that (i) the Environmental Remediation Order lacks any detailed analysis of the causal link between the alleged damage and the activities of the Company, which is a pre-condition to imposition of the measures proposed in the Environmental Remediation Order, (ii) the situation of the Caffaro site does not require urgent safety measures, because no new pollution events have occurred and no additional information/evidence of a situation of contamination exists and (iii) the Environmental Remediation Order was not enacted using the correct legal basis, and in any event the Ministry failed to verify the legal elements that could have led to a conclusion of legal responsibility of the addressees of the Environmental Remediation Order.
LivaNova has welcomed the decisions. The TAR decisions described above have nonetheless been appealed by the Ministry before the Council of State. No information on the timing of the first hearing of this appeal is presently available.

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Andrew Hagerty v. Cyberonics, Inc. On December 5, 2013, the United States District Court for the District of Massachusetts (“District Court”) unsealed a qui tam action filed by former employee Andrew Hagerty against Cyberonics under the False Claims Act (the “False Claims Act”) and the false claims statutes of 28 different states and the District of Columbia (United States of America et al ex rel. Andrew Hagerty v. Cyberonics, Inc. Civil Action No. 1:13-cv-10214-FDS). The False Claims Act prohibits the submission of a false claim or the making of a false record or statement to secure reimbursement from, or limit reimbursement to, a government-sponsored program. A “qui tam” action is a lawsuit brought by a private individual, known as a relator, purporting to act on behalf of the government. The action is filed under seal, and the government, after reviewing and investigating the allegations, may elect to participate, or intervene, in the lawsuit. Typically, following the government’s election, the qui tam action is unsealed.
Previously, in August 2012, Mr. Hagerty filed a related lawsuit in the same court and then voluntarily dismissed that lawsuit immediately prior to filing this qui tam action. In addition to his claims for wrongful and retaliatory discharge stated in the first lawsuit, the qui tam lawsuit alleges that Cyberonics violated the False Claims Act and various state false claims statutes while marketing its VNS Therapy System, and seeks an unspecified amount consisting of treble damages, civil penalties, and attorneys’ fees and expenses.
In October 2013, the United States Department of Justice declined to intervene in the qui tam action, but reserved the right to do so in the future. In December 2013, the District Court unsealed the action. In April 2014, Cyberonics filed a motion to dismiss the qui tam complaint, alleging a number of deficiencies in the lawsuit. In May 2014, the relator filed a First Amended Complaint. Cyberonics filed another motion to dismiss in June 2014, and the parties completed their briefing on the motion in July 2014. On April 6, 2015, the District Court dismissed all claims filed by Andrew Hagerty under the False Claims Act, but did not dismiss the claims for wrongful and retaliatory discharge. On July 28, 2015, Cyberonics filed its answer to the surviving claims in Mr. Hagerty’s first Amended Complaint and asserted its demand for arbitration pursuant to Mr. Hagerty’s employment documents.
In August 2015, Mr. Hagerty filed a Motion Seeking Leave to file a Second Amended Complaint responding to certain deficiencies noted by the District Court when dismissing claims in his First Amended Complaint alleging that Cyberonics submitted, or caused the submission of false claims under the False Claims Act. On September 4, 2015, Cyberonics filed our Brief in Opposition to Hagerty’s Motion for Leave to file a Second Amended Complaint.  Mr. Hagerty filed a Reply Brief in support of his Motion for Leave to file a Second Amended Complaint on September 11, 2015.  On September 16, 2015, the District Court heard oral arguments on (a) Mr. Hagerty’s motion seeking to amend his complaint, and (b) Cyberonics’ pending motion demanding arbitration on the claims relating to wrongful and retaliatory discharge.  On November 17, 2015, the District Court (1) denied Mr. Hagerty’s Motion for Leave to File a Second Amended Complaint (accordingly, the previously dismissed claims remain dismissed); (2) granted Cyberonics’ Motion to Compel Arbitration of the two remaining claims (for retaliatory discharge under the False Claims Act and for wrongful termination/retaliation under Massachusetts law); and (3) stayed the pending case (in order to consolidate all issues for appeal pending resolution of the arbitration). On or about February 22, 2016, Mr. Hagerty dismissed, without prejudice, his individual claims that were ordered to arbitration. Subsequently, on or about March 21, 2016, Mr. Hagerty filed an appeal of the previously dismissed FCA claims with the U.S. First Circuit Court of Appeals (“Appeals Court”). Both Mr. Hagerty and the Company filed written briefs with the Appeals Court and on September 30, 2016, the Company received notice that the Appeals Court scheduled oral arguments before it on November 8, 2016.
We believe that our commercial practices were and are in compliance with applicable legal standards, and we will continue to defend this case vigorously. We make no assurance as to the resources that will be needed to respond to these matters or the final outcome, and we cannot estimate a range of potential loss or damages.
Tax Litigation. In a tax audit report notified on October 30, 2009, the Regional Internal Revenue Office of Lombardy (the “Internal Revenue Office”) informed Sorin Group Italia S.r.l. that, among several issues, it was disallowing in part (for a total of €102.6 million) a tax-deductible write down of the investment in the U.S. company, Cobe Cardiovascular Inc., which Sorin Group Italia S.r.l. recognized in 2002 and deducted in five equal installments, beginning in 2002. In December 2009, the Internal Revenue Office issued notices of assessment for 2002, 2003 and 2004. The assessments for 2002 and 2003 were automatically voided for lack of merit. In December 2010 and October 2011, the Internal Revenue Office issued notices of assessment for 2005 and 2006 respectively. The Company challenged all three notices of assessment (for 2004, 2005 and 2006) before the relevant Provincial Tax Courts.
The preliminary challenges filed for 2004, 2005 and 2006 were heard and all denied at the first jurisdictional level, and subsequently, the Company filed an appeal against the decisions in the belief that all the decisions are incorrect in their reasoning and radically flawed. The appeal submitted against the first-level decision for 2005 was rejected. The second-level decision, relating to the 2005 notice of assessment, was appealed to the Italian Supreme Court (Corte di Cassazione) where we argued that the assessment should be deemed null and void and illegitimate because of a false application of regulations. The

31



Court’s decision is pending. The appeal we submitted against the first-level negative decision for 2004 assessment was accepted by the Commissione Tributaria Regionale di Bologna in June 2016, allowing our tax deduction. We expect the Italian Revenue Agency will file an appeal against this decision to the Supreme Court
In November 2012, the Internal Revenue Office served a notice of assessment for 2007 and, in July 2013, served a notice of assessment for 2008, wherein the Internal Revenue Office claimed an increase in taxable income due to a reduction (similar to the previous notices of assessment for 2004, 2005 and 2006) of the losses reported by Sorin Group Italia S.r.l. for the 2002, 2003 and 2004 tax periods and utilized in 2007 and 2008. Both notices of assessment were challenged within the statutory deadline. The Provincial Tax Court of Milan suspended the decision for 2007 until the litigation regarding years 2004, 2005 and 2006 are defined.
The total amount of losses in dispute is €62.6 million or $71.3 million. At the time of the Cyberonics-Sorin merger, LivaNova carefully reassessed its exposure on this complex tax litigation, taking into account the recent general adverse trend to taxpayers on litigations with Italian tax authorities. Although the Company’s defensive arguments are strong, the negative Court trend experienced so far by Sorin (four consecutive negative judgments received and one positive judgment received to date) as well as the fact of the ultimate outcome being dependent on the last possible Court level, i.e. the Italian Supreme Court, which is entitled to resolve only on procedural and legal aspects of the case but not on its substance, led LivaNova to leave unchanged (in euro) the previously recognized risk provision of $18.9 million.
Other Litigation. Additionally, we are the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of our business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of time. Since the outcome of these matters cannot be predicted with certainty, the costs associated with them could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 17.  Stockholders’ Equity
Share repurchase plans.
On August 1, 2016, the Board of Directors (“BOD”) authorized a share repurchase plan pursuant to an authority granted by shareholders at the 2016 annual general meeting held on June 15, 2016. The repurchase program authorized by the BOD is structured to enable us to buy back up to $30 million of ordinary shares on NASDAQ in the period up to and including December 31, 2016 and an aggregate of $150 million of ordinary shares (inclusive of the $30 million of ordinary shares set out above) also on NASDAQ up to and including December 31, 2018. As of September 30, 2016, 212,860 shares had been repurchased under this plan totaling $12.9 million at an average price per share of $60.44. All the repurchased shares have been canceled and are no longer considered issued.

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Comprehensive income.
The table below presents the change in each component of accumulated other comprehensive income (loss), net of tax and the reclassifications out of accumulated other comprehensive income into net earnings for the nine months ended September 30, 2016 and the thirty-eight weeks ended October 18, 2015 (in thousands):
 
 
Change in Unrealized Gain (Loss) on Cash Flow Hedging Derivatives
 
Foreign Currency Translation Adjustments Gain (Loss) (1)
 
Total
As of December 31, 2015
 
$
888

 
$
(55,116
)
 
$
(54,228
)
Other comprehensive income (loss) before reclassifications, before tax
 
(5,970
)
 
32,598

 
26,628

Tax benefit (expense)
 
1,792

 

 
1,792

Other comprehensive income (loss) before reclassifications, net of tax
 
(4,178
)
 
32,598

 
28,420

Reclassification of (gain)/loss from accumulated other comprehensive income, before tax
 
746

 

 
746

Tax effect
 
(279
)
 

 
(279
)
Reclassification of (gain)/loss from accumulated other comprehensive income, after tax
 
467

 

 
467

Net current-period other comprehensive income (loss), net of tax
 
(3,711
)
 
32,598

 
28,887

As of September 30, 2016
 
$
(2,823
)
 
$
(22,518
)
 
$
(25,341
)
 
 
 
 
 
 
 
As of January 23, 2015
 
$

 
$
(2,924
)
 
$
(2,924
)
Other comprehensive income (loss) before reclassifications, before tax
 

 
256

 
256

As of October 18, 2015
 
$

 
$
(2,668
)
 
$
(2,668
)
(1)
Taxes are not provided for foreign currency translation adjustments as translation adjustment are related to earnings that are intended to be reinvested in the countries where earned.
Note 18.  Stock-Based Incentive Plans
Stock-Based Incentive Plans
On October 16, 2015, the sole shareholder of LivaNova approved the adoption of the LivaNova 2015 Incentive Award Plan (the “2015 Plan”). The Plan became effective as of October 19, 2015. Incentive awards may be granted under the 2015 Plan in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock- and cash-based awards and dividend equivalents. As of September 30, 2016, there were approximately 7,135,639 shares available for future grants under the 2015 Plan.

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Stock-Based Compensation
 Amounts of stock-based compensation recognized in the consolidated statement of income (loss), by expense category are as follows (in thousands):
 
 
Three Months Ended September 30, 2016
 
Twelve Weeks Ended October 18, 2015
 
Nine Months Ended September 30, 2016
 
Thirty-Eight Weeks Ended October 18, 2015
Cost of goods sold
 
$
153

 
$
931

 
$
838

 
$
1,214

Selling, general and administrative
 
4,645

 
9,219

 
13,679

 
13,026

Research and development
 
223

 
5,531

 
782

 
7,041

</