UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20202021
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-13165
CRYOLIFE INC.
(Exact name of registrant as specified in its charter)
Florida | 59-2417093 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1655 Roberts Boulevard, NW, Kennesaw, Georgia | 30144 | |
(Address of principal executive offices) | (Zip Code) |
(770) 419-3355
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | CRY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | x | Accelerated Filer | o |
| Non-accelerated Filer | o | Smaller Reporting Company | o |
Emerging Growth Company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at October | |
Common Stock, $0.01 par value |
|
CryoLife, Inc. and Subsidiaries
SummaryCondensed Consolidated Statements of Operations and Comprehensive Income (Loss)
In Thousands, Except Per Share Data
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||
September 30, | September 30, | Three Months Ended | Nine Months Ended | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | September 30, | September 30, | |||||||||||||||||
(Unaudited) | (Unaudited) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
Revenues: | ||||||||||||||||||||||
Products | $ | 45,109 | $ | 47,484 | $ | 128,797 | $ | 147,053 | $ | 53,107 | $ | 45,109 | $ | 162,528 | $ | 128,797 | ||||||
Preservation services | 20,022 | 20,397 | 56,534 | 59,472 | 19,100 | 20,022 | 56,914 | 56,534 | ||||||||||||||
Total revenues | 65,131 | 67,881 | 185,331 | 206,525 | 72,207 | 65,131 | 219,442 | 185,331 | ||||||||||||||
Cost of products and preservation services: | ||||||||||||||||||||||
Products | 12,998 | 12,706 | 36,078 | 41,021 | 15,503 | 12,998 | 46,592 | 36,078 | ||||||||||||||
Preservation services | 9,001 | 9,953 | 26,060 | 29,043 | 8,915 | 9,001 | 26,710 | 26,060 | ||||||||||||||
Total cost of products and preservation services | 21,999 | 22,659 | 62,138 | 70,064 | 24,418 | 21,999 | 73,302 | 62,138 | ||||||||||||||
Gross margin | 43,132 | 45,222 | 123,193 | 136,461 | 47,789 | 43,132 | 146,140 | 123,193 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||
General, administrative, and marketing | 33,743 | 34,259 | 105,033 | 105,402 | 39,053 | 33,743 | 118,521 | 105,033 | ||||||||||||||
Research and development | 5,755 | 6,259 | 17,633 | 17,648 | 9,972 | 5,755 | 26,086 | 17,633 | ||||||||||||||
Total operating expenses | 39,498 | 40,518 | 122,666 | 123,050 | 49,025 | 39,498 | 144,607 | 122,666 | ||||||||||||||
Gain from sale of non-financial assets | (15,923) | -- | (15,923) | -- | ||||||||||||||||||
Operating income | 3,634 | 4,704 | 527 | 13,411 | 14,687 | 3,634 | 17,456 | 527 | ||||||||||||||
Interest expense | 4,940 | 3,555 | 11,980 | 11,260 | 4,100 | 4,940 | 12,995 | 11,980 | ||||||||||||||
Interest income | (13) | (259) | (181) | (608) | (18) | (13) | (60) | (181) | ||||||||||||||
Other expense, net | 2,888 | 2,400 | 5,810 | 2,662 | 2,661 | 2,888 | 3,261 | 5,810 | ||||||||||||||
(Loss) income before income taxes | (4,181) | (992) | (17,082) | 97 | ||||||||||||||||||
Income (loss) before income taxes | 7,944 | (4,181) | 1,260 | (17,082) | ||||||||||||||||||
Income tax benefit | (1,311) | (858) | (3,858) | (2,304) | (2,638) | (1,311) | (4,006) | (3,858) | ||||||||||||||
Net (loss) income | $ | (2,870) | $ | (134) | $ | (13,224) | $ | 2,401 | ||||||||||||||
Net income (loss) | $ | 10,582 | $ | (2,870) | $ | 5,266 | $ | (13,224) | ||||||||||||||
(Loss) income per common share: | ||||||||||||||||||||||
Income (loss) per share: | ||||||||||||||||||||||
Basic | $ | (0.08) | $ | (0.00) | $ | (0.35) | $ | 0.06 | $ | 0.27 | (0.08) | $ | 0.13 | (0.35) | ||||||||
Diluted | $ | (0.08) | $ | (0.00) | $ | (0.35) | $ | 0.06 | $ | 0.26 | $ | (0.08) | $ | 0.13 | $ | (0.35) | ||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||
Basic | 37,912 | 37,255 | 37,608 | 37,065 | 39,086 | 37,912 | 38,924 | 37,608 | ||||||||||||||
Diluted | 37,912 | 37,255 | 37,608 | 37,850 | 44,453 | 37,912 | 39,496 | 37,608 | ||||||||||||||
Net (loss) income | $ | (2,870) | $ | (134) | $ | (13,224) | $ | 2,401 | ||||||||||||||
Net income (loss) | $ | 10,582 | $ | (2,870) | $ | 5,266 | $ | (13,224) | ||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||
Foreign currency translation adjustments | 8,698 | (8,017) | 8,669 | (8,803) | (5,010) | 8,698 | (12,327) | 8,669 | ||||||||||||||
Comprehensive income (loss) | $ | 5,828 | $ | (8,151) | $ | (4,555) | $ | (6,402) | $ | 5,572 | $ | 5,828 | $ | (7,061) | $ | (4,555) | ||||||
See accompanying Notes to SummaryCondensed Consolidated Financial Statements
CryoLife, Inc. and Subsidiaries
SummaryCondensed Consolidated Balance Sheets
In Thousands
September 30, | December 31, | September 30, | December 31, | |||||||
2020 | 2019 | 2021 | 2020 | |||||||
(Unaudited) | (Unaudited) | |||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 64,122 | $ | 33,766 | $ | 64,587 | $ | 61,412 | ||
Restricted securities | 513 | 528 | 538 | 546 | ||||||
Trade receivables, net | 46,911 | 52,940 | 49,682 | 45,964 | ||||||
Other receivables | 2,520 | 2,921 | 5,494 | 2,788 | ||||||
Inventories | 69,402 | 53,071 | ||||||||
Inventories, net | 78,319 | 73,038 | ||||||||
Deferred preservation costs | 35,952 | 32,551 | 42,619 | 36,546 | ||||||
Prepaid expenses and other | 14,279 | 11,613 | 16,104 | 14,295 | ||||||
Total current assets | 233,699 | 187,390 | 257,343 | 234,589 | ||||||
Property and equipment, net | 31,799 | 32,150 | ||||||||
Operating lease right-of-use assets, net | 19,438 | 21,994 | ||||||||
Goodwill | 253,995 | 186,697 | 252,441 | 260,061 | ||||||
Acquired technology, net | 185,010 | 115,415 | 171,788 | 186,091 | ||||||
Operating lease right-of-use assets, net | 46,913 | 18,571 | ||||||||
Other intangibles, net | 40,697 | 42,319 | 36,001 | 40,966 | ||||||
Property and equipment, net | 36,973 | 33,077 | ||||||||
Deferred income taxes | 3,274 | 5,481 | 3,974 | 1,446 | ||||||
Other assets | 14,288 | 14,208 | 13,221 | 14,603 | ||||||
Total assets | $ | 782,200 | $ | 605,654 | $ | 818,654 | $ | 789,404 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Current portion of contingent consideration | $ | 17,600 | $ | 16,430 | ||||||
Accounts payable | $ | 10,399 | $ | 9,796 | 9,528 | 9,623 | ||||
Accrued compensation | 11,644 | 12,260 | 11,990 | 10,192 | ||||||
Accrued expenses | 9,091 | 7,472 | ||||||||
Accrued procurement fees | 4,057 | 4,362 | 3,296 | 3,619 | ||||||
Taxes payable | 3,129 | 2,808 | ||||||||
Current maturities of operating leases | 5,678 | 5,487 | 3,053 | 5,763 | ||||||
Current portion of long-term debt | 1,165 | 1,164 | 1,640 | 1,195 | ||||||
Taxes payable | 6,140 | 2,984 | ||||||||
Accrued expenses | 10,344 | 6,733 | ||||||||
Other liabilities | 4,240 | 2,409 | 1,803 | 3,366 | ||||||
Total current liabilities | 53,667 | 45,195 | 61,130 | 60,468 | ||||||
Long-term debt | 289,697 | 214,571 | 307,765 | 290,468 | ||||||
Non-current maturities of operating leases | 45,765 | 14,034 | ||||||||
Contingent consideration | 47,300 | 43,500 | ||||||||
Deferred income taxes | 24,813 | 25,844 | 27,339 | 34,713 | ||||||
Non-current maturities of operating leases | 15,026 | 17,918 | ||||||||
Deferred compensation liability | 4,982 | 4,434 | 5,571 | 5,518 | ||||||
Contingent consideration | 55,407 | -- | ||||||||
Other liabilities | 12,842 | 11,996 | 12,243 | 11,990 | ||||||
Total liabilities | $ | 456,434 | $ | 319,958 | $ | 507,113 | $ | 460,691 | ||
Commitments and contingencies |
|
|
|
| ||||||
Shareholders' equity: | ||||||||||
Preferred stock | -- | -- | -- | -- | ||||||
Common stock (issued shares of 40,341 in 2020 and 39,018 in 2019) | 403 | 390 | ||||||||
Common stock (issued shares of 40,816 in 2021 and 40,394 in 2020) | 408 | 404 | ||||||||
Additional paid-in capital | 316,394 | 271,782 | 309,290 | 316,192 | ||||||
Retained earnings | 23,480 | 36,704 | 22,075 | 20,022 | ||||||
Accumulated other comprehensive income (loss) | 80 | (8,589) | ||||||||
Treasury stock at cost (shares of 1,484 in each of 2020 and 2019) | (14,591) | (14,591) | ||||||||
Accumulated other comprehensive (loss) income | (5,584) | 6,743 | ||||||||
Treasury stock, at cost, 1,487 shares as of September 30, 2021 and December 31, 2020, respectively | (14,648) | (14,648) | ||||||||
Total shareholders' equity | 325,766 | 285,696 | 311,541 | 328,713 | ||||||
Total liabilities and shareholders' equity | $ | 782,200 | $ | 605,654 | $ | 818,654 | $ | 789,404 | ||
See accompanying Notes to SummaryCondensed Consolidated Financial Statements.Statements
CryoLife, Inc. and Subsidiaries
SummaryCondensed Consolidated Statements of Cash Flows
In Thousands
(Unaudited)
Nine Months Ended | Nine Months Ended | |||||||||
September 30, | September 30, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||
Net cash flows from operating activities: | ||||||||||
Net (loss) income | $ | (13,224) | $ | 2,401 | ||||||
Net income (loss) | $ | 5,266 | $ | (13,224) | ||||||
Adjustments to reconcile net (loss) income to net cash from operating activities: | ||||||||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||||
Depreciation and amortization | 14,818 | 13,257 | 18,008 | 14,818 | ||||||
Non-cash compensation | 7,432 | 6,581 | 7,471 | 7,432 | ||||||
Non-cash lease expense | 5,324 | 3,491 | 5,566 | 5,324 | ||||||
Change in fair value of contingent consideration | 4,970 | -- | ||||||||
Non-cash interest expense | 2,025 | 2,261 | ||||||||
Change in fair value of long-term loan | 4,949 | -- | -- | 4,949 | ||||||
Deferred income taxes | (4,916) | (1,064) | (8,128) | (4,916) | ||||||
Non-cash interest expense | 2,261 | 1,266 | ||||||||
Other non-cash adjustments to net (loss) income | 1,631 | 1,328 | ||||||||
Gain from sale of non-financial assets | (15,923) | -- | ||||||||
Other | 4,665 | 1,631 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts payable, accrued expenses, and other liabilities | 65 | 3,230 | ||||||||
Prepaid expenses and other assets | (2,268) | (2,560) | ||||||||
Receivables | 7,718 | (4,496) | (8,032) | 7,718 | ||||||
Inventories and deferred preservation costs | (19,744) | (3,864) | (16,986) | (19,744) | ||||||
Prepaid expenses and other assets | (2,560) | (3,020) | ||||||||
Accounts payable, accrued expenses, and other liabilities | 3,230 | (1,113) | ||||||||
Net cash flows provided by operating activities | 6,919 | 14,767 | ||||||||
Net cash flows (used in) provided by operating activities | (3,301) | 6,919 | ||||||||
Net cash flows from investing activities: | ||||||||||
Acquisition of Ascyrus, net of cash acquired | (59,643) | -- | ||||||||
Proceeds from sale of non-financial assets, net | 19,000 | -- | ||||||||
Acquisition of Ascyrus, net of cash acquisition | -- | (59,643) | ||||||||
Payments for Endospan agreements | (5,000) | (15,000) | -- | (5,000) | ||||||
Capital expenditures | (5,171) | (5,222) | (10,524) | (5,171) | ||||||
Other | (968) | (531) | (4) | (968) | ||||||
Net cash flows used in investing activities | (70,782) | (20,753) | ||||||||
Net cash flows provided by (used in) investing activities | 8,472 | (70,782) | ||||||||
Net cash flows from financing activities: | ||||||||||
Proceeds from exercise of stock options and issuance of common stock | 3,531 | 2,079 | ||||||||
Proceeds from issuance of convertible debt | 100,000 | -- | -- | 100,000 | ||||||
Proceeds from revolving line of credit | 30,000 | -- | -- | 30,000 | ||||||
Proceeds from financing insurance premiums | 2,816 | -- | -- | 2,816 | ||||||
Proceeds from exercise of stock options and issuance of common stock | 2,079 | 4,519 | ||||||||
Repayment of revolving line of credit | (30,000) | -- | -- | (30,000) | ||||||
Redemption and repurchase of stock to cover tax withholdings | (1,898) | (1,768) | ||||||||
Payment of debt issuance costs | (3,647) | -- | (2,219) | (3,647) | ||||||
Repayment of debt | (3,727) | (2,072) | (2,397) | (3,727) | ||||||
Redemption and repurchase of stock to cover tax withholdings | (1,768) | (2,723) | ||||||||
Other | (463) | (560) | (439) | (463) | ||||||
Net cash flows provided by (used in) financing activities | 95,290 | (836) | ||||||||
Net cash flows (used in) provided by financing activities | (3,422) | 95,290 | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted securities | (1,086) | 1,763 | 1,418 | (1,086) | ||||||
Increase (decrease) in cash, cash equivalents, and restricted securities | 30,341 | (5,059) | ||||||||
Increase in cash, cash equivalents, and restricted securities | 3,167 | 30,341 | ||||||||
Cash, cash equivalents, and restricted securities beginning of period | 34,294 | 42,236 | 61,958 | 34,294 | ||||||
Cash, cash equivalents, and restricted securities end of period | $ | 64,635 | $ | 37,177 | $ | 65,125 | $ | 64,635 | ||
See accompanying Notes to SummaryCondensed Consolidated Financial Statements
CryoLife, Inc. and Subsidiaries
SummaryCondensed Consolidated Statements of Shareholders’ Equity
In Thousands
(Unaudited)
Accumulated | |||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | (Loss) Income | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at June 30, 2020 | 39,288 | 393 | 293,022 | 26,350 | (8,618) | (1,484) | (14,591) | 296,556 | |||||||||||||
Net loss | -- | -- | -- | (2,870) | -- | -- | -- | (2,870) | |||||||||||||
Other comprehensive income: | |||||||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | -- | 8,698 | -- | -- | 8,698 | |||||||||||||
Comprehensive income |
|
|
|
|
|
|
| 5,828 | |||||||||||||
Stock Issued for Ascyrus Transaction | 992 | 10 | 19,990 | -- | -- | -- | -- | 20,000 | |||||||||||||
Equity compensation | 6 | -- | 2,518 | -- | -- | -- | -- | 2,518 | |||||||||||||
Exercise of options | 3 | -- | 31 | -- | -- | -- | -- | 31 | |||||||||||||
Employee stock purchase plan | 54 | -- | 873 | -- | -- | -- | -- | 873 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (2) | -- | (40) | -- | -- | -- | -- | (40) | |||||||||||||
Balance at September 30, 2020 | 40,341 | $ | 403 | $ | 316,394 | $ | 23,480 | $ | 80 | (1,484) | $ | (14,591) | $ | 325,766 | |||||||
Accumulated | |||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | Loss | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at June 30, 2021 | 40,742 | $ | 407 | $ | 305,157 | $ | 11,493 | $ | (574) | (1,487) | $ | (14,648) | $ | 301,835 | |||||||
Net income | -- | -- | -- | 10,582 | -- | -- | -- | 10,582 | |||||||||||||
Other comprehensive loss | -- | -- | -- | -- | (5,010) | -- | -- | (5,010) | |||||||||||||
Equity compensation | 8 | 1 | 2,990 | -- | -- | -- | -- | 2,991 | |||||||||||||
Exercise of options | 18 | -- | 191 | -- | -- | -- | -- | 191 | |||||||||||||
Employee stock purchase plan | 50 | -- | 1,019 | -- | -- | -- | -- | 1,019 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (2) | -- | (67) | -- | -- | -- | -- | (67) | |||||||||||||
Balance at September 30, 2021 | 40,816 | $ | 408 | $ | 309,290 | $ | 22,075 | $ | (5,584) | (1,487) | $ | (14,648) | $ | 311,541 | |||||||
. | Accumulated | ||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | (Loss) Income | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at December 31, 2019 | 39,018 | 390 | 271,782 | 36,704 | (8,589) | (1,484) | (14,591) | $ | 285,696 | ||||||||||||
Net loss | -- | -- | -- | (13,224) | -- | -- | -- | (13,224) | |||||||||||||
Other comprehensive loss: | |||||||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | -- | 8,669 | -- | -- | 8,669 | |||||||||||||
Comprehensive loss |
|
|
|
|
|
|
| (4,555) | |||||||||||||
Stock Issued for Ascyrus Transaction | 992 | 10 | 19,990 | -- | -- | -- | -- | 20,000 | |||||||||||||
Equity component of the convertible note issuance | -- | -- | 16,426 | -- | -- | -- | -- | 16,426 | |||||||||||||
Equity compensation | 273 | 3 | 7,885 | -- | -- | -- | -- | 7,888 | |||||||||||||
Exercise of options | 47 | 1 | 517 | -- | -- | -- | -- | 518 | |||||||||||||
Employee stock purchase plan | 84 | -- | 1,561 | -- | -- | -- | -- | 1,561 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (73) | (1) | (1,767) | -- | -- | -- | -- | (1,768) | |||||||||||||
Balance at September 30, 2020 | 40,341 | $ | 403 | $ | 316,394 | $ | 23,480 | $ | 80 | (1,484) | $ | (14,591) | $ | 325,766 | |||||||
. | Accumulated | ||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at December 31, 2020 | 40,394 | $ | 404 | $ | 316,192 | $ | 20,022 | $ | 6,743 | (1,487) | $ | (14,648) | $ | 328,713 | |||||||
Net income | -- | -- | -- | 5,266 | -- | -- | -- | 5,266 | |||||||||||||
Other comprehensive loss | -- | -- | -- | -- | (12,327) | -- | -- | (12,327) | |||||||||||||
Adoption of ASU 2020-06 | -- | -- | (16,426) | (3,213) | -- | -- | -- | (19,639) | |||||||||||||
Equity compensation | 252 | 3 | 7,892 | -- | -- | -- | -- | 7,895 | |||||||||||||
Exercise of options | 158 | 1 | 1,921 | -- | -- | -- | -- | 1,922 | |||||||||||||
Employee stock purchase plan | 87 | 1 | 1,608 | -- | -- | -- | -- | 1,609 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (75) | (1) | (1,897) | -- | -- | -- | -- | (1,898) | |||||||||||||
Balance at September 30, 2021 | 40,816 | $ | 408 | $ | 309,290 | $ | 22,075 | $ | (5,584) | (1,487) | $ | (14,648) | $ | 311,541 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements
CryoLife, Inc. and Subsidiaries
SummaryCondensed Consolidated Statements of Shareholders’ Equity
In Thousands
(Unaudited)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | |||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Loss | Stock | Equity | Stock | Capital | Earnings | (Loss) Income | Stock | Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 38,943 | $ | 389 | $ | 265,694 | $ | 37,519 | $ | (6,858) | (1,484) | $ | (14,591) | $ | 282,153 | ||||||||||||||||||||||||||||
Balance at June 30, 2020 | 39,288 | $ | 393 | $ | 293,022 | $ | 26,350 | $ | (8,618) | (1,484) | $ | (14,591) | $ | 296,556 | ||||||||||||||||||||||||||||
Net loss | -- | -- | -- | (134) | -- | -- | -- | (134) | -- | -- | -- | (2,870) | -- | -- | -- | (2,870) | ||||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | -- | (8,017) | -- | -- | (8,017) | ||||||||||||||||||||||||||||||||||
Comprehensive loss |
|
|
|
|
|
|
| (8,151) | ||||||||||||||||||||||||||||||||||
Other comprehensive income | -- | -- | -- | -- | 8,698 | -- | -- | 8,698 | ||||||||||||||||||||||||||||||||||
Stock issued for Ascyrus transaction | 992 | 10 | 19,990 | -- | -- | -- | -- | 20,000 | ||||||||||||||||||||||||||||||||||
Equity compensation | 6 | -- | 2,620 | -- | -- | -- | -- | 2,620 | 6 | -- | 2,518 | -- | -- | -- | -- | 2,518 | ||||||||||||||||||||||||||
Exercise of options | 5 | -- | 53 | -- | -- | -- | -- | 53 | 3 | -- | 31 | -- | -- | -- | -- | 31 | ||||||||||||||||||||||||||
Employee stock purchase plan | 36 | 1 | 884 | -- | -- | -- | -- | 885 | 54 | -- | 873 | -- | -- | -- | -- | 873 | ||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (2) | -- | (59) | -- | -- | -- | -- | (59) | (2) | -- | (40) | -- | -- | -- | -- | (40) | ||||||||||||||||||||||||||
Balance at September 30, 2019 | 38,988 | $ | 390 | $ | 269,192 | $ | 37,385 | $ | (14,875) | (1,484) | $ | (14,591) | $ | 277,501 | ||||||||||||||||||||||||||||
Balance at September 30, 2020 | 40,341 | $ | 403 | $ | 316,394 | $ | 23,480 | $ | 80 | (1,484) | $ | (14,591) | $ | 325,766 | ||||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | Loss | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at December 31, 2018 | 38,463 | 385 | 260,361 | 34,984 | (6,072) | (1,484) | (14,591) | $ | 275,067 | ||||||||||||
Net income | -- | -- | -- | 2,401 | -- | -- | -- | 2,401 | |||||||||||||
Other comprehensive loss: | |||||||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | -- | (8,803) | -- | -- | (8,803) | |||||||||||||
Comprehensive loss |
|
|
|
|
|
|
| (6,402) | |||||||||||||
Equity compensation | 251 | 2 | 7,037 | -- | -- | -- | -- | 7,039 | |||||||||||||
Exercise of options | 306 | 3 | 3,054 | -- | -- | -- | -- | 3,057 | |||||||||||||
Employee stock purchase plan | 61 | 1 | 1,462 | -- | -- | -- | -- | 1,463 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (93) | (1) | (2,722) | -- | -- | -- | -- | (2,723) | |||||||||||||
Balance at September 30, 2019 | 38,988 | $ | 390 | $ | 269,192 | $ | 37,385 | $ | (14,875) | (1,484) | $ | (14,591) | $ | 277,501 | |||||||
Accumulated | |||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | ||||||||||||||||
Stock | Capital | Earnings | (Loss) Income | Stock | Equity | ||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance at December 31, 2019 | 39,018 | $ | 390 | $ | 271,782 | $ | 36,704 | $ | (8,589) | (1,484) | $ | (14,591) | $ | 285,696 | |||||||
Net loss | -- | -- | -- | (13,224) | -- | -- | -- | (13,224) | |||||||||||||
Other comprehensive income | -- | -- | -- | -- | 8,669 | -- | -- | 8,669 | |||||||||||||
Stock issued for Ascyrus transaction | 992 | 10 | 19,990 | -- | -- | -- | -- | 20,000 | |||||||||||||
Equity compensation | 273 | 3 | 7,885 | -- | -- | -- | -- | 7,888 | |||||||||||||
Exercise of options | 47 | 1 | 517 | -- | -- | -- | -- | 518 | |||||||||||||
Employee stock purchase plan | 84 | -- | 1,561 | -- | -- | -- | -- | 1,561 | |||||||||||||
Equity component of the convertible note issuance | -- | -- | 16,426 | -- | -- | -- | -- | 16,426 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (73) | (1) | (1,767) | -- | -- | -- | -- | (1,768) | |||||||||||||
Balance at September 30, 2020 | 40,341 | $ | 403 | $ | 316,394 | $ | 23,480 | $ | 80 | (1,484) | $ | (14,591) | $ | 325,766 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements
CryoLife, Inc. and Subsidiaries
Notes to SummaryCondensed Consolidated Financial Statements
(Unaudited)
Overview
The accompanying summary consolidated financial statementsCondensed Consolidated Financial Statements include the accounts of CryoLife, Inc. and its subsidiaries (“CryoLife,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying SummaryCondensed Consolidated Balance Sheet as of December 31, 20192020 has been derived from audited financial statements. The accompanying unaudited summary consolidated financial statementsCondensed Consolidated Financial Statements as of, and for the three and nine months ended, September 30, 20202021 and 20192020 have been prepared in accordance with (i) accounting principles generally accepted in the U.S. for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”(the “SEC”). Accordingly, such statements do not include all the information and disclosures that are required by accounting principles generally accepted in the U.S. for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. These summary consolidated financial statementsCondensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and notesNotes included in CryoLife’s Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on February 19,22, 2021.
Significant Accounting Policies
A summary of our significant accounting policies is included in Note 1 of the “Notes to Consolidated Financial Statements” contained in our Form 10-K for the year ended December 31, 2020. Management believes that the consistent application of these policies enables us to provide users of the financial statements with useful and reliable information about our operating results and financial condition. The Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and assumptions. We did not experience any significant changes during the three and nine months ended September 30, 2021 in any of our Significant Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2020.
New Accounting Standards
Recently Adopted
In June 2016,August 2020 the Financial Accounting Standards Board (“FASB”(the “FASB”) issued ASCAccounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”(“ASU”). The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. Update No. 2016-13 is effective for annual periods beginning after December 15, 2019. The Company adopted this new guidance on January 1, 2020. The adoption of ASU 2016-13 did not result in a material effect on the Company’s financial condition, results of operations, or cash flows.
Not Yet Effective
In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number ofeliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the primaryhost contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. On January 1, 2021 we adopted ASU 2020-06 isusing the modified retrospective approach and recorded $20.4 million to increase long-term debt, $3.2 million to reduce retained earnings, and $16.4 million to reduce additional paid-in capital included on the Condensed Consolidated Balance Sheets. See Note 11 for further discussion of convertible debt.
In December 2019 the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify accounting principles generally accepted in the United States of America (“GAAP”) for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for annual reporting periodspublic entities in fiscal years beginning after December 15, 2021,2020 including interim periods within those fiscal years. EarlyWe adopted ASU 2019-12 on January 1, 2021 and the adoption is permitted, but no earlier than fiscal years beginningdid not have a material impact on our financial condition or results of operations.
Not Yet Effective
In March 2020 the FASB issued ASU 2020-04, Reference Rate Reform Topic 848 (“ASC 848”). The amendments in this ASU were put forth in response to the market transition from the LIBOR and other interbank offered rates to alternative reference rates. GAAP requires entities to evaluate whether a contract modification, such as the replacement or change of a reference rate, results in the establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022 and cannot be applied to contract modifications that occur after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. 31, 2022. We are in the process of evaluating the effect that the adoption of this standard will have on our financial position and results of operations.
Overview
On July 28, 2021 we entered into an asset purchase agreement and other ancillary agreements related to the sale of PerClot®, a polysaccharide hemostatic agent used in surgery (“PerClot”), to a subsidiary of Baxter International, Inc. (“Baxter”) and an agreement to terminate all of our material agreements with Starch Medical, Inc. (“SMI”) related to PerClot (collectively the “Baxter Transaction”). Under the terms of the Baxter Transaction, Baxter will pay an aggregate of up to $60.8 million in consideration (we will receive up to $45.8 million and SMI will receive up to $15.0 million), consisting of (i) $25.0 million at closing, of which $6.0 million was paid to SMI; (ii) up to $25.0 million upon our receipt of Premarket Approval (“PMA”) approval from the U.S. Food and Drug Administration (the “FDA”) for PerClot and our transfer of the PMA to Baxter, of which up to $6.0 million is payable to SMI, subject to certain reductions for delay in PMA approval; and (iii) up to $10.0 million upon Baxter’s achievement of certain cumulative worldwide net sales of PerClot prior to December 31, 2026 and December 31, 2027, of which up to $3.0 million is payable to SMI. In addition, at the conclusion of our manufacturing and supply services for Baxter, Baxter will pay $780,000 upon transfer of our PerClot manufacturing equipment. Under the terms of the Baxter Transaction, we will continue to provide to Baxter certain transition and manufacturing and supply services relating to the sale of SMI PerClot outside of the US and manufacture and supply of PerClot to Baxter post PMA approval.
2.Accountingfor the Transaction
Upon closing of the Baxter Transaction, we received $25.0 million from Baxter and paid $6.0 million to SMI. We derecognized intangible assets with a carrying value of $1.6 million and wrote-off $1.5 million of prepaid royalties previously recorded on our Condensed Consolidated Balance Sheets related to PerClot. Under the terms of the agreement, Baxter acquired intellectual property related to our development efforts for PerClot.We recorded a pre-tax gain of $15.9 million, included as Gain from sale of non-financial assets within the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. The PerClot product line was included as part of our Medical Devices segment.
Overview
On September 2, 2020 we entered into a Securities Purchase Agreement (the “Ascyrus Agreement”) to acquire 100% of the outstanding equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus is the developer ofdeveloped the Ascyrus Medical Dissection Stent (“AMDS”), hybrid prosthesis, the world’s first aortic arch remodeling device for use in the treatment of acute Type A aortic dissections.
Under the terms of the Ascyrus Agreement, we will pay an aggregate of up to $200.0 million in consideration, consisting of: (i) a cash payment of approximately $60.0 million and the issuance of $20.0 million in shares of CryoLife common stock, in each case, that were delivered at the closing of the acquisition, (ii) if the U.S. Food and Drug Administration (the “FDA”)FDA approves an Investigational Device Exemption (“IDE”) application for the AMDS, a cash payment of $10.0 million and the issuance of $10.0 million in shares of CryoLife common stock, (iii) if the FDA approves a Premarket Approval (“PMA”)PMA application submitted for the AMDS, a cash payment of $25.0 million, (iv) if regulatory approval of the AMDS is obtained in Japan on or before June 30, 2027, a cash payment of $10.0 million, (v) if regulatory approval of the AMDS is obtained in China on or before June 30, 2027, a cash payment of $10.0 million and (vi) a potential additional consideration cash payment of up tocapped at $55.0 million (or up to $65.0 million to $75.0 million if the Japanese or Chinese approvals are not secured on or before June 30, 2027)2027 and those approval milestone payments are added to the potential additional consideration cash payment cap) calculated as two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a Premarket ApprovalPMA application submitted for the AMDS.
Accounting for the Transaction
Upon closing of the acquisition on September 2, 2020 we paid $83.7$82.4 million consisting of $63.7$62.4 million in cash consideration and $20.0 million in shares of CryoLife common stock. The number of shares issued was based on a 10-day moving volume weighted average closing price of a share of CryoLife common stock as of the date immediately prior to closing, resulting in an issuance of 991,800 shares of CryoLife common stock.
As part of the acquisition, we may be required to pay additional consideration in cash and equity up to $120.0 million to the former shareholders of Ascyrus upon the achievement of certain milestones and the sales-based additional earnout described above. The fair value of the total potential purchase consideration of $200.0 million was calculated to be $139.1$137.8 million, which includes total purchase consideration, as well as the contingent consideration liability discussed below. Our preliminary allocation of the purchase consideration was allocated to Ascyrus’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of September 2, 2020.
We recorded the contingent consideration liability of $55.4$17.6 million and $16.4 million in Current liabilities and $47.3 million and $43.5 million in Other long-term liabilities as of September 30, 2021 and December 31, 2020, respectively, in the SummaryCondensed Consolidated Balance Sheets,, representing the estimated fair value of future potential payments. The fair value of the contingent consideration liability was estimated by discounting to present value the contingent payments expected to be made based on a probability-weighted scenario approach. We applied a discount rate based on our unsecured credit spread and the term commensurate risk-free rate to the additional consideration to be paid, and then applied a risk-based estimate of the probability of achieving each scenario to calculate the fair value of the contingent consideration. This fair value measurement was based on unobservable inputs, including management estimates and assumptions about the future achievement of milestones and future estimate of revenues, and is, therefore, classified as Level 3 within the fair value hierarchy presented in Note 4.5. We will remeasure this liability at each reporting date and will record changes in the fair value of the contingent consideration in operatingGeneral, administrative, and marketing expenses on the SummaryCondensed Consolidated Statements of Operations and Comprehensive Income (Loss). Increases or decreases in the fair value of the contingent consideration liability can result from changes in passage of time, discount periods and rates, changes in the timing and amount of our revenue estimates, and changes in the timing and expectation of regulatory approvals.
We performed an assessment of the fair value of the contingent consideration as ofand recorded a $700,000 and $5.0 million fair value adjustment for the three and nine months ended September 30, 20202021, respectively, in General, administrative, and concluded that an adjustment tomarketing expenses on the fair valueCondensed Consolidated Statements of Operations and Comprehensive Income (Loss), as a result of this assessment was not material.assessment.
We recorded $62.7$62.4 million of preliminary goodwill, that we expect to deductall of which was deductible for tax purposes, based on the amount by which the total purchase consideration price exceeded the fair value of the net assets acquired and liabilities assumed. Goodwill from this transaction primarily relates to synergies expected from the acquisition and has been allocated to our Medical Devicesdevices segment. The estimated allocation of assets acquired and liabilities assumed is based on the information available to usthat would have been known as of the acquisition date. During the nine months ended September 30, 2020. We are completing our procedures31, 2021 we received a $777,000 cash distribution from escrow related to the working capital adjustments which reduced the purchase price allocationconsideration and if new information regarding these valuesgoodwill. This adjustment is received that would resultincluded in a material adjustment toother cash flows used in investing activities on the values recorded, we will recognizeCondensed Consolidated Statements of Cash Flows for the adjustment, which may include the recognition of additional expenses, impairments, or other allocation adjustments, in the period this determination is made.nine months ended September 30, 2021.
The preliminarySeptember 2, 2020 allocation of purchase consideration allocatedadjusted as of September 2, 202030, 2021 consisted of the following (in thousands):
Consideration | ||
Cash paid for acquisition | $ |
|
Common stock issued | 20,000 | |
Contingent consideration | 55,407 | |
Fair value of total consideration | $ |
|
Purchase Price Allocation | ||
Cash and cash equivalents | $ | 4,017 |
Intangible assets | 72,600 | |
Net other assets/liabilities acquired |
| |
Goodwill |
| |
Net assets acquired | $ |
|
We incurred transaction costs of $618,000 and $677,000 for the three and nine months ended September 30, 2020, respectively, primarily related to the acquisition, which included, among other costs, expenses related to legal and professional fees. These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on our Summary Consolidated Statements of Operations and Comprehensive Income (Loss).
Pro forma financial information related to the Ascyrus Agreement has not been provided as it is not material to our consolidated results of operations. The results of operations of the Ascyrus acquisition are included in results of operations from the date of acquisition and were not significant for the three and nine months ended September 30, 2021. The results of operations of the Ascyrus acquisition are included in our Medical devices segment.
Exclusive Distribution Agreement and Securities Purchase Option Agreement
On September 11, 2019 CryoLife, Inc.’s wholly ownedwholly-owned subsidiary, JOTEC GmbH, (“JOTEC”), entered into an exclusive distribution agreement (“Endospan(the “Endospan Distribution Agreement”) with Endospan Ltd. (“Endospan”), an Israeli corporation, pursuant to which JOTEC obtained exclusive distribution rights for Endospan’s NexusNEXUS TM stent graft system (“NEXUS”) and accessories in certain countries in Europe in exchange for a fixed distribution fee of $9.0 million paid in September 2019.
CryoLife also entered into a securities purchase option agreement (“Endospan(the “Endospan Option Agreement”) with Endospan for $1.0 million paid in September 2019. The Endospan Option Agreement provides CryoLife the option to purchase all the outstanding securities of Endospan from Endospan’s securityholders at the time of acquisition, or the option to acquire all of Endospan’s assets, in each case, for a price between $350.0 and $450.0 million before, or within a certain period of time, or after FDA approval of NEXUS, with such option expiring if not exercised within 90 days after receiving notice that Endospan has received approval from the FDA for NEXUS.
Loan Agreement
CryoLife and Endospan also entered into a loan agreement (“Endospan(the “Endospan Loan”), dated September 11, 2019, in which CryoLife agreed to provide Endospan a secured loan of up to $15.0 million to be funded in three tranches of $5.0 million each.
The first tranche of the Endospan Loan was funded upon execution of the agreement in September 2019. During September 2020 we funded the second tranche payment of $5.0 million upon the certification of Investigational Device Exemption (“IDE”) approvalthe NEXUS IDE from the FDA of NEXUS.FDA. The third tranche is required to be funded upon certification of enrollment of at least 50% of the required number of patients in the primary arm of the FDA approved clinical trial for NEXUS, in each case subject to Endospan’s continued compliance with the Endospan Loan and certain other conditions. If a termination fee becomes payable by Endospan under the Endospan Distribution Agreement, it will be added to the amount payable to CryoLife under the Endospan Loan.
Variable Interest Entity
We consolidate the results of a variable interest entity ("VIE") when it is determined that we are the primary beneficiary. Based on our initial evaluation of Endospan and the related agreements with Endospan, we determined that Endospan is a VIE. Although the arrangement with Endospan resulted in our holding a variable interest, it did not empower us to direct
those activities of Endospan that most significantly impact the VIE economic performance. Therefore, we are not the primary beneficiary, and we have not consolidated Endospan into our financial results. Our payments to Endospan in September 2019 totaled $15.0 million which included a $9.0 million distribution fee, a $1.0 million securities purchase option, and $5.0 million for the first tranche of the Endospan Loan. AnWe paid an additional $5.0 million was funded as part offor the second tranche payment described above. We evaluated Endospan for VIE classification as of September 30, 2021 and December 31, 2020 and determined that Endospan meets the criteria of a non-consolidating VIE. Our payments to date, including any loans, guarantees, and other subordinated financial support related to this VIE, totaled $20.0 million as of September 30, 2020,2021, representing our maximum exposure to loss, and were not individually significant to our consolidated financial statements.
Valuation
The agreements with Endospan were entered into concurrently and had certain terms that are interrelated. In our evaluation of the initial relative fair value of each of the Endospan agreements to determine the amount to record, we utilized discounted cash flows to estimate the fair market value for the Endospan Loan and for the Endospan Distribution Agreement. We estimated the fair value of the Endospan Option Agreement utilizing the Monte Carlo simulation. The fair value measurement was based on unobservable inputs, including management estimates and assumptions about the future achievement of milestones and future estimate of revenues, and is, therefore, classified as Level 3 within the fair value hierarchy as presented in Note 5. Inputs in our valuation of the Endospan agreements included cash payments and anticipated payments based on the executed agreements with Endospan, projected discounted cash flows in connection with the Endospan transaction, our expected internal rate of return and discount rates, and our assessed probability and timing of receipt of certification of certain approvals and milestones in obtaining FDA approval. Based on the initial fair value of the Endospan Loan and the relative fair values of the Endospan Distribution Agreement and Endospan Option Agreement, we recorded the Endospan Loan value of $358,000 in Other long-term assets in the SummaryCondensed Consolidated Balance Sheets as of December 31, 2019. The Endospan Option Agreement was valued at $4.8 million in Other long-term assets in the SummaryCondensed Consolidated Balance Sheets as of September 30, 20202021 and December 31, 2019.2020. The Endospan Distribution Agreement was recorded at $8.1$6.1 million and $9.8$8.0 million in Other Intangibles,intangibles, net in the SummaryCondensed Consolidated Balance Sheets as of September 30, 20202021 and December 31, 2019,2020, respectively.
We elected the fair value option for recording the Endospan Loan. We assess the fair value of the Endospan Loan based on quantitative and qualitative characteristics and adjust the amount recorded to its current fair market value at each reporting period. We performed an assessment of theThe fair value of the Endospan Loan after funding the second tranche payment and adjusted the fair value of the Endospan Loan towas $409,000 as of September 30, 2020. As a result of the fair value adjustment, we recorded an expense of $4.9 million in Other Expense on the Consolidated Statements of Operations2021 and Comprehensive Income (Loss) during the three months ended September 30,December 31, 2020.
4.
The following is a summary of our financial instruments measured at fair value on a recurring basis (in thousands):
September 30, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
September 30, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||
Money market funds | $ | 11,483 | $ | -- | $ | -- | $ | 11,483 | $ | 10,012 | $ | -- | $ | -- | $ | 10,012 | ||||||
Restricted securities: | ||||||||||||||||||||||
Money market funds | 513 | -- | -- | 513 | 538 | -- | -- | 538 | ||||||||||||||
Endospan loan | -- | -- | 409 | 409 | -- | -- | 409 | 409 | ||||||||||||||
Total assets | $ | 11,996 | $ | -- | $ | 409 | $ | 12,405 | $ | 10,550 | $ | -- | $ | 409 | $ | 10,959 | ||||||
Current liabilities: | ||||||||||||||||||||||
Contingent consideration | -- | -- | (17,600) | (17,600) | ||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||
Contingent consideration | -- | -- | (55,407) | (55,407) | -- | -- | (47,300) | (47,300) | ||||||||||||||
Total liabilities | $ | -- | $ | -- | $ | (55,407) | $ | (55,407) | $ | -- | $ | -- | $ | (64,900) | $ | (64,900) | ||||||
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
December 31, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||
Money market funds | $ | 1,472 | $ | -- | $ | -- | $ | 1,472 | $ | 11,484 | $ | -- | $ | -- | $ | 11,484 | ||||||
Restricted securities: | ||||||||||||||||||||||
Money market funds | 528 | -- | -- | 528 | 546 | -- | -- | 546 | ||||||||||||||
Endospan loan | -- | -- | 358 | 358 | -- | -- | 409 | 409 | ||||||||||||||
Total assets | $ | 2,000 | $ | -- | $ | 358 | $ | 2,358 | $ | 12,030 | $ | -- | $ | 409 | $ | 12,439 | ||||||
Current liabilities: | ||||||||||||||||||||||
Contingent consideration | -- | -- | (16,430) | (16,430) | ||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||
Contingent consideration | -- | -- | (43,500) | (43,500) | ||||||||||||||||||
Total liabilities | $ | -- | $ | -- | $ | (59,930) | $ | (59,930) | ||||||||||||||
We used prices quoted from our investment advisors to determine the Level 1 valuation of our investments in money market funds. We recorded the Endospan Loan, classified as Level 3, as a result of an agreement with Endospan in September 2019. The fair value of the contingent consideration component of the Ascyrus acquisition was classified as aupdated using Level 3 financial instrument.inputs. See Note 23 and Note 34 for further discussion of the Ascyrus acquisition and the Endospan Loan, respectively. Changes in fair value of Level 3 assets and liabilities are listed in the tables below (in thousands):
Endospan Loan | Contingent Consideration | |||||
Balance as of December 31, 2019 | $ | 358 | Balance as of December 31, 2019 | $ | -- | |
Additional investment in Endospan | 5,000 | Discounted value at acquisition | (55,407) | |||
Change in valuation | (4,949) | Change in valuation | -- | |||
Balance as of September 30, 2020 | $ | 409 | Balance as of September 30, 2020 | $ | (55,407) |
Endospan Loan | Contingent Consideration | ||||
Balance as of December 31, 2020 | $ | 409 | $ | (59,930) | |
Change in valuation | -- | (4,970) | |||
Balance as of September 30, 2021 | $ | 409 | $ | (64,900) | |
The following is a summary of cash equivalents and restricted securities (in thousands):
Unrealized | Estimated | Unrealized | Estimated | |||||||||||||
Holding | Market | Holding | Market | |||||||||||||
September 30, 2020 | Cost Basis | Gains | Value | |||||||||||||
September 30, 2021 | Cost Basis | Gains | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 11,483 | $ | -- | $ | 11,483 | $ | 10,012 | $ | -- | $ | 10,012 | ||||
Restricted securities: | ||||||||||||||||
Money market funds | 513 | -- | 513 | 538 | -- | 538 | ||||||||||
Total assets | $ | 11,996 | $ | -- | $ | 11,996 | $ | 10,550 | $ | -- | $ | 10,550 | ||||
Unrealized | Estimated | Unrealized | Estimated | |||||||||||||
Holding | Market | Holding | Market | |||||||||||||
December 31, 2019 | Cost Basis | Gains | Value | |||||||||||||
December 31, 2020 | Cost Basis | Gains | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 1,472 | $ | -- | $ | 1,472 | $ | 11,484 | $ | -- | $ | 11,484 | ||||
Restricted securities: | ||||||||||||||||
Money market funds | 528 | -- | 528 | 546 | -- | 546 | ||||||||||
Total assets | $ | 2,000 | $ | -- | $ | 2,000 | $ | 12,030 | $ | -- | $ | 12,030 | ||||
As of September 30, 20202021 and December 31, 2019 $513,0002020 $538,000 and $528,000,$546,000, respectively, of our money market funds were designated as short-term restricted securities due to a contractual commitment to hold the securities as pledged collateral relating to international tax obligations.
There were 0 gross realized gains or losses on cash equivalents and restricted securities infor the three and nine months ended September 30, 20202021 and 2019.2020. As of September 30, 2020 $513,0002021 $538,000 of our restricted securities had a maturity date within three months. As of December 31, 2019 $528,0002020 $546,000 of our restricted securities had a maturity date within three months.
6.7. Inventories, net and Deferred Preservation Costs
Inventories at September 30, 20202021 and December 31, 20192020 were comprised of the following (in thousands):
September 30, | December 31, | ||||
2020 | 2019 | ||||
Raw materials and supplies | $ | 30,875 | $ | 21,180 | |
Work-in-process | 7,461 | 5,127 | |||
Finished goods | 31,066 | 26,764 | |||
Total inventories | $ | 69,402 | $ | 53,071 | |
Deferred preservation costs at September 30, 2020 and December 31, 2019 were comprised of the following (in thousands):
September 30, | December 31, | ||||
2020 | 2019 | ||||
Cardiac tissues | $ | 16,300 | $ | 15,365 | |
Vascular tissues | 19,254 | 17,186 | |||
NeoPatch | 398 | - | |||
Total deferred preservation costs | $ | 35,952 | $ | 32,551 | |
September 30, | December 31, | ||||
2021 | 2020 | ||||
Raw materials and supplies | $ | 34,005 | $ | 33,625 | |
Work-in-process | 12,438 | 6,318 | |||
Finished goods | 31,876 | 33,095 | |||
Total inventories, net | $ | 78,319 | $ | 73,038 | |
To facilitate product usage, we maintain consignment inventory of our On-X heart valves at domestic hospital locations and both On-X heart valves, JOTEC, and JOTECAMDS products at international hospital locations. We retain title and control over this consignment inventory until the device is implanted, at which time we invoice the hospital and recognize revenue. As of September 30, 2021 we had $14.7 million in consignment inventory, with approximately 41% in domestic locations and 59% in international locations. As of December 31, 2020 we had $12.8$11.9 million in consignment inventory, with approximately 47% in domestic locations and 53% in international locations. As
Total deferred preservation costs were $42.6 million and $36.5 million as of September 30, 2021 and December 31, 2019 we had $12.02020, respectively.
Inventory and deferred preservation costs obsolescence reserves were $2.8 million in consignment inventory, with approximately 51% in domestic locations and 49% in international locations.$3.5 million as of September 30, 2021 and December 31, 2020, respectively.
Indefinite Lived Intangible Assets
As of September 30, 20202021 and December 31, 20192020 the carrying values of our indefinite lived intangible assets were as follows (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||
2020 | 2019 | 2021 | 2020 | |||||||
Goodwill | $ | 253,995 | $ | 186,697 | $ | 252,441 | $ | 260,061 | ||
In-process R&D | 2,283 | 2,190 | 2,258 | 2,392 | ||||||
Procurement contracts and agreements | 2,013 | 2,013 | 2,013 | 2,013 | ||||||
Trademarks | 765 | 844 | ||||||||
Trademarksa | 397 | 765 | ||||||||
__________
a During the three and nine months ended September 30, 2021 we transferred $380,000 of PerClot related trademarks to Baxter as a result of the Baxter Transaction described in Note 2.
We monitor the phases of development of our acquired in-process research and development projects, including the risks associated with further development and the amount and timing of benefits expected to be derived from the completed projects. Incremental costs associated with development are charged to expense as incurred. Capitalized costs are amortized over the estimated useful life of the developed asset once completed. Our in-process research and development projects are reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired.
Based on our experience with similar agreements, we believe that our acquired procurement contracts and agreements have indefinite useful lives, as we expect to continue to renew these contracts for the foreseeable future. We believe that our trademarks have indefinite useful lives as we currently anticipate that our trademarks will contribute to our cash flows indefinitely.
We evaluate our goodwill and non-amortizing intangible assets for impairment on an annual basis during the fourth quarter of the year, and, if necessary, during interim periods if factors indicate that an impairment review is warranted. As of
September 30, 20202021 we concluded that our assessment of current factors did not indicate that goodwill or non-amortizing intangible assets are more likely than not to be impaired. We will continue to evaluate the recoverability of these non-amortizing intangible assets in future periods as necessary.
The goodwill balance increased during the nine months ended September 30, 2020 as a result of the goodwill recorded in connection with the Ascyrus acquisition as further described in Note 2 above. As of September 30, 20202021 and December 31, 20192020 our entire goodwill balance was related to our Medical Devicesdevices segment.
Medical Devices Segment | ||
Balance as of December 31, | $ |
|
Ascyrus acquisition |
| |
Revaluation of goodwill denominated in foreign currency |
| |
Balance as of September 30, | $ |
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Definite Lived Intangible Assets
The definite lived intangible balance includes balances related to acquired technology, customer relationships, distribution and manufacturing rights and know-how, patents, and other definite lived intangible assets. The acquired technology balance increased $72.6 million duringDuring the three and nine months ended September 30, 20202021 we transferred $1.2 million of PerClot related distribution and manufacturing rights to developed technology acquiredBaxter as a result of the Ascyrus acquisition as furtherBaxter Transaction described in Note 2 above.2. As of September 30, 20202021 and December 31, 20192020 the gross carrying values, accumulated amortization, and approximate amortization period of our definite lived intangible assets were as follows (in thousands):
Gross Carrying | Accumulated | Amortization | Gross Carrying | Accumulated | Amortization | |||||||||||||||
September 30, 2020 | Value | Amortization | Period | |||||||||||||||||
September 30, 2021 | Value | Amortization | Period | |||||||||||||||||
Acquired technology | $ | 217,085 | $ | 32,075 | 11 | – | 22 | Years | $ | 215,917 | $ | 44,129 | 11 | – | 22 | Years | ||||
Customer lists and relationships | 31,215 | 7,733 | 13 | – | 22 | Years | 31,192 | 9,248 | 13 | – | 22 | Years | ||||||||
Distribution and manufacturing rights and know-how | 14,239 | 4,678 | 5 | – | 15 | Years | 10,068 | 3,933 | 5 | – | 15 | Years | ||||||||
Patents | 3,888 | 3,104 | 17 | Years | 4,041 | 3,136 | 17 | Years | ||||||||||||
Other | 2,712 | 903 | 4 | – | 5 | Years | 3,938 | 1,589 | 4 | – | 5 | Years | ||||||||
Gross Carrying | Accumulated | Amortization | Gross Carrying | Accumulated | Amortization | |||||||||||||||
December 31, 2019 | Value | Amortization | Period | |||||||||||||||||
December 31, 2020 | Value | Amortization | Period | |||||||||||||||||
Acquired technology | $ | 140,193 | $ | 24,778 | 11 | – | 22 | Years | $ | 222,182 | $ | 36,091 | 11 | – | 22 | Years | ||||
Customer lists and relationships | 31,131 | 6,581 | 13 | – | 22 | Years | 31,316 | 8,132 | 13 | – | 22 | Years | ||||||||
Distribution and manufacturing rights and know-how | 13,826 | 3,005 | 5 | – | 15 | Years | 14,728 | 5,349 | 5 | – | 15 | Years | ||||||||
Patents | 3,664 | 3,074 | 17 | Years | 3,966 | 3,113 | 17 | Years | ||||||||||||
Other | 1,919 | 608 | 3 | – | 5 | Years | 3,453 | 1,073 | 4 | – | 5 | Years | ||||||||
Amortization Expense
The following is a summary of amortization expense as recorded in general,General, administrative, and marketing expenses on our SummaryCondensed Consolidated Statement of Operations and Comprehensive Income (Loss) (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Amortization expense | $ | 3,397 | $ | 2,660 | $ | 9,430 | $ | 7,796 | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Amortization expense | $ | 4,203 | $ | 3,397 | $ | 12,701 | $ | 9,430 | |||
As of September 30, 20202021 scheduled amortization of intangible assets for the next five years is as follows (in thousands):
Remainder | ||||||||||||||||||||
of 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | Total | ||||||||||||||
Amortization expense | $ | 4,127 | 16,506 | 15,959 | 15,486 | 15,160 | 13,079 | $ | 80,317 | |||||||||||
Remainder | ||||||||||||||||||||
of 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | Total | ||||||||||||||
Amortization expense | $ | 4,121 | 15,944 | 15,434 | 15,050 | 13,002 | 12,771 | $ | 76,322 | |||||||||||
Income Tax Expense
Our effective income tax rate was a benefit of 33% and 318% for the three and nine months ended September 30, 2021, respectively, as compared to a benefit of 31% and 23% for the three and nine months ended September 30, 2020, respectively, as compared to a benefit of 87% and 2,375% for the three and nine months ended September 30, 2019, respectively. The change in the tax rate for the three and nine months ended September 30, 20202021 is primarily due to a changechanges in pre-tax book loss, as well as a reduction in the excess tax benefit related to stock compensation, forand the three and nine months ended September 30, 2020,estimated current year valuation allowance, as compared to the three and nine months ended September 30, 2019.2020. We utilized the interim reporting guidance of ASC 740 to calculate the effective tax rate for the three and nine months ended September 30, 2021 and 2020. We expect the effective income tax rate for the twelve months ended December 31, 2021 to be more in line with applicable statutory tax rates.
The income tax rate for the three and nine months ended September 30, 2020 and 20192021 was favorably impacted by excess tax benefit deductions related to stock compensation, the research and development tax credit, and lossesthe reduction of a valuation allowance on prior year items. The tax rate was unfavorably impacted by non-deductible operating expenses, executive compensation expenses, an increase in highthe valuation allowance on current year items, and the recording of a tax reserve on prior year items.
The income tax rate jurisdictions.for the three and nine months ended September 30, 2020 was favorably impacted by excess tax benefit deductions related to stock compensation and the research and development tax credit. These factors were partially offset by the unfavorable impacts of non-deductible operating expenses and executive compensation expenses.
Deferred Income Taxes
We generate deferred tax assets primarily as a result of the difference in fixed asset depreciation lives for book and tax purposes, accruals for which the timing of deductibility is different for book and tax purposes, the timing of tax deductions related to stock compensation, interest expense disallowances, and operating losses. We acquired significant deferred tax assets, primarilybelieve our utilization of net operating loss carryforwards,losses from our acquisitions of JOTEC and its subsidiaries in 2017, On-X in 2016, Hemosphere, Inc. in 2012, and Cardiogenesis Corporation in 2011. We believe utilization of these net operating lossesprevious transactions will not have a material impact on income taxes for the 20202021 tax year.
As of September 30, 20202021 we maintained a total of $2.7$11.6 million in valuation allowances against deferred tax assets, primarily related toincluding state and foreignfederal net operating loss carryforwards and interest expense disallowance carryforwards, and a net deferred tax liability of $23.4 million. As of December 31, 2020 we maintained a total of $7.2 million in valuation allowances against deferred tax assets, including state and federal net operating loss carryforwards, and a net deferred tax liability of $21.5$33.3 million. As of December 31, 2019
During the nine months ended September 30, 2021 we maintained a total of $3.2 million in valuation allowances against deferred tax assets,corrected certain immaterial prior year errors primarily related to statethe release of a valuation allowance, reduction of income taxes payable, and foreign net operating loss carryforwards, and a net deferredan increase in the tax liabilityreserve. On correcting the errors, we recorded an income tax benefit of $20.4$2.1 million.
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)
In response to the novel coronavirus disease (“COVID-19”) pandemic, the U.S. government enacted the CARES Act on March 27, 2020. The CARES Act providesprovided various forms of relief and assistance to U.S. businesses. We recorded a reduction to income taxes payable and deferred tax assets of approximately $1.3 million for the anticipated change to the 2019 Section 163(j) interest expense deduction limitation. We will continue to monitor and assesslimitation for the impact the CARES Act and similar legislation in other countries may have on our business and financial results.three months ended March 2020.
We have operating and finance lease obligations resulting from the lease of land and buildings that comprise our corporate headquarters and various manufacturing facilities; leases related to additional manufacturing, office, and warehouse space; leases on Company vehicles; and leases on a variety of office and other equipment.
We sublease, onOn January 6, 2021 we executed a modification to extend the lease of our headquarters located in Kennesaw, Georgia. This modification resulted in an operatingincrease in the present value of future lease basis, 2 unused office space facilities near our corporate office. Total annual sub-lease rental income for these facilities is approximately $905,000.obligations and corresponding right-of-use asset of $23.3 million, using a discount rate of 6.41%.
Consolidated balance sheet informationOn June 1, 2021 we began occupancy of the newly constructed addition to our leased JOTEC headquarters located in Hechingen, Germany. This lease resulted in an increase in the present value of future lease obligations and corresponding right-of-use asset of $9.8 million, using a discount rate of 5.46%.
Information related to leases included in the Condensed Consolidated Balance Sheets is as follows (in thousands, except lease term and discount rate):
Operating leases: | September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | ||||||
Operating lease right-of-use assets | $ | 28,365 | $ | 27,007 | $ | 58,429 | $ | 28,242 | ||
Accumulated amortization | (8,927) | (5,013) | (11,516) | (9,671) | ||||||
Operating lease right-of-use assets, net | $ | 19,438 | $ | 21,994 | $ | 46,913 | $ | 18,571 | ||
Current maturities of operating leases | $ | 5,678 | $ | 5,487 | $ | 3,053 | $ | 5,763 | ||
Non-current maturities of operating lease | 15,026 | 17,918 | ||||||||
Non-current maturities of operating leases | 45,765 | 14,034 | ||||||||
Total operating lease liabilities | $ | 20,704 | $ | 23,405 | $ | 48,818 | $ | 19,797 | ||
Finance leases: | ||||||||||
Property and equipment, at cost | $ | 7,369 | $ | 7,161 | $ | 6,910 | $ | 7,620 | ||
Accumulated amortization | (1,743) | (1,279) | (2,014) | (1,905) | ||||||
Property and equipment, net | $ | 5,626 | $ | 5,882 | $ | 4,896 | $ | 5,715 | ||
Current maturities of finance leases | $ | 595 | $ | 597 | $ | 537 | $ | 614 | ||
Non-current maturities of finance leases | 5,206 | 5,415 | 4,608 | 5,300 | ||||||
Total finance lease liabilities | $ | 5,801 | $ | 6,012 | $ | 5,145 | $ | 5,914 | ||
Weighted average remaining lease term (in years): | ||||||||||
Operating leases | 5.2 | 5.5 | 12.4 | 5.1 | ||||||
Finance leases | 10.0 | 10.6 | 9.1 | 9.8 | ||||||
Weighted average discount rate: | ||||||||||
Operating leases | 5.2% | 5.4% | 5.9% | 5.2% | ||||||
Finance leases | 2.0% | 2.0% | 2.0% | 2.0% | ||||||
Current maturities of finance leases are included as a component of Other current liabilities and non-current maturities of finance leases are included as a component of Other long-term liabilities on our SummaryCondensed Consolidated Balance Sheets. A summary of lease expenses for our finance and operating leases included in General, Administrative,administrative, and Marketing Expensesmarketing expenses on our SummaryCondensed Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
Amortization of property and equipment | $ | 164 | $ | 188 | $ | 487 | $ | 608 | $ | 190 | $ | 164 | $ | 500 | $ | 487 | ||||||
Interest expense on finance leases | 30 | 30 | 89 | 93 | 27 | 30 | 85 | 89 | ||||||||||||||
Total finance lease expense | 194 | 218 | 576 | 701 | 217 | 194 | 585 | 576 | ||||||||||||||
Operating lease expense | 1,806 | 1,717 | 5,324 | 4,870 | 1,989 | 1,806 | 5,566 | 5,324 | ||||||||||||||
Sublease income | (226) | (227) | (679) | (679) | (92) | (226) | (308) | (679) | ||||||||||||||
Total lease expense | $ | 1,774 | $ | 1,708 | $ | 5,221 | $ | 4,892 | $ | 2,114 | $ | 1,774 | $ | 5,843 | $ | 5,221 | ||||||
A summary of our cash flow information related to leases is as follows (in thousands):
Nine Months Ended | Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | September 30, 2020 | September 30, 2019 | September 30, 2021 | September 30, 2020 | ||||||
Operating cash flows for operating leases | $ | 5,438 | $ | 5,004 | $ | 4,536 | $ | 5,438 | ||
Financing cash flows for finance leases | 465 | 561 | 446 | 465 | ||||||
Operating cash flows for finance leases | 92 | 91 | 82 | 92 |
Future minimum lease payments and sublease rental income are as follows (in thousands):
Finance | Operating | Sublease | Finance | Operating | Sublease | |||||||||||
Leases | Leases | Income | Leases | Leases | Income | |||||||||||
Remainder of 2020 | $ | 178 | $ | 1,435 | $ | 226 | ||||||||||
2021 | 695 | 6,823 | 905 | |||||||||||||
Remainder of 2021 | $ | 134 | $ | 680 | $ | 92 | ||||||||||
2022 | 639 | 4,340 | 306 | 642 | 6,009 | 305 | ||||||||||
2023 | 638 | 2,877 | -- | 641 | 6,601 | -- | ||||||||||
2024 | 636 | 2,706 | -- | 635 | 6,212 | -- | ||||||||||
2025 | 612 | 5,282 | -- | |||||||||||||
Thereafter | 3,612 | 5,283 | -- | 2,963 | 46,618 | -- | ||||||||||
Total minimum lease payments | $ | 6,398 | $ | 23,464 | $ | 1,437 | $ | 5,627 | $ | 71,402 | $ | 397 | ||||
Less amount representing interest | (597) | (2,760) | (482) | (22,584) | ||||||||||||
Present value of net minimum lease payments | 5,801 | 20,704 | 5,145 | 48,818 | ||||||||||||
Less current maturities | (595) | (5,678) | (537) | (3,053) | ||||||||||||
Lease liabilities, less current maturities | $ | 5,206 | $ | 15,026 | $ | 4,608 | $ | 45,765 | ||||||||
Credit Agreement
On December 1, 2017 we entered into a credit and guaranty agreement for a $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility (the “Term Loan Facility”) and a $30.0 million secured revolving credit facility (“the Revolving(the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Agreement”). We and each of our existing domestic subsidiaries (subject to certain exceptions and exclusions) guarantee the obligations under the Credit Agreement (the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all existing and after-acquired real and personal property (subject to certain exceptions and exclusions) of us and the Guarantors.
On December 1, 2017June 2, 2021 we borrowedentered into an amendment to our Credit Agreement to extend the entire $225.0 millionmaturity dates of both the Company’s Term Loan and its Revolving Credit Facility. The proceedsAs part of the amendment, the maturity dates of both the Company’s Term Loan and its Revolving Credit Facility were each extended by two and one-half years, until June 1, 2027 and June 1, 2025, respectively, subject to earlier springing maturities if our 4.25% Convertible Senior Notes, described below, remain outstanding on April 1, 2025 and December 31, 2024, respectively. With respect to the Term Loan, Facility were used along with cashif the Convertible Senior Notes remain outstanding on hand and sharesApril 1, 2025, the Term Loan’s maturity date will be April 1, 2025, or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of CryoLife common stock to (i) fund the acquisition of JOTEC and its subsidiaries (the “JOTEC Acquisition”), (ii) pay certain fees and expenses related91 days prior to the JOTEC AcquisitionConvertible Senior Notes’ new maturity date and (ii) June 1, 2027. In the Credit Agreement, and (iii) pay the outstanding balancecase of our prior credit facility. The Revolving Credit Facility may be used for working capital, capital expenditures, acquisitions permitted under the Credit Agreement, and other general corporate purposes pursuant to the terms of the Credit Agreement.
The loan under the Term Loan Facility is repayable on a quarterly basis according to the amortization provisions set forth in the Credit Agreement. We have the right to repay the loan under the Credit Agreement in whole or in part at any time. Amounts repaid in respect of the loan under the Term Loan Facility may not be reborrowed. Amounts repaid in respect of the loan under the Revolving Credit Facility, may be reborrowed. Allif the Convertible Senior Notes are still outstanding principal and interest in respect of (i) the Term Loan Facility must be repaid on or before December 1,31, 2024, and (ii) the Revolving Credit Facility mustFacility’s maturity date will be repaid oneither December 31, 2024 or, before December 1, 2022.
In October 2018 we finalized an amendment(i) 182 days prior to the Credit Agreement to reprice interest rates, resulting in a reduction inConvertible Senior Notes’ new maturity date and (ii) June 1, 2025. Under the interest rate margins over base rates on the Term Loan Facility. The loan underamendment, the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.25%2.50%, or LIBOR, plus a margin of 3.25%3.50%. Prior to the repricing,amendment, the optional floating annual rate was equal to either the base rate plus a margin of 3.00%2.25%, or LIBOR, plus a margin of 4.00%3.25%. The loan underWe paid debt issuance costs of $2.1 million, of which $1.8 million will be amortized over the Revolving Credit Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of between 3.00% and 3.25%, depending on our consolidated leverage ratio, or LIBOR, plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. While a payment event of default or bankruptcy event of default exists, we are obligated to pay a per annum default rate of interest of 2.00% in excesslife of the interest rate otherwise payable with respect toterm loan facility and included in current and long-term debt on the overdue principal amountCondensed Consolidated Balance Sheets. The remaining $361,000 of any loans outstandingdebt issuance costs and overdue interest payments$474,000 of non-cash debt extinguishment costs were recorded in Interest expense on the Condensed Consolidated Statements of Operations and other overdue fees and amounts. As of September 30, 2020 the aggregate interest rate was 4.25% per annum. We are obligated to pay an unused commitment fee equal to 0.50% of the unutilized portion of the revolving loans. In addition, we are also obligated to pay other customary fees for a credit facility of this size and type. Comprehensive Income (Loss).
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, the Credit Agreement contains certain customary affirmative and negative covenants, including covenants that limit our ability and the ability of our subsidiaries to, among other things, grant liens, incur debt, dispose of assets, make loans and investments, make acquisitions, make certain restricted payments (including cash dividends), merge or consolidate, change business or accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. In addition, with respect to the Revolving Credit Facility, when the principal amount of loans outstanding thereunder is in excess of 25% of the Revolving Credit Facility, the Credit Agreement requires us to comply with a specified maximum first lien net leverage ratio.
The Credit Agreement includes certain customary events of default that include, among other things, non-payment of principal, interest, or fees; inaccuracy of representations and warranties; breach of covenants; cross-default to certain material indebtedness; bankruptcy and insolvency; and change of control. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued but unpaid interest under the Credit Agreement immediately due and payable and may exercise the other rights and remedies provided under the Credit Agreement and related loan documents.
In March 2020 as a precautionary measure to increase cash and maintain maximum financial flexibility during the current uncertainty in global markets resulting from the COVID-19 pandemic, we borrowed the entire amount available under our $30.0 million Revolving Credit Facility at an aggregate interest rate of 5.20%. On June 29, 2020 we used the net proceeds from the issuance of Convertible Senior Notes, as discussed below, to repay the $30.0 million outstanding under our Revolving Credit Facility.
On April 29, 2020 we entered into an amendment to our Credit Agreement. As part of the amendment we obtained a waiver of our maximum first lien net leverage ratio covenant through the end of 2020. In addition, the amendment to our Credit Agreement provides that EBITDA, for covenant testing purposes, in each quarter of 2020 will be deemed equal to a fixed value equal to our bank covenant EBITDA in the fourth quarter of 2019, when our first lien net leverage was 3.4x. As a result of these changes, we are subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. We are required to maintain a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period. Beginning in 2021, if we repay borrowings under our Revolving Credit Facility to 25% or less, no financial maintenance covenants, including the minimum liquidity covenant and the maximum first lien net leverage ratio covenant, are applicable. We are in compliance with our debt covenants as of September 30, 2021.
Convertible Senior Notes
On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25% convertible senior notesConvertible Senior Notes with a maturity date of July 1, 2025 (the “Convertible Senior Notes”). The net proceeds from this offering, after deducting initial purchasers’ discounts and costs directly related to this offering, were approximately $96.5 million. On January 1, 2021 we adopted ASU 2020-06 and adjusted the carrying balance of the Convertible Senior Notes to notional. The Convertible Senior Notes balance was $100.0 million recorded in Long-term debt on the Condensed Consolidated Balance Sheets as of September 30, 2021. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. Our current intent is to settle in cash the principal amount outstanding and any note conversion value over the principal amount with shares of our common stock. The initial conversion rate of the Convertible Senior Notes is 42.6203 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $23.46 per share, subject to adjustments. We use the treasury stockif-converted method for assumed conversion of the Convertible Senior Notes to computefor the weighted average shares of common stock outstanding for diluted earnings per share.
share calculation. The conversion featurefair value and the effective interest rate of the Convertible Senior Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $16.4 million in additional paid-in-capital during the nine months endedof September 30, 2020. 2021 was approximately $124.2 million and 5.05%, respectively. The fair value was based on market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.
The interest expense recognized on the Convertible Senior Notes includes approximately $1.2 million and $3.7 million for the aggregate of the contractual coupon interest, and the amortization of the debt issuance costs as of the three and nine months ended September 30, 2021, respectively. The interest expense recognized on the Convertible Senior
Notes includes approximately $2.0 million and $2.2 million for the aggregate of the contractual coupon interest, the accretion
of the debt discount, and the amortization of the debt issuance costs as of three and nine months ended September 30, 2020, respectively. The interest on the Convertible Senior Notes includes the contractual coupon interest, accretion of the debt discount, and amortization of the debt issuance costs. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually. As of September 30, 2021 there were $2.7 million of unamortized debt issuance costs related to convertible senior notes.
Holders of the Convertible Senior Notes may convert their notes at their option at any time prior to January 1, 2025, but only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the 5 business day period after any 5 consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (iii) we give a notice of redemption with respect to any or all of the notes, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. On or after January 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem them on or after July 5, 2023, in whole or in part, at our option, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. We may redeem for cash all or part of the Convertible Senior Notes at a redemption price equal to 100% of the principal amount of the redeemable Convertible Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the Convertible Senior Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the Convertible Senior Notes do not contain any financial covenants and do not restrict us from conducting significant restructuring transactions or issuing or repurchasing any of its other securities. As of September 30, 2020, we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes. We have used a portion of the proceeds to pay off the $30.0 million outstanding under our Revolving Credit Facility and finance the Ascyrus transaction and anticipate using the remaining funds for general corporate purposes.
Government Supported Bank Debt
In June 2015 JOTEC obtained two loans from Sparkasse Zollernalb, which are government sponsored by the Kreditanstalt für Wiederaufbau Bank (“KFW”). Both KFW loans have a term of nine years and the interest rates are 2.45% and 1.40%, respectively.
Loan Balances
The short-term and long-term balances of our term loan and other long-term borrowings were as follows (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||
2020 | 2019 | 2021 | 2020 | |||||||
Term loan balance | $ | 218,812 | $ | 220,500 | $ | 216,563 | $ | 218,250 | ||
Convertible senior notes | 78,662 | -- | 100,000 | 79,555 | ||||||
2.45% Sparkasse Zollernalb (KFW Loan 1) | 911 | 1,061 | 643 | 886 | ||||||
1.40% Sparkasse Zollernalb (KFW Loan 2) | 1,463 | 1,615 | 1,157 | 1,457 | ||||||
Total loan balance | 299,848 | 223,176 | 318,363 | 300,148 | ||||||
Less unamortized loan origination costs | (8,986) | (7,441) | (8,958) | (8,485) | ||||||
Net borrowings | 290,862 | 215,735 | 309,405 | 291,663 | ||||||
Less short-term loan balance | (1,165) | (1,164) | (1,640) | (1,195) | ||||||
Long-term loan balance | $ | 289,697 | $ | 214,571 | $ | 307,765 | $ | 290,468 | ||
Interest Expense
Interest expense was $4.1 million and $13.0 million for the three and nine months ended September 30, 2021, respectively, as compared to $4.9 million and $12.0 million for the three and nine months ended September 30, 2020, as compared to $3.6 million and $11.3 million for the three and nine months ended September 30, 2019.respectively. Interest expense includes interest on debt and uncertain tax positions in both periods.
Liability Claims
Our estimated unreported lossIn the normal course of business, we are made aware of adverse events involving our products and tissues. Future adverse events could ultimately give rise to a lawsuit against us, and liability was $2.0 million and $1.9 million asclaims may be asserted against us in the future based on past events that we are not aware of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019,at the related recoverablepresent time. We maintain claims-made insurance amounts were $1.0 million and $935,000, respectively. We accruepolicies to mitigate our estimate of unreportedfinancial exposure to product and tissue processing liability claims. Claims-made insurance policies generally cover only those asserted claims as a component of other long-term liabilities and recordincidents that are reported to the related recoverable insurance amount as a component of Other long-term assets, as appropriate. Further analysis indicated thatcarrier while the estimated liabilitypolicy is in effect. The amounts recorded in these Condensed Consolidated Financial Statements as of September 30, 2020 could have been as high as $3.9 million, after including a reasonable margin2021 represent our estimate of the probable losses and anticipated recoveries for statistical fluctuations calculated based on actuarial simulation techniques. incurred but not reported claims related to products sold and services performed prior to the balance sheet date.
The employment agreement of our Chairman, President, and Chief Executive Officer (“CEO”), Mr. J. Patrick Mackin, provides for a severance payment, which would become payable upon the occurrence of certain employment termination events, including termination by us without cause.
PerClot Technology
On September 28, 2010 we entered into a worldwide distribution agreement (the “Distribution Agreement”) and a license and manufacturing agreement (the “License Agreement”) with Starch Medical, Inc. (“SMI”), for PerClot®, a polysaccharide hemostatic agent used in surgery. The Distribution Agreement has a term of 15 years but can be terminated for any reason before the expiration date by us by providing 180 days’ notice. The Distribution Agreement also contains minimum purchase requirements that expire upon the termination of the Distribution Agreement or following U.S. regulatory approval for PerClot. Separate and apart from the terms of the Distribution Agreement, pursuant to the License Agreement, as amended by a September 2, 2011 technology transfer agreement, we can manufacture and sell PerClot, assuming appropriate regulatory approvals, in the U.S. and certain other jurisdictions and may be required to pay royalties to SMI at certain rates on net revenues of products.
We may make contingent payments to SMI of up to $1.0 million if certain U.S. regulatory and certain commercial milestones are achieved.
We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. Enrollment was completed in January 2019. We anticipate being in a position to submit Premarket Approval (“PMA”) to the FDA in the fourth quarter of 2020.
As of September 30, 2020 we had $1.5 million in prepaid royalties, $1.8 million in intangible assets, net, and $1.2 million in property and equipment, net, on our Summary Consolidated Balance Sheets related to the PerClot product line. If we do not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets could be materially impaired in future periods.
12.13. Revenue Recognition
Sources of Revenue
We have identified the following revenues disaggregated by revenue source:
Domestic Hospitalshospitals – direct sales of products and preservation services.
International Hospitalshospitals – direct sales of products and preservation services.
International Distributorsdistributors – generally these contracts specify a geographic area that the distributor will service, terms and conditions of the relationship, and purchase targets for the next calendar year.
CardioGenesis Cardiac Laser Console Trialscardiac laser console trials and Salessales – CardioGenesis cardiac trialed laser consoles are delivered under separate agreements.
For the three and nine months ended September 30, 20202021 and 20192020 the sources of revenue were as follows (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Domestic hospitals | $ | 36,249 | $ | 36,627 | $ | 102,813 | $ | 108,582 | $ | 36,129 | $ | 36,249 | $ | 111,291 | $ | 102,813 | ||||||
International hospitals | 20,764 | 20,246 | 56,638 | 63,204 | 25,458 | 20,764 | 79,219 | 56,638 | ||||||||||||||
International distributors | 8,035 | 9,654 | 25,522 | 29,773 | 10,544 | 8,035 | 28,694 | 25,522 | ||||||||||||||
CardioGenesis cardiac laser therapy | 83 | 1,354 | 358 | 4,966 | 76 | 83 | 238 | 358 | ||||||||||||||
Total sources of revenue | $ | 65,131 | $ | 67,881 | $ | 185,331 | $ | 206,525 | $ | 72,207 | $ | 65,131 | $ | 219,442 | $ | 185,331 | ||||||
Also see segment disaggregation information in Note 1416 below.
Contract Balances
We may generate contract assets during the pre-delivery design and manufacturing stage of E-xtra DESIGN ENGINEERING product order fulfillment. We assess the balance related to any arrangements in process and determine if the enforceable right to payment creates a material contract asset requiring disclosure. No material arrangements in process existed as of September 30, 20202021 and 2019.2020.
We also incur contract obligations on general customer purchase orders that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product or service, we have determined that the balance related to these contract obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate. The value of orders accepted but unfulfilled as of September 30, 20202021 and 20192020 was not material.
13.14. Stock Compensation
Overview
We have stock option and stock incentive plans for employees and non-employee Directors that provide for grants of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock units (“PSUs”), and options to purchase shares of our common stock at exercise prices generally equal to the fair value of such stock at the dates of grant. We also maintain a shareholder-approved Employee Stock Purchase Plan (the “ESPP”(“ESPP”) for the benefit of our employees. The ESPP allows eligible employees to purchase common stock on a regular basis at the lower of 85% of the market price at the beginning or end of each offering period.
Equity Grants
During the nine months ended September 30, 20202021 the Compensation Committee of our Board of Directors (the “Committee”) authorized awards from approved stock incentive plans of RSUs to certain employees, RSAs to non-employee Directors, and RSAs and PSUs to certain Company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 494,000 shares and had an aggregate grant date market value of $12.5 million.
During the nine months ended September 30, 2020 the Committee authorized awards from approved stock incentive plans of RSUs to certain employees, RSAs to non-employee Directors, and RSAs and PSUs to certain Company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 330,000 shares and had an aggregate grant date market value of $8.2 million. TheIn February 2021, the Committee used structured discretion to determine that the 2020 PSUs grantedwere earned and should be paid out at 100% of target resulting in 2020 represent the right to receive from 60% to 150%a modification of the target numberaward which resulted in $1.2 million of shares of common stock. The performance component of PSU awards granted in 2020 is based on attaining specified levels of adjusted EBITDA, as defined in the PSU grant documents, for the 2020 calendar year.
Duringcompensation expense during the nine months ended September 30, 2019 the Committee authorized awards from approved stock incentive plans of RSUs2021 related to certain employees, RSAs to non-employee Directors, and RSAs and PSUs to certain Company officers, which, assuming thatthese performance under the PSUs were to be achieved at target levels, together totaled 503,000 shares and had an aggregate grant date market value of $14.9 million. NaN types of PSUs were granted in 2019, an annual grant with a one year performance period (“Annual PSU”) and a special Long-Term Incentive Program PSU grant (“LTIP”), which has multiple performance periods over a five year period. If the highest performance thresholds were met, the Annual PSU granted in 2019 represented the right to receive up to 150% of the target number of shares of common stock. The performance component of the Annual PSU awards granted in 2019 was based on attaining specified levels of adjusted earnings before interest, taxes, depreciation, and amortization, (“EBITDA”), as defined in the Annual PSU grant documents, for the 2019 calendar year. The annual PSU granted in 2019 earned approximately 83% of the target number of shares. If the highest performance thresholds were met, the PSUs granted in 2019 under the LTIP represent the right to receive up to 288%, and up to 192% for Mr. Mackin, of the target number of shares of common stock. The performance component of the LTIP awards granted in 2019 is based on attaining specified levels of adjusted revenue growth and gross margin, as defined in the LTIP grant document, for the years 2019 through 2023. The first performance period under the LTIP will not conclude until December 31, 2021.awards.
The Committee authorized, from approved stock incentive plans, grants of stock options to purchase a total of 212,000226,000 and 169,000212,000 shares to certain Company officers during the nine months ended September 30, 20202021 and 2019,2020, respectively. The exercise prices of the options were equal to the closing stock prices on their respective grant dates.
Employees purchased common stock totaling 84,000 shares51,000 and 61,00087,000 shares in the three and nine months ended September 31, 2021, respectively, as compared to 54,000 and 84,000 shares in the three and nine months ended September 30, 2020, and 2019, respectively, through the ESPP. There were 0 purchases of shares through the ESPP during the three months ended September 30, 2020 and 2019.
Stock Compensation Expense
The following weighted-average assumptions were used to determine the fair value of options and shares purchased under the ESPP:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||
September 30, 2020 | September 30, 2020 | September 30, 2021 | September 30, 2021 | |||||||||||||
Stock Options | ESPP | Stock Options | ESPP | Stock Options | ESPP | Stock Options | ESPP | |||||||||
Expected life | N/A | 0.5 Years | 5 Years | 0.5 Years | N/A | 0.5 Years | 5.0 Years | 0.5 Years | ||||||||
Expected stock price volatility | N/A | 0.83 | 0.35 | 0.31 | N/A | 0.44 | 0.40 | 0.46 | ||||||||
Risk-free interest rate | N/A | 0.17% | 1.41% | 1.57% | N/A | 0.05% | 0.57% | 0.09% | ||||||||
The following table summarizes total stock compensation expenses prior to the capitalization of amounts into deferredDeferred preservation and inventoryInventory costs (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
RSA, RSU, and PSU expense | $ | 1,984 | $ | 2,133 | $ | 6,189 | $ | 5,579 | $ | 2,465 | $ | 1,984 | $ | 6,211 | $ | 6,189 | ||||||
Stock option and ESPP expense | 534 | 487 | 1,699 | 1,460 | 525 | 534 | 1,684 | 1,699 | ||||||||||||||
Total stock compensation expense | $ | 2,518 | $ | 2,620 | $ | 7,888 | $ | 7,039 | $ | 2,990 | $ | 2,518 | $ | 7,895 | $ | 7,888 | ||||||
Included in the total stock compensation expense, as applicable in each period, were expenses related to RSAs, RSUs, PSUs, and stock options issued in each respective year, as well as those issued in prior periods that continue to vest during the period, and compensation related to the ESPP. These amounts were recorded as stock compensation expense and were subject to our normal allocation of expenses to inventory costs and deferred preservation costs. We capitalized $115,000 and $424,000 in the three and nine months ended September 30, 2021, respectively, and $160,000 and $456,000 in the three and nine months ended September 30, 2020, and $158,000 and $458,000 in the three and nine months ended September 30, 2019,respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.
As of September 30, 2020 we had total unrecognized compensation costs of $12.5 million related to RSAs, RSUs, and PSUs and $2.5 million related to unvested stock options. As of September 30, 2020 this expense is expected to be recognized over a weighted-average period of 1.9 years for PSUs, 1.8 years for stock options, 1.8 years for RSUs, and 1.2 years for RSAs.
The following table sets forth the computation of basic and diluted (loss) earningsloss per common share (in thousands, except per share data):
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
Basic (loss) income per common share | 2020 | 2019 | 2020 | 2019 | |||||||
Net (loss) income | $ | (2,870) | $ | (134) | $ | (13,224) | $ | 2,401 | |||
Net income (loss) allocated to participating securities | 20 | 1 | 93 | (17) | |||||||
Net (loss) income allocated to common shareholders | $ | (2,850) | $ | (133) | $ | (13,131) | $ | 2,384 | |||
Basic weighted-average common shares outstanding | 37,912 | 37,255 | 37,608 | 37,065 | |||||||
Basic (loss) income per common share | $ | (0.08) | $ | (0.00) | $ | (0.35) | $ | 0.06 | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
Diluted (loss) income per common share | 2020 | 2019 | 2020 | 2019 | |||||||
Net (loss) income | $ | (2,870) | $ | (134) | $ | (13,224) | $ | 2,401 | |||
Net income (loss) allocated to participating securities | 20 | 1 | 93 | (16) | |||||||
Net (loss) income allocated to common shareholders | $ | (2,850) | $ | (133) | $ | (13,131) | $ | 2,385 | |||
Basic weighted-average common shares outstanding | 37,912 | 37,255 | 37,608 | 37,065 | |||||||
Effect of dilutive stock options and awards | -- | -- | -- | 785 | |||||||
Diluted weighted-average common shares outstanding | 37,912 | 37,255 | 37,608 | 37,850 | |||||||
Diluted (loss) income per common share | $ | (0.08) | $ | (0.00) | $ | (0.35) | $ | 0.06 | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
Basic income (loss) per common share | 2021 | 2020 | 2021 | 2020 | |||||||
Net income (loss) | $ | 10,582 | $ | (2,870) | $ | 5,266 | $ | (13,224) | |||
Net (income) loss allocated to participating securities | (63) | 20 | (34) | 93 | |||||||
Net income (loss) allocated to common shareholders | $ | 10,519 | $ | (2,850) | $ | 5,232 | $ | (13,131) | |||
Basic weighted-average common shares outstanding | 39,086 | 37,912 | 38,924 | 37,608 | |||||||
Basic income (loss) per common share | $ | 0.27 | $ | (0.08) | $ | 0.13 | $ | (0.35) | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
Diluted income (loss) per common share | 2021 | 2020 | 2021 | 2020 | |||||||
Net income (loss) | $ | 10,582 | $ | (2,870) | $ | 5,266 | $ | (13,224) | |||
Net (income) loss allocated to participating securities | (55) | 20 | (34) | 93 | |||||||
Net loss attributable to convertible senior notes | 919 | -- | -- | -- | |||||||
Net income (loss) allocated to common shareholders | $ | 11,446 | $ | (2,850) | $ | 5,232 | $ | (13,131) | |||
Basic weighted-average common shares outstanding | 39,086 | 37,912 | 38,924 | 37,608 | |||||||
Effect of dilutive stock options and awards | 505 | -- | 572 | -- | |||||||
Effect of convertible senior notes | 4,862 | -- | -- | -- | |||||||
Diluted weighted-average common shares outstanding | 44,453 | 37,912 | 39,496 | 37,608 | |||||||
Diluted income (loss) per common share | $ | 0.26 | $ | (0.08) | $ | 0.13 | $ | (0.35) | |||
We excluded stock options from the calculation of diluted weighted-average common shares outstanding if the per share value, including the sum of (i) the exercise price of the options and (ii) the amount of the compensation cost attributed to future services and not yet recognized, was greater than the average market price of the shares because the inclusion of these stock options would be antidilutive to loss per common share. For the three and nine months ended September 30, 2021 539,000 and 517,000 of potential common shares relating to stock options, respectively, were antidilutive and excluded from the calculation of diluted weighted-average common shares outstanding. Accordingly, forFor the three and nine months ended September 30, 2020 all stock options and awards were excluded from the calculation of diluted weighted-average common shares outstanding as these would be antidilutive due to the net loss. For the three months ended September 30, 2019 all stock
options and awards were excluded from the calculation of diluted weighted-averagepotential common shares outstandingrelated to our Convertible Senior Notes calculated under the if-converted method, as these shares would be antidilutive due to the net loss. Forfor the nine months ended September 30, 2019 stock options to purchase a weighted-average of 123,000 shares were antidilutive and excluded from the calculation of diluted weighted-average common shares outstanding.2021.
We have 2 reportable segments organized according to our products and services: Medical Devicesdevices and Preservation Services.services. The Medical Devicesdevices segment includes external revenues from product sales of BioGlue,aortic stents and stent grafts, surgical sealants, On-X, and other product revenues. Aortic stents and stent grafts include JOTEC, (which includes AMDS, and NEXUS revenues), On-X, CardioGenesis cardiac laser therapy, PerClot, and PhotoFix.product revenues. Surgical sealants include BioGlue Surgical Adhesive product revenues. The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular tissues and NeoPatch.tissues. There are 0 intersegment revenues.
The primary measure of segment performance, as viewed by our management, is segment gross margin or net external revenues less cost of products and preservation services. We do not segregate assets by segment;segment, therefore, asset information is excluded from the segment disclosures below.
The following table summarizes revenues, cost of products and preservation services, and gross margins for our operating segments (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
Revenues: | ||||||||||||||||||||||
Medical devices | $ | 45,109 | $ | 47,484 | $ | 128,797 | $ | 147,053 | $ | 53,107 | $ | 45,109 | $ | 162,528 | $ | 128,797 | ||||||
Preservation services | 20,022 | 20,397 | 56,534 | 59,472 | 19,100 | 20,022 | 56,914 | 56,534 | ||||||||||||||
Total revenues | 65,131 | 67,881 | 185,331 | 206,525 | 72,207 | 65,131 | 219,442 | 185,331 | ||||||||||||||
Cost of products and preservation services: | ||||||||||||||||||||||
Medical devices | 12,998 | 12,706 | 36,078 | 41,021 | 15,503 | 12,998 | 46,592 | 36,078 | ||||||||||||||
Preservation services | 9,001 | 9,953 | 26,060 | 29,043 | 8,915 | 9,001 | 26,710 | 26,060 | ||||||||||||||
Total cost of products and preservation services | 21,999 | 22,659 | 62,138 | 70,064 | 24,418 | 21,999 | 73,302 | 62,138 | ||||||||||||||
Gross margin: | ||||||||||||||||||||||
Medical devices | 32,111 | 34,778 | 92,719 | 106,032 | 37,604 | 32,111 | 115,936 | 92,719 | ||||||||||||||
Preservation services | 11,021 | 10,444 | 30,474 | 30,429 | 10,185 | 11,021 | 30,204 | 30,474 | ||||||||||||||
Total gross margin | $ | 43,132 | $ | 45,222 | $ | 123,193 | $ | 136,461 | $ | 47,789 | $ | 43,132 | $ | 146,140 | $ | 123,193 | ||||||
The following table summarizes net revenues by product and service (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Products: | |||||||||||
BioGlue | $ | 15,811 | $ | 15,679 | $ | 44,985 | $ | 50,834 | |||
JOTEC | 15,290 | 15,774 | 43,932 | 48,936 | |||||||
On-X | 12,067 | 12,610 | 34,385 | 36,751 | |||||||
PhotoFix | 1,134 | 1,087 | 3,056 | 2,752 | |||||||
PerClot | 724 | 980 | 2,081 | 2,814 | |||||||
CardioGenesis cardiac laser therapy | 83 | 1,354 | 358 | 4,966 | |||||||
Total products | 45,109 | 47,484 | 128,797 | 147,053 | |||||||
Preservation services: | |||||||||||
Cardiac tissue | 10,679 | 11,304 | 28,758 | 30,734 | |||||||
Vascular tissue | 9,285 | 9,093 | 27,657 | 28,738 | |||||||
NeoPatch | 58 | -- | 119 | -- | |||||||
Total preservation services | 20,022 | 20,397 | 56,534 | 59,472 | |||||||
Total revenues | $ | 65,131 | $ | 67,881 | $ | 185,331 | $ | 206,525 | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Products: | |||||||||||
Aortic stents and stent grafts | $ | 20,896 | $ | 15,290 | $ | 62,165 | $ | 43,932 | |||
Surgical sealants | 16,544 | 15,811 | 52,236 | 44,985 | |||||||
On-X | 14,022 | 12,067 | 41,843 | 34,385 | |||||||
Other | 1,645 | 1,941 | 6,284 | 5,495 | |||||||
Total products | 53,107 | 45,109 | 162,528 | 128,797 | |||||||
Preservation services | 19,100 | 20,022 | 56,914 | 56,534 | |||||||
Total revenues | $ | 72,207 | $ | 65,131 | $ | 219,442 | $ | 185,331 | |||
Forward-Looking Statements
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements give our expectations or forecasts of future events as of the date of this Form 10-Q. In some cases, words such as “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,” “pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future,” “assume,” and variations of these types of words or other similar expressions identify forward-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date of this Form 10-Q.
All statements included herein, other than statements of historical facts, that address activities, events, or developments that we expect or anticipate will or may occur in the future, or that reflect our beliefs about the future and/or expectations, are forward-looking statements, including statements about the following:
Our belief that new products, new indications, global expansion, and business development are the four growth areas that will drive our business in the future;
Our expectations regarding theThe potential impactsimpact of the COVID-19 pandemic on product demand and our product sales, business operations, manufacturing operations, supply chain, cash flow, business development, employees,workforce, clinical and regulatory timelines, and our research and development projects, including clinical research projects;
Our belief that our distributors may delay or reduce purchases of products in U.S. Dollars depending on the relative price of goods in their local currencies;
Our beliefbeliefs that the use of surgical adhesives and sealants, with or without sutures and staples, in certain areas can enhance the efficacy of certain procedures through more effective and rapid wound closure;
Our beliefs and anticipation regarding the favorable attributes and benefits of our products, the basis on which our products compete, our physician education activities, the advantages of our relationships with organ and tissue procurement organizations and tissue banks, the FDA classification of our medical devices, our compliance with applicable laws and regulations, and the advantages of our intellectual property and its significance to our segments and our business as a whole, our relations with our employees, timelines regarding product launches and regulatory certifications, clearances, renewals, and approvals;
Our beliefs about potential competition and competitive products, potential adverse regulatory consequences, potential security vulnerabilities, and the associated potential adverse effects on our business;
Our beliefs about the impact of the contaminated saline solution and the tissue processed with contaminated saline solution we identified in the fourth quarter of 2020;
Our beliefs regarding our global expansion efforts, including the international growth opportunity that would be provided by obtaining regulatory approval for BioGlue in China;
Our beliefs about the unavailability of handpieces for cardiac laser therapy, the temporary nature of this unavailability, and a possible resolution of this unavailability during the first half of 2021;
OurThe dependencies affecting our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the agreements with Endospan and Baxter and our acquisition of Ascyrus, and our beliefs about the costs and expected timeline regardingtimelines for certain clinical trial milestones for the regulatory approvals of the AMDS globally and the NEXUS stent graft system in the U.S.; and the AMDS globally;
Our plans, costs,beliefs regarding the fair value of our business development activities and expected timeline regarding regulatory approval for PerClotthe estimates and assumptions about the future achievements of milestones and future revenues and cash flows related to those business development activities, including our ability to achieve the milestones in the U.S.Baxter Transaction;
Our beliefs about the present value and additional international marketspotential impairment of our intangible assets and leases;
Our beliefs about the distributiontiming for handpiece availability and CardioGenesis cardiac laser therapy revenue;
Our beliefs regarding the impact alternative anticoagulation therapy may have on the number of PerClot in those markets after the requisite regulatory approvals are obtained;patients choosing On-X mechanical heart valves;
Our belief that revenues for preservation services, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, staffing levels, timing of the release of tissues to an implantable status, demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing products or services;
Our beliefs regarding the seasonal nature of the demand for some of our products and services and the reasons for such seasonality, if any, and regarding the impact of consignment inventory on product sales, if any;
Our belief that our cash from operations and existing cash and cash equivalents, will enable us to meet our current operational liquidity needs for at least the next twelve months, our expectations regarding future cash requirements, and the impact that our cash requirements might have on our cash flows for the next twelve months;
Our expectation regarding the impact on cash flows of undertaking significant business development activities and the potential need to obtain additional borrowing capacitydebt financing or equity financing;
Our expectations regarding the possible benefits to us of the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” or similar legislation;
Our belief that we will incur expenses for research and development projects, including for clinical research projects to gain regulatory approvals for products or indications, including JOTEC, On-X, PerClot,aortic stents and stent grafts, and BioGlue products, and for research and development for new products despite reduced planned spending due to COVID-19;COVID-19 and that our efforts to develop new products and technologies will likely require additional investment, research, and new clinical studies or data;
Our beliefs about pending and potential legal or other governmental or regulatory proceedings;
Our expectations regarding the timing of clinical research work and regulatory approvals for and expected distribution of products or indications, including JOTEC, On-X, PerClot,aortic stents and stent grafts, and BioGlue products;products, and CryoValve SGPV if the FDA reclassifies allograft heart valves as Class III medical devices;
Our beliefs and expectations regarding the utilization of net operating loss carryforwards from our acquisitions of JOTEC, On-X, Hemosphere, Inc., and Cardiogenesis Corporation;
Our beliefs about our operating results which may fluctuate significantly on a periodic basis as a result of internal and external factors, including reduced demand for our products, availability of products, materials, and supplies, strategic actions we take such as acquisitions or divestitures, unanticipated costs and expenses, market reception of our new or improved product offerings, and interest rate and currency fluctuations; and
Other statements regarding projections of future financial and business performance; anticipated growth and trends in our business and the markets relevant to our business, including as our growth relates to our competitors; future production capacity and product supply; the availability and benefits of our products in the future; and the expected timing and impact of our strategic initiatives.
These and other forward-looking statements reflect the views of management at the time such statements are originally made based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends,
current conditions, and expected future developments as well as other factors we believe are appropriate in the circumstances and are subject to a number of risks, uncertainties, estimates, and assumptions. Whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially and adversely from our expectations, including, without limitation, in addition to those specified in the text surrounding such statements, the risks described in Part II, Item 1A, “Risks Factors” in this Form 10-Q and elsewhere throughout this report, the risks described in our other filings with the Securities and Exchange Commission including the risks described under in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20192020 and elsewhere throughout that report, and other risks which we may not be able to identify in advance, many of which are beyond our control. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We assume no obligation, and expressly disclaim any duty, to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I - FINANCIAL INFORMATION
CryoLife, Inc. (“CryoLife,” the “Company,” “we,” or “us”) is a leader in the manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac and vascular surgical procedures for patients with aortic disease. We have four major product families: aortic stents and stent grafts, surgical sealants, On-X® mechanical heart valves and related surgical products, and implantable human tissues. Aortic stents and stent grafts include JOTEC® stent grafts and surgical products (“JOTEC” products), the Ascyrus Medical Dissection Stent hybrid prosthesis (“AMDS”), and the NEXUSTM endovascular stent graft system (“NEXUS”). Surgical sealants include BioGlue® Surgical Adhesive products (“BioGlue”), JOTEC stent grafts and surgical products, On-X mechanical heart valves and surgical products, and implantable cardiac and vascular human tissues. products. In addition to these four major product families, we sell or distribute PhotoFixTM® bovine surgical patch,patches,
CardioGenesis® cardiac laser therapy products, and chorioamniotic allografts (previously marketed as NeoPatch®), and PerClot® hemostatic powder CardioGenesis cardiac laser therapy, and NeoPatch chorioamniotic(prior to the Baxter Transaction, described below). allograft.
We reported quarterly revenues of $65.1$72.2 million for the three months ended September 30, 2020, a 4% decrease2021, an 11% increase from the three months ended September 30, 2019. This2020. The increase in revenues for the three months ended September 30, 2021 was primarily due to decreasesincreases in revenues from CardioGenesis cardiac laser therapy, cardiac preservation service revenues,aortic stents and stent grafts, On-X, JOTEC and PerClotsurgical sealants product revenues, partially offset by increasesdecreases in vascularother product revenues and preservation services revenues, BioGlue and PhotoFix product revenues.
See the “Results of Operations” section below for additional analysis of the three and nine months ended September 30, 2020.2021.
On July 28, 2021 we entered into an asset purchase agreement and other ancillary agreements related to the sale of PerClot®, a polysaccharide hemostatic agent used in surgery (“PerClot”), to a subsidiary of Baxter International, Inc. (“Baxter”) and an agreement to terminate all of our material agreements with Starch Medical, Inc. (“SMI”) related to PerClot (collectively the “Baxter Transaction”). Under the terms of the Baxter Transaction, Baxter will pay an aggregate of up to $60.8 million in consideration (we will receive up to $45.8 million and SMI will receive up to $15.0 million), consisting of (i) $25.0 million at closing, of which $6.0 million was paid to SMI; (ii) up to $25.0 million upon our receipt of Premarket Approval (“PMA”) approval from the U.S. Food and Drug Administration (the “FDA”) for PerClot and our transfer of the PMA to Baxter, of which up to $6.0 million is payable to SMI, subject to certain reductions for delay in PMA approval; and (iii) up to $10.0 million upon Baxter’s achievement of certain cumulative worldwide net sales of PerClot prior to December 31, 2026 and December 31, 2027, of which up to $3.0 million is payable to SMI. In addition, at the conclusion of our manufacturing and supply services for Baxter, Baxter will pay $780,000 upon transfer of our PerClot manufacturing equipment. Under the terms of the Baxter Transaction, we will continue to provide to Baxter certain transition and manufacturing and supply services relating to the sale of SMI PerClot outside of the US and manufacture and supply of PerClot to Baxter post PMA approval.
In December 2019 an outbreak of a respiratory illness caused by a new coronavirus named “2019-nCoV” (“COVID-19”) was detected, and by March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a “pandemic.”
Because of the uncertainty created by the COVID-19 pandemic, as well asBeginning in March 2020 we took steps to address the potential social and economic impactsimpact of COVID-19 upon the marketson our employees and operations, and to preserve cash, including reducing expenditures and delaying investments. These steps included, but were not limited to, implementing specific protocols to minimize workplace exposures to COVID-19 by our employees; implementing remote work arrangements for most employees we deemed able to do so; restricting business travel; issuing $100.0 million in which we operateaggregate principal amount convertible senior notes (“Convertible Senior Notes”); using portions of those proceeds to repay our Revolving Credit Facility and the resulting impact on our resultsremainder for general corporate purposes (see the “Liquidity and Capital Resources” identified in Part I, Item 2 of operations and cash flows, we have reevaluated the needthis form 10-Q for and timingfurther detail of certain expenses and have taken pre-emptive steps to reduce spending. These steps have includedthis transaction); implementing hiring restrictions; reducing planned expenditures on some pending clinical trials; imposing senior management cash salary reductions in exchange for cash payments in the second quarter of 2021; requiring our Board of Directors to accept CryoLife stock instead of cash compensation for a six month period through October 2020; deferringand suspending for seven months 2020 management merit increases; reducing most discretionary spending; reducing capital expenditures; and reducing planned spending on certain research and development projects, including clinical research projects.increases.
We have implemented specific protocolsOur efforts to minimize workplace exposures toprotect our supply chain and reduce the spread of COVID-19 byamong our employees, including our work-from-home arrangements, were successful in 2020 and through the first three quarters of 2021 as we have been able to, and expect to, continuecontinued to operate all manufacturing sites at near full production to supply our customers.
We have implemented remote work arrangements for employees we deem able to do so and have restricted business travel, each since mid-March, and to date, these arrangementsproduction. These efforts have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, or disclosure controls and procedures.
As a precautionary measureprocedures; however, there is no guarantee that these efforts and arrangements, if they are continued, will continue to increase cashbe successful in the future. Further, our reductions or delays in expenditures slowed our progress on certain key R&D initiatives and maintain maximum financial flexibility duringcould in the current uncertainty in global markets resultingfuture continue to adversely impact our business operations or further delay our recovery from the COVID-19 pandemic, we borrowed the entire amount available under our $30.0 million revolving credit facility during the first quarter of 2020, which we subsequently repaid in the second quarter of 2020 from part of the proceeds of our $100.0 million aggregate principal amount convertible senior notes (“Convertible Senior Notes”). See the “Liquidity and Capital Resources” identified in Part I, Item 2 of this form 10-Q for further detail of this transaction.pandemic.
We are monitoringAlthough we have scaled back most of our COVID-19 mitigation efforts, we continue to monitor the impact of the COVID-19 pandemic on our business and recognize that it could continue to negatively impact our business and results of operations through at leastduring the fourth quarterremainder of 20202021 and potentially beyond. To date,As an example, the COVID-19 pandemic reportedly has impacted the global supply chain. Although we have experienced the most severeyet to experience any material effects of this impact of COVID-19 on our revenuessupply chain or
operations, we face an increasing risk that upstream disruptions may occur. As global economies have begun to emerge from the COVID-19 downturn, the expiration of COVID-related hiring freezes, increased opportunities for remote work, and increasing compensation pressure have resulted in Aprila war for talent and an unprecedent number of the second quarter of 2020 followed by some sequential recovery each month during the second quarter of 2020career changes. The resulting worker shortages at all levels have impacted supply chains and further recovery duringdistribution channels and employers’ and our own ability to adequately staff operations. Impact from these shortages in the third quarter, including a shortage of 2020.trained staff capable of meeting the increased demand associated with releasing quarantined tissue, have impacted and may impact our operations going forward. Increasing portions of our operations are being impacted by public and private vaccine mandates which can impact hospital staffing, impact our specialized workforce, and impact the global supply chain, all of which can directly or indirectly impact our product sales, business operations, manufacturing operations, workforce, and research and development projects. The extent to which our operations and employeesfinancial performance will be impacted by the pandemic induring the fourth quarterremainder of 2020 and beyond2021 will depend largely on future developments, including further increases in COVID-19 cases in key markets and the impact of COVID-19vaccine mandates on procedure volumes involving our products, including patients’ willingness to undergo procedures even when the numberspread of COVID-19, cases flattens outglobal availability and acceptance of vaccines, the prevalence of vaccine mandates generally, the emergence and prevalence of more virulent COVID-19 variants, disruptions to workforce availability, and any continuing impact on the global supply chain. If COVID-19 or decreases. These future developments remain uncertainits variants become more contagious, if efforts to further contain the effects of COVID-19 or its variants, including vaccine mandates or adoption, are unsuccessful, if COVID-19, its variants, or disruptions to the global supply chain impact our supply chain or employee availability or productivity, or if we continue to experience periods of uncertainty due to COVID-19 or its variants, it could materially, adversely affect our revenues, financial condition, profitability, and difficult to predict. New information is continually emerging regarding the severity of the pandemic and the various government, regulatory, expert, and recommended actions to contain it or address its impact.cash flows.
See the “Risk Factors” identified in Part II, Item 1A of this form 10-Q for risks related to COVID-19.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1 of the “Notes to Consolidated Financial Statements” contained in our Form 10-K for the year ended December 31, 2019. Management believes that the consistent application of these policies enables us to provide users of the financial statements with useful and reliable information about our operating results and financial condition. The summary consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and assumptions. We did not experience any significant changes during the three and nine months ended September 30, 2020 in any of our Critical Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2019.
See Note 1 of “Notes to SummaryCondensed Consolidated Financial Statements” identified in Part I, Item I of this form 10-Q for further discussion of new accounting standards that have been adopted.
(Tables in thousands)
Revenues
Percent | Revenues as a Percentage of | |||||||||
Revenues for the | Change | Total Revenues for the | ||||||||
Three Months Ended | From Prior | Three Months Ended | ||||||||
September 30, | Year | September 30, | ||||||||
2020 | 2019 | 2020 | 2019 | |||||||
Products: | ||||||||||
BioGlue | $ | 15,811 | $ | 15,679 | 1% | 24% | 23% | |||
JOTEC | 15,290 | 15,774 | -3% | 24% | 23% | |||||
On-X | 12,067 | 12,610 | -4% | 19% | 19% | |||||
PhotoFix | 1,134 | 1,087 | 4% | 2% | 2% | |||||
PerClot | 724 | 980 | -26% | 1% | 1% | |||||
CardioGenesis cardiac laser therapy | 83 | 1,354 | -94% | 0% | 2% | |||||
Total products | 45,109 | 47,484 | -5% | 70% | 70% | |||||
Preservation services: | ||||||||||
Cardiac tissue | 10,679 | 11,304 | -6% | 16% | 17% | |||||
Vascular tissue | 9,285 | 9,093 | 2% | 14% | 13% | |||||
NeoPatch | 58 | -- | 100% | 0% | 0% | |||||
Total preservation services | 20,022 | 20,397 | -2% | 30% | 30% | |||||
Total | $ | 65,131 | $ | 67,881 | -4% | 100% | 100% | |||
Percent | Revenues as a Percentage of | |||||||||
Revenues for the | Change | Total Revenues for the | ||||||||
Nine Months Ended | From Prior | Nine Months Ended | ||||||||
September 30, | Year | September 30, | ||||||||
2020 | 2019 | 2020 | 2019 | |||||||
Products: | ||||||||||
BioGlue | $ | 44,985 | $ | 50,834 | -12% | 24% | 25% | |||
JOTEC | 43,932 | 48,936 | -10% | 23% | 24% | |||||
On-X | 34,385 | 36,751 | -6% | 19% | 18% | |||||
PhotoFix | 3,056 | 2,752 | 11% | 2% | 1% | |||||
PerClot | 2,081 | 2,814 | -26% | 1% | 1% | |||||
CardioGenesis cardiac laser therapy | 358 | 4,966 | -93% | 0% | 2% | |||||
Total products | 128,797 | 147,053 | -12% | 69% | 71% | |||||
Preservation services: | ||||||||||
Cardiac tissue | 28,758 | 30,734 | -6% | 16% | 15% | |||||
Vascular tissue | 27,657 | 28,738 | -4% | 15% | 14% | |||||
NeoPatch | 119 | -- | 100% | 0% | 0% | |||||
Total preservation services | 56,534 | 59,472 | -5% | 31% | 29% | |||||
Total | $ | 185,331 | $ | 206,525 | -10% | 100% | 100% | |||
Percent | Revenues as a Percentage of | |||||||||
Revenues for the | Change | Total Revenues for the | ||||||||
Three Months Ended | From Prior | Three Months Ended | ||||||||
September 30, | Year | September 30, | ||||||||
2021 | 2020 | 2021 | 2020 | |||||||
Products: | ||||||||||
Aortic stents and stent grafts | $ | 20,896 | $ | 15,290 | 37% | 29% | 24% | |||
Surgical sealants | 16,544 | 15,811 | 5% | 23% | 24% | |||||
On-X | 14,022 | 12,067 | 16% | 19% | 19% | |||||
Other | 1,645 | 1,941 | -15% | 3% | 3% | |||||
Total products | 53,107 | 45,109 | 18% | 74% | 70% | |||||
Preservation services | 19,100 | 20,022 | -5% | 26% | 30% | |||||
Total | $ | 72,207 | $ | 65,131 | 11% | 100% | 100% | |||
Percent | Revenues as a Percentage of | |||||||||
Revenues for the | Change | Total Revenues for the | ||||||||
Nine Months Ended | From Prior | Nine Months Ended | ||||||||
September 30, | Year | September 30, | ||||||||
2021 | 2020 | 2021 | 2020 | |||||||
Products: | ||||||||||
Aortic stents and stent grafts | $ | 62,165 | $ | 43,932 | 42% | 28% | 23% | |||
Surgical sealants | 52,236 | 44,985 | 16% | 24% | 24% | |||||
On-X | 41,843 | 34,385 | 22% | 19% | 19% | |||||
Other | 6,284 | 5,495 | 14% | 3% | 3% | |||||
Total products | 162,528 | 128,797 | 26% | 74% | 69% | |||||
Preservation services | 56,914 | 56,534 | 1% | 26% | 31% | |||||
Total | $ | 219,442 | $ | 185,331 | 18% | 100% | 100% | |||
Revenues decreased 4%increased 11% and 10%18% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019.2020. The decreaseincrease in revenues for the three months ended September 30, 20202021 was primarily due to decreasesincreases in revenues from CardioGenesis cardiac laser therapy, cardiac preservation service revenues,aortic stents and stent grafts, On-X, JOTEC and PerClotsurgical sealants product revenues, partially offset by increasesdecreases in vascularother product revenues and preservation services revenues, BioGlue and PhotoFix product revenues. The decreaseincrease in revenues for the nine months ended September 30, 20202021 was primarily due to decreasesincreases in revenues from all products except PhotoFix, and from preservation services. Excluding the effects for foreign exchange, revenues decreased 4%increased 10% and 10%16% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019.2020. Revenues for the three and nine months ended September 30, 2021 and 2020 were negatively impacted in certain regions by delays or cancellations of some surgical procedures as a result of reduced hospital capacity and staffing and hospital restrictions due to the COVID-19 pandemic, as well as patient reluctance to undergo procedures oncepandemic. Additionally, reduced hospital staffing and restricted access resulting from COVID-19 have impacted the adverse impacts to capacity and restrictions decreased.adoption rates for newly acquired or newly released products. Revenue decreasesThe revenue impact from COVID-19 was smaller and varied regionally during 2020the three and nine months ended September 30, 2021 as compared to 2019 were largerthe three and nine months ended September 30, 2020 with the largest negative impact during the second quarter with smaller sequential decreases during the third quarter as procedure volumes increased throughout the third quarter.three months ended June 30, 2020. A detailed discussion of the changes in product revenues and preservation services revenues for the three and nine months ended September 30, 20202021 is presented below.
Products
Revenues from products decreased 5%increased 18% and 12%26% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019.2020. The decreaseincrease for the three months ended September 30, 20202021 was primarily due to decreases in revenues from CardioGenesis cardiac laser therapy product, On-X, JOTEC and PerClot products, partially offset by increases in revenues from BioGlueaortic stents and PhotoFix products.stent grafts, On-X, and surgical sealants product
revenues, partially offset by decreases in other product revenues. The decreaseincrease in revenues for the nine months ended September 30, 20202021 was due to decreasesincreases in revenues from all products except for PhotoFix.products. A detailed discussion of the changes in product revenues for BioGlue, JOTEC,aortic stents and stent grafts, surgical sealants, On-X, PhotoFix, PerClot, and CardioGenesis cardiac laser therapyother product revenues is presented below.
Sales of certain products through our direct sales force and distributors across Europe and various other countries are denominated in a variety of currencies including Euros, British Pounds, Polish Zlotys, Swiss Francs, Brazilian Reals, and Canadian Dollars, with a concentration denominated in Euros. Each currency is subject to exchange rate fluctuations. For the three and nine months ended September 30, 20202021 as compared to the three and nine months ended September 30, 2019,2020, the U.S. Dollar weakened in comparison to major currencies, resulting in revenue increases when these foreign currency denominated transactions were translated into U.S. Dollars. For the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, the U.S. Dollar strengthened in comparison to major currencies, excluding Euros, resulting in revenue decreases when these foreign currency denominated transactions were translated into U.S. Dollars. Future changes in these exchange rates could have a material, adverse effect on our revenues denominated in these currencies. Additionally, our sales to many distributors around the world are denominated in U.S. Dollars, and although these sales are not directly impacted by currency exchange rates, we believe that some of our distributors may delay or reduce purchases of products in U.S. Dollars depending on the relative price of these goods in their local currencies.
BioGlueAortic Stents and Stent Grafts
BioGlue is used as an adjunct to standard methods of achieving hemostasis (such as suturesAortic stents and staples) in adult patients in open surgical repair of large vessels (such as aorta, femoral,stent grafts, including JOTEC, AMDS, and carotid arteries).
Revenues from the sales of BioGlue increased 1% for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This increase was primarily due to a 5% increase in volume of milliliters sold, which increased revenues by 1%. Excluding the effects for foreign exchange, revenues increased 1% for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.
Revenues from the sales of BioGlue decreased 12% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This decrease was primarily due to an 11% decrease in volume of milliliters sold, which decreased revenues by 11%, and the effect of foreign exchange rates, which decreased revenues by 1%. Excluding the effects for foreign exchange, revenues decreased 11% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.
On a constant currency basis, revenues from sales of BioGlue increased in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily in Asia Pacific, partially offset by decreases in North America and Latin America. The increase in the Asia Pacific market was primarily due to distributor buying patterns. The decreases in North America and Latin America were primarily due to delays and cancellations of surgical procedures due to the COVID-19 pandemic.
On a constant currency basis, revenues from sales of BioGlue decreased in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 in North America and the European Economic Area, the Middle East, and Africa (collectively, “EMEA”) and to a lesser extent in Latin America, partially offset by an increase in the Asia Pacific market. These markets were impacted by a decrease in volume of milliliters sold in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily due to delays and cancellations of surgical procedures due to the COVID-19 pandemic.
We are currently seeking regulatory approval for BioGlue in China, and if this effort is successful, management believes this will provide an additional international growth opportunity for BioGlue in future years.
Domestic revenues from BioGlue accounted for 50% of total BioGlue revenues for the three and nine months ended September 30, 2020, and 53% and 51% of total BioGlue revenues for the three and nine months ended September 30, 2019, respectively.
JOTEC
The JOTECNEXUS products are used in endovascular and open vascular and cardiac surgery as well as for the treatment of complex aortic arch and thoracic aortic diseases. Our aortic stents and stent grafts are primarily distributed in international markets.
On September 11, 2019 CryoLife and its wholly-owned subsidiary JOTEC entered into exclusive distribution and loan agreements with Endospan Ltd. (“Endospan”), an Israeli corporation, under which JOTEC obtained exclusive distribution rights for Endospan’s NEXUS stent graft system (“NEXUS”)products and accessories in certain countries in Europe. NEXUS revenues are included as a component of JOTEC product revenues.
On September 2, 2020 CryoLife entered into an agreement to acquire all of the equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus has developed the Ascyrus Medical Dissection Stent,AMDS, an aortic arch remodeling device used for the treatment of acute Type A aortic dissections (“AMDS”).dissections. The AMDS is currently distributed in EMEAEurope, the Middle East, and Africa (collectively, “EMEA”), Canada, and the Asia Pacific region and is included as a component of JOTEC product revenues.aortic stents and stent grafts revenues from the date of the acquisition.
JOTECAortic stents and stent grafts revenues decreased 3%increased 37% and 10%42% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019.2020.
JOTECAortic stents and stent grafts revenues, excluding original equipment manufacturing (“OEM”), decreased 3%increased 38% for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019.2020. This decreaseincrease was primarily due to an increase in volume of units sold, which increased revenues by 38% and the effect of foreign exchange rates, which increased revenues by 3%, partially offset by a decrease in the average sales prices of certain products in certain regions, which decreased revenues by 3%.
JOTECAortic stents and stent grafts revenues, excluding OEM, decreased 10%increased 41% for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019.2020. This decreaseincrease was primarily due to a change in the mix of volumeunits sold, which decreasedincreased revenues by 5%38%, and the effect of foreign exchange rates, which increased revenues by 7%, partially offset by a decrease in average sales prices of certain products in certain regions, which decreased revenues by 4%.
On a constant currency basis, revenues for aortic stents and stent grafts, excluding OEM, increased 34% and 33% for the three and nine months ended September 30, 2021, respectively, as compared to the three and nine months ended September 30, 2020. The increase in revenues was partially due to improved conditions from the COVID-19 pandemic for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020. Revenues for the three and nine months ended September 30, 2021 increased primarily in EMEA. The revenue increase in EMEA is primarily due to an increase in sales of JOTEC new product launches, as well as sales of the AMDS as a result of the Ascyrus acquisition in the third quarter of 2020, and an increase in NEXUS sales as these products continue to penetrate the EMEA market. Aortic stents and stent grafts OEM sales accounted for less than 1% of product revenues for the three and nine months ended September 30, 2021 and 2020.
Surgical Sealants
Surgical sealants include BioGlue products used as an adjunct to standard methods of achieving hemostasis (such as sutures and staples) in adult patients in open surgical repair of large vessels (such as aorta, femoral, and carotid arteries).
Revenues from the sales of surgical sealants increased 5% for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. This increase was primarily due to an increase in volume of milliliters sold, which increased revenues by 3%, and the effect of foreign exchange rates, which increased revenues by 2%.
Revenues from the sales of surgical sealants increased 16% for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was primarily due to an increase of milliliters sold, which increased revenues by 15%, and the effect of foreign exchange rates, which increased revenues by 2%, partially offset by a decrease in average sales prices of certain products in certain regions, which decreased revenues by 2%1%.
On a constant currency basis, revenues for JOTEC, excluding OEM, decreased 4%from the sales of surgical sealants increased 3% and 7% in14% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019. Revenues2020. The increase in revenues for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020 decreasedwas primarily due to revenue increases in Latin America and Asia Pacific markets.North America, partially offset by decreases in EMEA. The decreaseincrease in Latin America was primarily in direct markets due to the delay in surgical procedures due to the COVID-19 pandemic. The decrease in Asia Pacific was primarily due to a decrease in certain distributor markets. Revenuesrevenues for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020 decreasedwas primarily due to increases in North America, EMEA and Latin America, primarilypartially offset by decreases in directAsia Pacific. The revenue increase in these markets was primarily due to the delay inan increase of surgical procedures due to improved conditions related to the COVID-19 pandemic offset by an increaseduring the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020. Revenue decreases for the three months ended September 30, 2021 in EMEA and for the nine months ended September 30, 2021 in Asia Pacific were primarily due to growthchanges in distributor buying patterns in those markets. JOTEC OEM sales
We are currently seeking regulatory approval for BioGlue in China, where the Chinese regulatory body has made additional requests, and expressed several concerns, related to the application. If we cannot satisfy the regulator’s requests and concerns and obtain approval by May 2022, the pending application will expire and no longer be eligible for allowance, requiring the Company to restart or decide to abandon the approval process.
See Part II, Item 1A, “Risk Factors—Operational Risks— We may not be successful in obtaining necessary clinical results or regulatory clearances/approvals for new and existing products and services, and our approved products and services may not achieve market acceptance.”
Domestic revenues from surgical sealants accounted for less than 1%48% and 52% of producttotal surgical sealant revenues for the three and nine months ended September 30, 2021, respectively, and 50% of total surgical sealant revenues for both the three and nine months ended September 30, 2020 and 2019.2020.
On-X
The On-X catalogue of products includes the On-X prosthetic aortic and mitral heart valves and the On-X ascending aortic prosthesis (“AAP”) for heart valve replacement. On-X product revenues also include revenues from the distribution of CarbonAid® CO2 diffusion catheters and from the sale of Chord-X® ePTFE sutures for mitral chordal replacement. On-X also generates revenue from pyrolytic carbon coating products produced for OEM customers.
On-X product revenues increased 16% and 22% for the three and nine months ended September 30, 2021, respectively, as compared to the three and nine months ended September 30, 2020.
On-X product revenues, excluding OEM, increased 17% for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. This increase was primarily due to an increase in volume of units sold, which increased revenues by 20%, and the effect of foreign exchange rates, which increased revenues by 1%, partially offset by a decrease in average sales prices, which decreased revenues by 4%.
On-X product revenues, excluding OEM, increased 23% for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was primarily due to an increase in volume of units sold, which increased revenues by 27%, and the effect of foreign exchange rates, which increased revenues by 1%, partially offset by a decrease in average sales prices, which decreased revenues by 5%.
On a constant currency basis, On-X revenues, excluding OEM, increased 16% and 22% for the three and nine months ended September 30, 2021, respectively, as compared to the three and nine months ended September 30, 2020. The increase in revenues for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020 was primarily due to revenue increases in North America, Asia Pacific, and EMEA. The revenue
On-X product revenues decreased 4% and 6%increases in these markets were partially due to improved conditions from the COVID-19 pandemic for the three and nine months ended September 30, 2020, respectively,2021, as compared to the three and nine months ended September 30, 2019.
On-X product revenues, excluding OEM, decreased 1% for2020. Revenues were also positively impacted in the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This decrease was primarilyNorth American market due to a decreaseincreases in volume of units sold, and the effect of foreign exchange rates, which collectively decreased revenues by 1%.
On-X product revenues, excluding OEM, decreased 6% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This decrease was primarilymarket share, in EMEA due to an 18% decreaseincrease of shipments in volume of units sold, which decreased revenues by 5%, and the effect of foreign exchange rates, which decreased revenues by 1%.
On a constant currency basis, On-X revenues, excluding OEM, decreased 1% and 5% in the three and nine months ended September 30, 2020, respectively, as compared to the three and nine months ended September 30, 2019. This decrease in the three months ended September 30, 2020 as compared to three months ended September 30, 2019 was primarily in EMEAdirect markets and in Asia Pacific due to delays and cancellations of surgical procedures due to the COVID-19 pandemic, partially offset by an increasegrowth in North America due to increases in market share. The decrease in the nine months ended September 30, 2020 as compared to nine months ended September 30, 2019 was primarily in EMEA and, to a lesser extent, in Asia Pacific due to delays and cancellations of surgical procedures due to the COVID-19 pandemic, partially offset by an increase in North America due to increases in market share.distributor markets. On-X OEM sales accounted for less than 1% of product revenues for botheach of the three and nine months ended September 30, 2021 and 2020.
Domestic revenues from On-X accounted for 61% and 62% of total On-X revenues for the three and nine months ended September 30, 2021, respectively, and 66% and 65% of On-X revenues for the three and nine months ended September 30, 2020, and 2019.respectively.
PhotoFixOther
Other revenues are comprised of PhotoFix, PerClot (prior to the Baxter Transaction), and CardioGenesis cardiac laser therapy product revenues. Other revenues increased 4%decreased 15% for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019. This increase2020. Other revenues increased 14% for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.
The decrease in revenues for the three months ended September 30, 2021 was primarily due to a 6%65% decrease in PerClot revenues partially offset by a 16% increase in PhotoFix revenues. The decrease in PerClot revenues is due to the Baxter Transaction described above. The increase in PhotoFix revenues was primarily due to an increase in volume of units sold, which increased revenues by 2%14%, a change in average sales prices, which increased revenues 1%, and the effect of foreign exchange rates, which increased revenues by 1%.
PhotoFix revenues increased 11% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This increase was primarily due to a 4% increase in units sold, which increased revenues by 6%, anand increase in average sales prices, which increased revenues 4%, and the effect of foreign exchange rates, which increased revenues by 1%.
The increase in units soldrevenues for the three and nine months ended September 30, 20202021 was primarily due to a 29% increase in PhotoFix revenues. The increase in PhotoFix revenues was primarily due to an increase in the number of physicians who implant the product compared to the three and nine months ended September 30, 2019 as this product continues to increase penetration in domestic and European markets.
PerClot
Revenues from the sale of PerClot decreased 26% for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The decrease in the three months ended September 30, 2020 was primarily due to a 22% decrease in the volume of gramsunits sold, which decreased revenues 18%, combined with a decrease in average sales prices, which decreasedincreased revenues by 9%27%, partially offset by the effect of foreign exchange rates, which increased revenues by 1%.
Revenues from, and the sale of PerClot decreased 26% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The decrease in the nine months ended September 30, 2020 was primarily due to a 26% decrease in the volume of grams sold, which decreased revenues 20%, combined with a changeincrease in average sales prices, which decreasedincreased revenues by 6%1%.
The decrease in volume for both the three and nine months ended September 30, 2020 was primarily due to a decrease in sales of PerClot in Asia Pacific and EMEA due to delays and cancellations of surgical procedures due to the COVID-19 pandemic and competitive pressures in certain regions.
We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. Enrollment was completed in January 2019, and we anticipate being in a position to submit the PMA to the FDA in the fourth quarter of 2020.
CardioGenesis Cardiac Laser Therapy
Revenues from our CardioGenesis cardiac laser therapy product line historically consisted primarily of sales of handpieces and, in certain periods, the sale of laser consoles. During the three and nine months ended September 30,31, 2021 and 2020 we had minimal revenues from the CardioGenesis cardiac laser therapy product line as we did not have a supply of handpieces ashandpieces. During this period our contract manufacturer of handpieces iswas unable to supply themhandpieces until the FDA approvesapproved our supplier’s change in manufacturing location, pending our supplier’s resolutionwhich was received in January of several observations the FDA raised during a2021, and resumed manufacturing site change inspection.of handpieces. We do not believe these observations relate to quality or safety. We will not have anyanticipate resuming limited sales of handpieces available to ship until our supplier resolves these issues with the FDA. We currently anticipate resumption of supply during the first halffourth quarter of 2021.
Revenues from cardiac laser therapy decreased 94% and 93% for the three and nine months ended September 30, 2020, respectively, as compared to the three and nine months ended September 30, 2019 as a result of this handpiece supply issue.
Preservation Services
Preservation services primarily include service revenues from the preservation ofprocessing cardiac and vascular tissues. Revenues from preservation services decreased 2% and 5% for the three and nine months ended September 30, 2020, respectively, as compared to the three and nine months ended September 30, 2019. Revenues decreased for the three months ended September 30, 2020 from a decrease of cardiac preservation service revenues, partially offset by an increase in revenues from vascular preservation services. Revenues decreased for the nine months ended September 30, 2020 from a decrease of cardiac and vascular preservation service revenues as compared to the nine months ended September 30, 2019. The detailed discussion of cardiac and vascular preservation services is presented below:
We continue to evaluate modifications to our tissue processing procedures in an effort to improve tissue processing throughput, reduce costs, and maintain quality across our tissue processing business. Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, timing of the release of tissues for implant, demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing products or services. See further discussion below of specific items affecting cardiac and vascular preservation services revenues for the three and nine months ended September 30, 2020.
Cardiac Preservation Services
Our cardiac valves are primarily used in cardiac replacement and reconstruction surgeries, including the Ross procedure, for patients with endocarditis or congenital heart defects. Our cardiac tissues are primarily distributed in domestic markets.
Revenues from cardiac preservation services, consisting of revenues from the distribution of heart valves and cardiac patch tissues, decreased 6% for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. This decrease during the three months ended September 30, 2020 was primarily due to a 7% decrease in unit shipments of cardiac tissues, which decreased revenues by 6%.
Revenues from cardiac preservation services, decreased 6% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This decrease during the nine months ended September 30, 2020 was primarily due to a 6% decrease of unit shipments of cardiac tissues, which decreased revenues by 6%.
The decrease in unit shipments for the three months ended September 30, 2020, was primarily due to a decrease in aortic and pulmonary valve shipments due to delays and cancellations of surgical procedures due to the COVID-19 pandemic. The decrease in unit shipments for nine months ended September 30, 2020, was primarily due to a decrease in pulmonary and aortic valve shipments due to delays and cancellations of surgical procedures due to the COVID-19 pandemic, partially offset by an increase in cardiac patch shipments.
Vascular Preservation Services
The majority of our vascular preservation services revenues are related to shipments of saphenous veins, which are mainly used in peripheral vascular reconstruction surgeries to avoid limb amputations. Competition with synthetic product alternatives and the availability of tissues for processing are key factors affecting revenue volume that can fluctuate from quarter to quarter. Our vascular tissues are primarily distributed in domestic markets.
We continue to evaluate modifications to our tissue processing procedures in an effort to improve tissue processing throughput, reduce costs, and maintain quality across our tissue processing business. Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to quarter and year to year due to a variety of factors, including quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, timing of the release of tissues for implant, demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing products or services.
In the fourth quarter of 2020 we became aware that a supplier shipped to us a saline solution lot that we use in our tissue processing that contained some contamination in a small number of bottles of the solution lot. The contamination was identified by our in-process quality controls. The contaminated solution was estimated to have impacted a small percentage of tissue processed with this solution lot, causing us to write-off approximately $826,000 of tissue in the fourth quarter of 2020. An additional $5.0 million of tissue was quarantined in process pending further testing. Upon completion, and FDA acceptance of the testing, we began releasing tissue meeting our release criteria late in the second quarter of 2021.We believe that the written-off and quarantined tissue impacted the availability of tissue for distribution, which had a negative impact on
revenue in the first quarter of 2021 and, to a lesser extent, the second quarter of 2021. However, our ability to release this quarantined and other tissue in the third quarter was negatively impacted by trained staffing availability.
Revenues from vascular preservation services increased 2%tissue processing decreased 5% for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019. This increase2020. Revenues from tissue processing increased 1% for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020.
The decrease in revenues for the three months ended September 30, 2021 was primarily due to a 5% decrease in both cardiac and vascular tissue revenues. The decrease in cardiac tissue revenues was primarily due to a decrease in cardiac tissue shipments due to the staffing impact on tissue release schedules, which decreased revenues 3%, and a decrease in average service fees, which decreased revenues by 2%. The decrease in vascular tissue revenues was primarily due to a decrease in vascular tissue shipments due to the staffing impact on tissue release schedules, which decreased revenues by 4%, and a decrease in average service fees, which decreased revenues by 1%. The decrease in cardiac volume for three months ended September 30, 2021 was primary due to a decrease in the volume of cardiac valve shipments due to the staffing impact on tissue release schedules. The decrease in vascular volume for the three months ended September 30, 2021 was primarily due to a decrease in saphenous vein shipments.
The increase in revenues for the nine months ended September 30, 2021 was primarily due to a 3% increase in vascular tissue revenues, partially offset by a 2% decrease in cardiac tissue revenues. The increase in vascular tissue revenues was primarily due to an increase in vascular tissue shipments, which increased revenues by 4%, partially offset by a decrease in average service fees, which decreased revenues by 2%1%.
Revenues from vascular preservation services decreased 4% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This decrease was due to a 4% The decrease in vascularcardiac tissue shipments, which decreased revenues by 2% andwas primarily due to a decrease in average service fees, which decreased revenues by 2%.
The increase in shipments
Cost of vascular tissues for the three months ended September 30, 2020 was due to increases in saphenous vein shipments, partially offset by a decrease in femoral artery shipments. The decrease in shipmentsProducts
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Cost of products | $ | 15,503 | $ | 12,998 | $ | 46,592 | $ | 36,078 | |||
Cost of vascular tissues for the nine months ended September 30, 2020 was due to a decrease in femoral arteryproducts increased 19% and femoral vein shipments, partially offset by an increase in saphenous vein shipments. The decrease in shipments29% for the three and nine months ended September 30, 2020 are due to delays and cancellations of surgical procedures due to the COVID-19 pandemic.
Cost of Products and Preservation Services
Cost of Products
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Cost of products | $ | 12,998 | $ | 12,706 | $ | 36,078 | $ | 41,021 | |||
Cost of products increased 2% for the three months ended September 30, 2020,2021, respectively, as compared to the three months ended September 30, 2019. Cost of products decreased 12% for theand nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.2020. Cost of products for the three and nine months ended September 30, 20202021 and 20192020 included costs related to JOTEC (including AMDSaortic stents and NEXUS),stent grafts, surgical sealants, On-X, BioGlue, PhotoFix, PerClot, and CardioGenesis cardiac laser therapyother products.
The increase in cost of products for the three and nine months ended September 30, 20202021 was primarily due to an increase in costs relatedshipments due to a changeimproved conditions from the COVID-19 pandemic, JOTEC product launches in late 2020, AMDS which was acquired in the mixthird quarter of 2020, and write-downs of certain products, sold, partially offset by a decrease in unit shipments duringas compared to the three and nine months ended September 30, 2020. The decrease in cost of products for the nine months ended September 30, 2020 was primarily due to a decrease in unit shipments.
Cost of Preservation Services
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Cost of preservation services | $ | 9,001 | $ | 9,953 | $ | 26,060 | $ | 29,043 | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Cost of preservation services | $ | 8,915 | $ | 9,001 | $ | 26,710 | $ | 26,060 | |||
Cost of preservation services decreased 10%1% for both the three andmonths ended September 30, 2021 as compared to the three months ended September 30, 2020. Cost of preservation services increased 2% for the nine months ended September 30, 2020,2021 as compared to the three and nine months ended September 30, 2019.2020. Cost of preservation services includes costs for cardiac and vascular tissue preservation services.
CostThe decrease in cost of preservation services decreasedfor the three months ended September 30, 2021 was primarily due to a decrease in shipments during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase in cost of preservation services for the nine months ended September 30, 2021 was primarily due to an
increase in shipments due to improved conditions from the COVID-19 pandemic as compared to the nine months ended September 30, 2020.
Gross Margin
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Gross margin | $ | 47,789 | $ | 43,132 | $ | 146,140 | $ | 123,193 | |||
Gross margin as a percentage of total revenues | 66% | 66% | 67% | 66% | |||||||
Gross margin increased 11% for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to favorable gross margins of newly launched JOTEC products and AMDS, partially offset by the write-down of certain products. Gross margin as a percentage of total revenues was flat for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Gross margin as a percentage of revenues was favorably impacted by the mix of products sold, offset by write-downs of certain products.
Gross margin increased 19% for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to favorable pricing of certain products and an increase in the volume of products sold. Gross margin as a percentage of total revenues increased for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily due to favorable gross margins of newly launched JOTEC products and AMDS, and mix of products sold, partially offset by write-downs of certain products.
General, Administrative, and Marketing Expenses
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
General, administrative, and marketing expenses | $ | 39,053 | $ | 33,743 | $ | 118,521 | $ | 105,033 | |||
General, administrative, and marketing expenses | 54% | 52% | 54% | 57% | |||||||
as a percentage of total revenues | |||||||||||
General, administrative, and marketing expenses increased 16% and 13% for the three and nine months ended September 30, 2021, respectively, as compared to the three and nine months ended September 30, 2020. The increase in General, administrative, and marketing expenses for the three and nine months ended September 30, 2021 was primarily due to an increase in personnel, commission, amortization, business development, integration, and severance expenses. General, administrative, and marketing expenses included $1.3 million and $6.1 million of business development, integration, and severance expenses for the three and nine months ended September 30, 2021, respectively, as compared to $1.1 million and $2.5 million for the three and nine months ended September 30, 2020, respectively. Business development, integration, and severance expenses during the three and nine months ended September 30, 2021 primarily consisted of charges related to the Ascyrus acquisition. Business development, integration, and severance expenses during the three and nine months ended September 30, 2020 primarily dueconsisted of expenses related to a reduction of unit costs and to a lesser degree, the cost of unit shipments of cardiac and vascular tissue.Endospan agreements.
Gross MarginResearch and Development Expenses
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Gross margin | $ | 43,132 | $ | 45,222 | $ | 123,193 | $ | 136,461 | |||
Gross margin as a percentage of total revenues | 66% | 67% | 66% | 66% | |||||||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Research and development expenses | $ | 9,972 | $ | 5,755 | $ | 26,086 | $ | 17,633 | |||
Research and development expenses | 14% | 9% | 12% | 10% | |||||||
as a percentage of total revenues | |||||||||||
Gross margin decreased 5%Research and 10%development expenses increased 73% and 48% for the three and nine months ended September 30, 2020,2021, respectively, as compared to the three and nine months ended September 30, 2019 due to an overall decrease in revenues from products2020. Research and preservation services and a corresponding overall decrease in costs of products and preservation services. Gross margin as a percentage of total revenues decreased in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily due to a change in the mix of products sold during the three months ended September 30, 2020.
Operating Expenses
General, Administrative, and Marketing Expenses
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
General, administrative, and marketing expenses | $ | 33,743 | $ | 34,259 | $ | 105,033 | $ | 105,402 | |||
General, administrative, and marketing expenses | 52% | 50% | 57% | 51% | |||||||
as a percentage of total revenues | |||||||||||
General, administrative, and marketing expenses decreased 2%development spending for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, and were flat for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The decreases in general, administrative, and marketing expenses for the three months ended September 30, 2020 were primarily due to decreased travel and marketing expenses from reduced and cancelled travel and events as well as reduced commissions due to the COVID-19 pandemic. General, administrative, and marketing expenses included $981,000 and $1.2 million of business development expenses as of the three and nine months ended September 30, 2020 as compared to $1.2 million and $2.6 million as of the three and nine months ended September 30, 2019. Business development expenses during three and nine months ended September 30, 2020 were primarily comprised of expenses related to the Ascyrus acquisition. Business development expenses during the three and nine months ended September 30, 2019 primarily consisted of expenses related to the Endospan agreements.
Research and Development Expenses
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Research and development expenses | $ | 5,755 | $ | 6,259 | $ | 17,633 | $ | 17,648 | |||
Research and development expenses | 9% | 9% | 10% | 9% | |||||||
as a percentage of total revenues | |||||||||||
Research and development expenses decreased 8% for the three months ended September 30, 2020, as compared to September 30, 2019 and were flat for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Research and development spending in the three and nine months ended September 30, 20202021 was primarily focused on clinical work to gain regulatory approvals for On-X, JOTEC, and JOTECPerClot products. Research and development spending infor the three and nine months ended September 30, 2019 w2020 aswas primarily focused on clinical work with respect to our pivotal clinical trial to gain regulatory approval for JOTEC products, and to a lesser extent, to gain regulatory approval for On-X products as well as approval to commercialize PerClot for surgical indications in the U.S.
During the second and third quarters of 2020 we reduced spending on research and development projects due to the COVID-19 pandemic. While we have reduced planned spending on research and development projects during 2020 due to the COVID-19 pandemic, we nonetheless expect to incur expenses during the remainder of the year for clinical research
projects to gain regulatory approvals for new products or indications, including JOTEC On-X, PerClot, and BioGlue products, and to incur expenses for research and development for new products.
Gain from sale of non-financial assets for the three and nine months ended September 30, 2021 consisted of the net $15.9 million gain from the sale of PerClot assets as part of the Baxter Transaction on July 28, 2021.
Interest expense was $4.1 million and $13.0 million for the three and nine months ended September 30, 2021, respectively, as compared to $4.9 million and $12.0 million for the three and nine months ended September 30, 2020, respectively, as compared to $3.6 million and $11.3 million for the three and nine months ended September 30, 2019, respectively. Interest expense for the three and nine months ended September 30, 20202021 and 20192020 relates to interest on debt and uncertain tax positions. Interest on debt includes $1.4
Other expense, net was $2.7 million and $2.3$3.3 million of non-cash interest related to the convertible and term loan debt for the three and nine months ended September 30, 2020, respectively. Interest on debt includes $407,000 and $1.2 million of non-cash interest related2021, respectively, as compared to the term loan debt for the three and nine months ended September 30, 2019, respectively.
Other Expense, Net
Other expense, net was $2.9 million and $5.8 million for the three and nine months ended September 30, 2020, respectively, as compared to otherrespectively. Other expense, of $2.4 million and $2.7 millionnet for the three and nine months ended September 30, 2019, respectively. 2021 and 2020 primarily includes the realized and unrealized effects of foreign currency gains and losses. Other expense, net includes $4.9 million in fair value adjustments of financial instruments for the three and nine months ended September 30, 2020 respectively. Other expense, net includes $2.1 million in realized and unrealized gains and $846,000 in realized and unrealized losses duefair value adjustments of foreign currency fluctuationsfinancial instruments.
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Income (loss) before income taxes | $ | 7,944 | $ | (4,181) | $ | 1,260 | $ | (17,082) | |||
Income tax benefit | (2,638) | (1,311) | (4,006) | (3,858) | |||||||
Net income (loss) | $ | 10,582 | $ | (2,870) | $ | 5,266 | $ | (13,224) | |||
Diluted income (loss) per common share | $ | 0.26 | $ | (0.08) | $ | 0.13 | $ | (0.35) | |||
Diluted weighted-average common shares outstanding | 44,453 | 37,912 | 39,496 | 37,608 | |||||||
We experienced income before income taxes for the three and nine months ended September 30, 2020, respectively. Other expense, net included $2.4 million and $2.7 million in realized and unrealized losses due to foreign currency fluctuations during the three and nine months ended September 30, 2019, respectively.
Earnings
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
(Loss) income before income taxes | $ | (4,181) | $ | (992) | $ | (17,082) | $ | 97 | |||
Income tax benefit | (1,311) | (858) | (3,858) | (2,304) | |||||||
Net (loss) income | $ | (2,870) | $ | (134) | $ | (13,224) | $ | 2,401 | |||
Diluted (loss) income per common share | $ | (0.08) | $ | (0.00) | $ | (0.35) | $ | 0.06 | |||
Diluted weighted-average common shares outstanding | 37,912 | 37,255 | 37,608 | 37,850 | |||||||
We experienced a loss before income taxes for the three months ended September 30, 2020 and three months ended September 30, 2019. We experienced a loss before income taxes for the nine months ended September 30, 20202021, as compared to income before income taxes for the nine months ended September 30, 2019. Thea loss before income taxes for the three and nine months ended September 30, 20202020. The income before income taxes for the three and nine months ended September 30, 2021 was primarily due to decreasesa gain from sale of non-financial assets related to the Baxter Transaction described above, partially offset by business development, integration and severance expenses primarily related to the Ascyrus acquisition, investments in revenues impacted bythe research and development pipeline, and delays and cancellations of some surgical procedures as a result of reduced hospital capacity and hospital restrictions due to the COVID-19 pandemic as well as the fixed nature of certain operating expenses.pandemic.
Our effective income tax rate was a benefit of 33% and 318% for the three and nine months ended September 30, 2021, respectively, as compared to a benefit of 31% and 23% for the three and nine months ended September 30, 2020, respectively, as compared to a benefit of 87% and 2,375% for the three and nine months ended September 30, 2019, respectively. The change in the tax rate for the three and nine months ended September 30, 20202021 is primarily due to a change changes
in pre-tax book loss, as well as a reduction in the excess tax benefit related to stock compensation, forand the three and nine months ended September 30, 2020,estimated current year valuation allowance, as compared to the three and nine months ended September 30, 2019.2020.
The income tax rate for the three and nine months ended September 30, 2020 and 20192021 was favorably impacted by excess tax benefit deductions related to stock compensation, the research and development tax credit, and lossesthe reduction of a valuation allowance on prior year items. The tax rate was unfavorably impacted by non-deductible operating expenses, executive compensation expenses, an increase in highthe valuation allowance on current year items, and the recording of a tax reserve on prior year items.
The income tax rate jurisdictions.for the three and nine months ended September 30, 2020 was favorably impacted by excess tax benefit deductions related to stock compensation and the research and development tax credit. These factors were partially offset by the unfavorable impacts of non-deductible operating expenses and executive compensation expenses.
In response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) on March 27, 2020. The CARES Act providesprovided various forms of relief and assistance to U.S. businesses. We recorded a reduction to income taxes payable and deferred tax assets of approximately $1.3 million for the anticipated change to the 2019 Section 163(j) interest expense deduction limitation. We will continue to monitor and assesslimitation for the impact the CARES Act and similar legislation in other countries may have on our business and financial results.three months ended March 2020.
We experienced a net loss and diluted loss per common share for three months ended September 30, 2020 as compared to a net loss for the three months ended September 30, 2019. We experienced net loss and diluted loss per common share for the nine months ended September 30, 2020 as compared to a net income and diluted income per common share for the three and nine months ended September 30, 2019. Net2021, as compared to a net loss and diluted loss per common share for the three and nine months ended September 30, 20202020. Net income and diluted income per common share for the three months and nine months ended September 30, 2021 was primarily due to an increase in lossincome before income taxes, as discussed above.
Seasonality
As result of the uncertainty and other impacts of the COVID-19 pandemic and the resulting shifts of timing in some revenue, our historically observable seasonality of revenues has been impacted or obscured in 2020 and 2021 and may be obscured for the remainder of 2021 and potentially beyond.
Historically, we believe the demand for JOTEC products is seasonal, with a decline in demand generally occurring in the third quarter due to the summer holiday season in Europe. We are uncertain whether the demand for AMDS and NEXUS products is seasonal, as these products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may not yet be obvious.
Historically, we believe the demand for BioGlue and On-X products is seasonal, with a decline in demand generally occurring in the third quarter followed by stronger demand in the fourth quarter. We believe that this trend may be due to the summer holiday season in Europe and the U.S. We believe the seasonality for On-X products may be obscured as the On-X products have not fully penetrated many markets.
We believe the demand for JOTEC products is seasonal, with a decline in demand generally occurring in the third quarter due to the summer holiday season in Europe. However, the nature of any seasonal trends may be obscured due to integration activities in 2018 and 2019 subsequent to the JOTEC Acquisition including the implementation of our distributor-to-direct strategy and our European sales force realignment.
We do not believe the demand for CardioGenesis cardiac laser therapy or PerClotour other products is seasonal.
We are uncertain whether the demand for PhotoFix, Endospan, and Ascyrus products is seasonal, as these products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may not yet be obvious.
Demand for our cardiac preservation services has traditionally been seasonal, with peak demand generally occurring in the third quarter. We believe this trend for cardiac preservation services is primarily due to the high number of surgeries scheduled during the summer months for school-aged patients. Based on experience in recent years, we believe that this trend is lessening as we are distributing a higher percentage of our tissues for use in adult populations.
Demand for our vascular preservation services ishas also traditionally been seasonal, with lowest demand generally occurring in the fourth quarter. We believe this trend for vascular preservation services is primarily due to fewer vascular surgeries being scheduled during the winter holiday months.
As a result of the uncertain impact of the COVID-19 pandemic and the resulting shifts of timing in some revenue, our historically observable seasonality of revenues may be obscured for the remainder of 2020 and potentially beyond.
Liquidity and Capital Resources
Net Working Capital
As of September 30, 20202021 net working capital (current assets of $233.7$257.3 million less current liabilities of $53.7$61.1 million) was $180.0$196.2 million, with a current ratio (current assets divided by current liabilities) of 4 to 1, compared to net working capital of $142.2$174.1 million and a current ratio of 4 to 1 at December 31, 2019.2020.
Overall Liquidity and Capital Resources
Our primary cash requirements for the nine months ended September 30, 20202021 were for the acquisition of Ascyrus as further described below, funding of the second tranche payment related to the Endospan Loan, general working capital needs, capital expenditures for facilities and equipment, interest and principal payments under our Credit Agreement defined below, and debt issuance costs(defined below), interest payments under our Convertible Senior Notes capital expenditures for facilities and equipment,(defined below), and repurchases of stock to cover tax withholdings. We funded our cash requirements through our existing cash reserves, and proceeds from stock option exercises.exercises, and the Baxter Transaction described above.
We believe our cash from operations and existing cash and cash equivalents will enable us to meet our current operational liquidity needs for at least the next twelve months. Our future cash requirements are expected to include interest and principal payments under our Credit Agreement and Convertible Senior Notes (described in “Significant Sources and Uses of Liquidity” section below), expenditures for clinical trials, research and development expenditures, general working capital needs, capital expenditures, and other corporate purposes and may include cash to fund business development activities including obligations in the Endospan and Ascyrus agreements. These items may have a significant effect on our future cash flows during the next twelve months. Subject to the terms of our Credit Agreement, we may seek additional borrowing capacity or financing, pursuant to our current or any future shelf registration statement, for general corporate purposes or to fund other future cash requirements. If we undertake any further significant business development activity, we may need to finance such activities by obtaining additional debt financing or using a registration statement to sell equities.equity securities. There can be no assurance that we will be able to obtain any additional debt or equity financing at the time needed or that such financing will be available on terms that are favorable or acceptable to us.
Significant Sources and Uses of Liquidity
In connection with the closing of the JOTEC Acquisition,On December 1, 2017 we entered into a credit and guaranty agreement for a $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility (the “Term Loan Facility”) and a $30.0 million secured revolving credit facility (“the Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Agreement”). We and each of our existing domestic subsidiaries (subject to certain exceptions and exclusions) guarantee the obligations under the Credit Agreement (the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all existing and after-acquired real and personal property (subject to certain exceptions and exclusions) of us and the Guarantors.
On December 1, 2017 CryoLife borrowedJune 2, 2021 we entered into an amendment to our Credit Agreement to extend the entire $225.0 millionmaturity dates of both the Company’s Term Loan and its Revolving Credit Facility. The proceedsAs part of the amendment, the maturity dates of both the Company’s Term Loan and its Revolving Credit Facility were each extended by two and one-half years, until June 1, 2027 and June 1, 2025, respectively, subject to earlier springing maturities if our 4.25% Convertible Senior Notes, described below, remain outstanding on April 1, 2025 and December 31, 2024, respectively. With respect to the Term Loan, Facility were used along with cashif the Convertible Senior Notes remain outstanding on hand and sharesApril 1, 2025, the Term Loan’s Maturity Date will be April 1, 2025, or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of CryoLife common stock to (i) fund the JOTEC Acquisition, (ii) pay certain fees and expenses related91 days prior to the JOTEC AcquisitionConvertible Senior Notes’ new maturity date and (ii) June 1, 2027. In the case of the Revolving Credit Agreement, and (iii) payFacility, if the Convertible Senior Notes are still outstanding balanceon December 31, 2024, the Revolving Credit Facility’s Maturity Date will be either December 31, 2024 or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of our(i) 182 days prior credit facility.
In October 2018 we finalized an amendment to the Credit Agreement to reprice interest rates, resulting in a reduction inConvertible Senior Notes’ new maturity date and (ii) June 1, 2025. Under the interest rate margins over base rates on the Term Loan Facility. The loan underamendment, the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.25%2.50%, or LIBOR, plus a margin of 3.25%3.50%. Prior to the repricing,amendment, the optional floating annual rate was equal to either the base rate plus a margin of 3.00%2.25%, or LIBOR, plus a margin of 4.00%3.25%. The loan under the Revolving Credit Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of between 3.00% and 3.25%, depending on our consolidated leverage ratio, or LIBOR, plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. While a payment or bankruptcy event of default exists, we are obligated to pay a per annum default rate of interest of 2.00% in excess of the interest rate otherwise payable with respect to the overdue principal amount of any loans outstanding and overdue interest payments and other overdue fees and amounts.
In March 2020 as a precautionary measure to increase cash and maintain maximum financial flexibility during the current uncertainty in global markets resulting from the COVID-19 pandemic, we borrowed the entire amount available under our $30.0 million Revolving Credit Facility at an aggregate interest rate of 5.20%. On June 29, 2020 we used some of the net proceeds from the issuance of Convertible Senior Notes to repay the $30.0 million outstanding under our Revolving Credit Facility.
On April 29, 2020 we entered into an amendment to our Credit Agreement. As part of the amendment we obtained a waiver of our maximum first lien net leverage ratio covenant through the end of 2020. In addition, the amendment to our Credit Agreement provides that EBITDA, for covenant testing purposes, in each quarter of 2020 will be deemed equal to a fixed value, equal to our bank covenant EBITDA in the fourth quarter of 2019, when our first lien net leverage was 3.4x. As a result of these changes, we are subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. We are required to maintain a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period. Beginning in 2021, if we repay borrowings under our Revolving Credit Facility to 25% or less, no financial maintenance covenants, including the minimum liquidity covenant and the maximum first lien net leverage ratio covenant, are applicable.
On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25% convertible senior notesConvertible Senior Notes with a maturity date of July 1, 2025 (“Convertible(the “Convertible Senior Notes”). The net proceeds from this offering, after deducting initial
purchasers’ discounts and costs directly related to this offering, were approximately $96.5 million. On January 1, 2021 we adopted ASU 2020-06 and adjusted the carrying balance of the Convertible Senior Notes to notional. The Convertible Senior Notes balance was $100.0 million recorded in Long-term debt on the Condensed Consolidated Balance Sheets as of September 30, 2021. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. Our current intent is to settle in cash the principal amount outstanding and any note conversion value over the principal amount with shares of our Common Stock. The initial conversion rate of the Convertible Senior Notes is 42.6203 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $23.46 per share, subject to adjustments. We use the treasury stockif-converted method for assumed conversion of the Convertible Senior Notes to computefor the weighted average shares of common stock outstanding for diluted earnings per share.
share calculation. The conversion featurefair value and the effective interest rate of the Convertible Senior Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $16.4 million in additional paid-in-capital during the nine months endedof September 30, 2020. 2021 was approximately $124.2 million and 5.05%, respectively. The fair value was based on market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.
The interest expense recognized on the Convertible Senior Notes includes approximately $2.0$1.2 million and $2.2$3.7 million for the aggregate of the contractual coupon interest, the accretion of the debt discount, and the amortization of the debt issuance costs as of the three and nine months ended September 30, 2020,2021, respectively. The interest on the Convertible Senior Notes includes the contractual coupon interest, accretion of the debt discount, and amortization of the debt issuance costs. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually.
Holders of the Convertible Senior Notes may convert their notes at their option at any time prior to January 1, 2025 but only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (iii) we give a notice of redemption with respect to any or all of the notes, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. On or after January 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem them on or after July 5, 2023, in whole or in part, at our option, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. We may redeem for cash all or part of the Convertible Senior Notes at a redemption price equal to 100% of the principal amount of the redeemable Convertible Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the Convertible Senior Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the Convertible Senior Notes do not contain any financial covenants and do not restrict us from conducting significant restructuring transactions or issuing or repurchasing any of its other securities. As of September 30, 2020, we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes. I We have used a portion of the proceeds to pay off the $30.0 million outstanding under our Revolving Credit Facility and finance the Ascyrus transaction and anticipate using the remaining funds for general corporate purposes.
On September 2, 2020, we entered into a Securities Purchase Agreement (the “Ascyrus Agreement”) to acquire 100% of the outstanding equity interests of Ascyrus. Ascyrus is the developer of AMDS, the world’s first aortic arch remodeling device for the use in the treatment of acute Type A aortic dissections.
Under the terms of the Ascyrus Agreement, we will pay an aggregate of up to $200.0 million in consideration, consisting of: (i) a cash payment of approximately $60.0 million and the issuance of $20.0 million in shares of CryoLife common stock, in each case, delivered at the closing of the acquisition, (ii) if the U.S. Food and Drug Administration (the “FDA”) approves an Investigational Device Exemption (“IDE”) application for the AMDS, a cash payment of $10.0 million and the issuance of $10.0 million in shares of CryoLife common stock, (iii) if the FDA approves a Premarket Approval (“PMA”) application submitted for the AMDS, a cash payment of $25.0 million, (iv) if regulatory approval of the AMDS is obtained in Japan on or before June 30, 2027, a cash payment of $10.0 million, (v) if regulatory approval of the AMDS is obtained in China on or before June 30, 2027, a cash payment of $10.0 million and (vi) a potential cash payment of up to $55.0 million (or up to $65.0 million to $75.0 million if the Japanese or Chinese approvals are not secured on or before June 30, 2027) calculated as
two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a Premarket Approval application submitted for the AMDS.Upon closing of the acquisition on September 2, 2020, we paid $83.7 million consisting of $63.7 million in cash consideration, and $20.0 million in shares of CryoLife common stock. The number of shares issued was based on a 10-day moving volume weighted average closing price of a share of CryoLife common stock as of the date immediately prior to closing, resulting in an issuance of 991,800 shares of CryoLife common stock.
While we have reduced spending on some research and development projects during 2020 due to the COVID-19 pandemic, we nonetheless expect to incur expenses during the remainder of 2020 for clinical research projects to gain regulatory approvals for new products or indications, including for JOTEC, On-X, PerClot, and BioGlue products, and to incur expenses for research and development for new products.
We believe utilization of net operating loss carryforwards from our acquisitions of JOTEC, On-X, Hemosphere, Inc., and Cardiogenesis Corporation will not have a material impact on income taxes for the 2020 tax year.
We expect to benefit from various aspects of the CARES Act including a decrease in the amount of interest expense limitation in 2019 and 2020 and the deferment of a portion of the 2020 employer’s portion of social security tax into 2021 and 2022.
As of September 30, 20202021 approximately 24%33% of our cash and cash equivalents were held in foreign jurisdictions.
Net Cash Flows from Operating Activities
Net cash provided byused in operating activities was $3.3 million for the nine months ended September 30, 2021, as compared to cash provided from operating activities of $6.9 million for the nine months ended September 30, 2020, as compared to $14.8 million for the nine months ended September 30, 2019.2020.
We use the indirect method to prepare our cash flow statement and, accordingly, the operating cash flows are based on our net (loss) income, which is then adjusted to remove non-cash items, items classified as investing and financing cash flows, and changes in operating assets and liabilities from the prior year end. For the nine months ended September 30, 20202021 these non-cash items included $14.8$18.0 million in depreciation and amortization expenses, $7.4$15.9 million of gain from sale of non-financial assets, $7.5 million in non-cash compensation, $5.3$5.6 million in non-cashof lease expense,expenses, and $4.9$8.1 million related to fair value adjustment of long-term loan.deferred income tax changes.
Our working capital needs, or changes in operating assets and liabilities, also affected cash from operations. For the nine months ended September 30, 20202021 these changes included the unfavorable adjustmentseffect of $19.7a $17.0 million due to an increase in inventory balances and deferred preservation costs, the unfavorable effect of a $8.0 million increase in receivables, and $2.6the unfavorable effect of a $2.3 milliondue to an increase in prepaid expenses and other assets, partially offset by $7.7 million due to the timing differences between recording receivables and the receipt of cash and favorable effect of $3.2 million due to timing differences between the recording of accounts payable and other current liabilities.assets.
Net Cash Flows from Investing Activities
Net cash provided by investing activities was $8.5 million for the nine months ended September 30, 2021. Net cash used inby investing activities was $70.8 million for the nine months ended September 30, 2020, as compared to $20.8 million for the nine months ended September 30, 2019.2020. During the nine months ended September 30, 20202021 cash flows used inprovided by investing activities included $59.6$19.0 million of payments related tonet proceeds from the Ascyrus acquisition, netsale of non-financial assets, partially offset by $10.5 million of cash acquired, $5.0 million in cash payments related to the Endospan agreements as described in the “Significant Sources of and Uses of Liquidity” section above, and of $5.2 millionused related to capital expenditures.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $3.4 million for the nine months ended September 30, 2021, as compared to cash provided by financing activities wasof $95.3 million for the nine months ended September 30, 2020, as compared to net cash used in financing activities of $836,000 for the nine months ended September 30, 2019.2020. The current year cash provided by financing activities was primarily due to the $100.0 million cash proceeds from the issuance of the Convertible Senior Notes partially offset by $3.6 million of debt issuance costs associated with these Convertible Senior Notes as described in the “Significant Sources and Uses of Liquidity” section above. During the nine months ended September 30, 2020, we borrowed and subsequently repaid $30.0 million from the Revolving Credit Facility, as described in the “Significant Sources and Uses of Liquidity” section above.
used in financing activities was primarily due to $2.4 million repayment of debt, $2.2 million payment of debt issuance costs, and $1.9 million for repurchases of common stock to cover tax withholdings, partially offset by $3.5 million of proceeds from exercise of stock options and issuances of common stock.
We have no off-balance sheet arrangements.
Scheduled contractual obligations and the related future payments as of September 30, 2020 were as follows (in thousands):
Remainder of | ||||||||||||||||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||
Long-term debt obligations | $ | 321,187 | $ | 701 | 2,803 | 2,803 | 2,803 | 211,858 | 100,219 | |||||||||||
Contingent payments | 129,194 | -- | 25,048 | 2,097 | 2,048 | -- | 100,001 | |||||||||||||
Interest payments on long-term debt | 59,411 | 2,370 | 13,601 | 13,412 | 13,306 | 12,460 | 4,262 | |||||||||||||
Research obligations | 24,158 | 3,282 | 8,733 | 7,495 | 4,196 | 452 | -- | |||||||||||||
Operating leases | 23,464 | 1,435 | 6,823 | 4,340 | 2,877 | 2,706 | 5,283 | |||||||||||||
Purchase commitments | 7,026 | 4,145 | 2,651 | 163 | 18 | 25 | 24 | |||||||||||||
Finance leases | 6,398 | 178 | 695 | 639 | 638 | 636 | 3,612 | |||||||||||||
Total contractual obligations | $ | 570,838 | $ | 12,111 | $ | 60,354 | $ | 30,949 | $ | 25,886 | $ | 228,137 | $ | 213,401 | ||||||
Our long-term debt obligations and interest payments above result frominclude $318.4 million of scheduled principal payments and $70.7 million in anticipated interest payments related to our Credit Agreement, Convertible Senior Notes, and JOTEC governmental loans.Long-term debt obligations include $100.0 million aggregate principal of Convertible Senior Notes with a maturity date of July 1, 2025, of which $78.7 million has been recorded as long-term debt as of September 30, 2020 on the “Summary Consolidated Balance Sheets” included in Part I, Item 1 of this form 10-Q.
TheWe have contingent payments obligation includespayment obligations that include up to $120.0 million to be paid to the former shareholders of Ascyrus, of which $10.0 million is expected to be paid in CryoLife common stock, upon the achievement of certain milestones described in the “Significant Sources of and Uses of Liquidity” section above.milestones. We anticipate making a $5.0 million third tranche payment under theour loan agreement with Endospan Loan upon receipt of certification that certain approvals and clinical trial milestones have been achieved. The contingent payments obligation also includes payments that we may make if certain U.S. regulatory approvals and certain commercial milestones are achieved related to our transaction with Starch Medical, Inc. (“SMI”) for PerClot and other licensed technologies.
Our research obligations represent commitments for ongoing studies and paymentsAs part of the Baxter Transaction, we may be required to support research and development activities.pay up to $9.0 million if certain milestones are met. See “Overview” identified in Part I, Item 2 of this Form 10-Q.
Our operating and finance lease obligations result from the lease of land and buildings that comprise our corporate headquarters and our various manufacturing facilities, leases related to additional manufacturing, office, and warehouse space, leases on Company vehicles, and leases on a variety of office equipment and other equipment. The operating and finance lease obligations in this schedule are based on actual payments which include both interest and lease liability.
Our purchase commitments include obligations from agreements with suppliers, one of which is the minimum purchase requirements for PerClot under a distribution agreement with SMI. Pursuant to the terms of the distribution agreement, we may terminate that agreement, including the minimum purchase requirements set forth in the agreement for various reasons, one of which is if we obtain FDA approval for PerClot. These minimum purchases are included in the table above through 2021, based on the assumption that we will not terminate the distribution agreement before receiving FDA approval for PerClot. However, if we do not obtain FDA approval for PerClot and/or we choose not to terminate the distribution agreement, we may have minimum purchase obligations of up to $1.8 million per year through the end of the contract term in 2025.
The schedule of contractual obligations above excludes (i) obligations for estimated liability claims unless they are due as a result of a settlement agreement or other contractual obligation, as no assessments have been made for specific litigation, and (ii) any estimated liability for uncertain tax positions and interest and penalties, currently estimated to be $4.5 million, as no specific assessments have been made by any taxing authorities.
Capital expenditures were $10.5 million and $5.2 million for both the nine months ended September 30, 20202021 and 2019,2020, respectively. Capital expenditures infor the nine months ended September 30, 20202021 were primarily related to leasehold improvements needed to support our business, routine purchases of manufacturing and tissues processing equipment, computer software, and computer software.equipment.
See the “Risk Factors” identified in Part II, Item 1A of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our interest income and interest expense are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash and cash equivalents of $64.1$64.6 million as of September 30, 20202021 and interest paid on the outstanding balances, if any, of our variable rate Revolving Credit Facility, Term Loan Facility, and Convertible Senior Notes. A 10% adverse change in interest rates, as compared to the rates experienced by us infor the nine months ended September 30, 2020,2021, affecting our cash and cash equivalents, restricted cash and securities, Term Loan Facility, Revolving Credit Facility, and Convertible Senior Notes would not have a material effect on our financial position, results of operations, or cash flows.
We have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency denominated balances are sensitive to changes in exchange rates. In this regard, changes in exchange rates could cause a change in the U.S. Dollar equivalent of cash or funds that we will receive in payment for assets or that we would have to pay to settle liabilities. As a result, we could be required to record these changes as gains or losses on foreign currency translation.
We have revenues and expenses that are denominated in foreign currencies. Specifically, a portion of our international BioGlue, On-X, PerClot, and JOTECaortic stents and stent grafts revenues are denominated in Euros, British Pounds, Swiss Francs,
Polish Zlotys, Canadian Dollars, and Brazilian Reals, and a portion of our general,General, administrative, and marketing expenses are denominated in Euros, British Pounds, Swiss Francs, Polish Zlotys, Canadian Dollars, Brazilian Reals, and Singapore Dollars. These foreign currency transactions are sensitive to changes in exchange rates. In this regard, changes in exchange rates could cause a change in the U.S. Dollar equivalent of net income from transactions conducted in other currencies. As a result, revenues and expenses could fluctuate related to a change in exchange rates.
An additional 10% adverse change in exchange rates from the exchange rates in effect on September 30, 2021 affecting our balances denominated in foreign currencies could impact our financial position or cash flows by approximately $8.0 million. An additional 10% adverse change in exchange rates from the weighted-average exchange rates experienced by us for the nine months ended September 30, 2021 affecting our revenue and expense transactions denominated in foreign currencies, would not have had a material impact on our financial position, profitability, or cash flows.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (“Disclosure Controls”) as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. These Disclosure Controls are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our President and CEO and our Executive Vice President of Finance, Chief Operating Officer, and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CryoLife have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Our Disclosure Controls have been designed to provide reasonable assurance of achieving their objectives.
Our management utilizes the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our Disclosure Controls over financial reporting. Based upon the most recent Disclosure Controls evaluation conducted by management with the participation of the CEO and CFO, as of September 30, 2020,2021, the CEO and CFO have concluded that our Disclosure Controls were effective at a reasonable assurance level to satisfy their objectives and to ensure that the information required to be disclosed by us in our periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
As disclosed above, on September 2, 2020 we entered into the Ascyrus AgreementChanges to acquire 100% of the outstanding equity interests of Ascyrus. We are currentlyDisclosure Controls and Procedures
There were no changes in the process of implementing CryoLife’sour internal control structure over these operations.financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - – OTHER INFORMATION
From time to time, we are involved in legal proceedings concerning matters arising from the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or whether there is a reasonable possibility that a loss or additional loss may have been incurred and to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.
Based on current knowledge, we do not believe that there are any pending matters that could potentially have a material adverse effect on our business, financial condition, results of operations, or cash flows. We are, however, engaged in various legal actions in the normal course of business. There can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, and an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.
Item 1A. Risk Factors.
Risks Relating Toto Our Business
Our business involves a variety of risks and uncertainties, known and unknown, including, among others, the risks discussed below. These risks should be carefully considered together with the other information provided in our Annual Report on Form 10-K and in our other filings with the SEC. Our failure to adequately anticipate or address these risks and uncertainties may have a material, adverse impact on our business, reputation, revenues, financial condition, profitability, and cash flows. Additional risks and uncertainties not presently known or knowable to us, or that we currently believe to be immaterial, may also adversely affect our business.
An outbreak of respiratory illness caused by a novel coronavirus named “2019-nCoV” ( “COVID -19”) has resulted in millions of infectionsDuring 2020 and continues to spread worldwide. On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a “pandemic.” In response,2021, businesses, communities, and governments worldwide have undertaken significant effortstaken, and continue to containtake, a wide range of actions to mitigate the spread and impact of COVID-19, and slow its spread, including various “shelter-in-place” and “stay-at-home” orders. In addition, hospitalsleading to an unprecedented impact on the global economy. Hospitals and other healthcare providers have hadadopted differing approaches to refocus their care onaddress the surge and resurgence of the COVID-19 cases, and have postponedincluding their impact on healthcare workers, such as postponing elective and non-emergent procedures, restrictedrestricting access to thesetheir facilities, and in some cases cancelledcancelling elective procedures, or re-allocatedre-allocating scarce resources to some critically ill patients. Although some areas have seen a decline in COVID-19 case numbers,cases, the potential for additional impact from new wavesvariants of COVID-19 and longer than anticipated timelines for widespread therapeutic and vaccine availability timelinesand acceptance remain. These effortsconditions have impacted and could continue to impact our business activities, including the following activities:including:
Our product sales. WeCertain regions have experienced an impact on revenues infor the three and nine months endingended September 30, 2020,2021, due to the COVID-19 pandemic. In addition to COVID-19’s impact on procedure volumes, including an impact on procedure volumes due in part to COVID-19-related healthcare staffing shortages, we have begun to observe additional downstream effects on our business, including restrictions on sales representative access in hospitals due to vaccine mandates and an increase in delays or difficulty in collecting certain outstanding receivables, particularly with certain governmental payors in regions heavily impacted by COVID-19. Although to date we experienced the most severe impact to our revenues in April of the second quarter 2020 followed by some sequential recovery in May and June and further recovery during the third quarter of 2020, theThe extent to which our revenuefinancial performance will be impacted by the pandemic in the fourth quarter of 20202021 and beyond will depend largely on future developments.developments, including global availability and acceptance of the vaccine, and the prevalence of public and private vaccine mandates. COVID-19’s continued or increased impact on our financial performance may also increase the risks we face with respect to managing our indebtedness.
Our business operations. We have takenIn 2020 we took several steps to address the impact of COVID-19 on our business operations. We have reevaluated the need for,employees, cash consumption, and timing of, certain expensesoperations, including reducing expenditures and have taken pre-emptive steps to reduce spending. These spendingdelaying investments. The reductions however, might not be adequate and delays we adopted could potentially adversely impact our business operations or delay our recovery afterfrom the effects of the pandemic subside. We also have implemented specific protocols to minimize exposure to COVID-19 among all of our employees, including those working at our three primary manufacturing facilities. In addition,pandemic. Although we have implemented remote work arrangements for employees we deem ablebegun to do soscale back many of these steps in most geographies, the COVID-19 virus and have significantly restricted business travelits variants remain highly contagious and our efforts to essential travel only. There can be no guarantee, however, that these arrangements will reducecontain the spread of COVID-19 and its variants among our employees, andincluding our key personnel, potentially adversely impactingand to protect our supply chain, may not succeed. COVID-19 also continues to impact our business operations, orpartners, including the various regulators and notified bodies that these arrangements will not create additionalwe rely on, which increases the regulatory risks such a cyber security, productivity, internal controls, or employee attrition risks. Although we have not experienced a significant supply chain interruptionface, and specifically, the risks we face with respect to date, such an interruption could occur. In addition, the availabilitytimely review and approval of tissuenew and renewal certifications, clearances, and approvals for processing could decrease as the pandemic persists.our products.
Our management of our indebtedness. As a precautionary measure to increase cash and maintain maximum financial flexibility during themanufacturing operations. The COVID-19 pandemic has continued to impact the global supply chain; the pandemic’s impact on workforces, global mobility, material availability, and demand has reportedly continued or worsened in many cases. Although we borrowed the entire amount available under our $30.0 million secured revolving credit facility (“the Revolving Credit Facility”), increasing the levelhave yet to experience any material effects of our indebtedness and our repayment obligations. Subsequently, we issued $100.0 million aggregate principal amount of 4.25% convertible senior notes with a maturity date of July 1, 2025 (“Convertible Senior Notes”). We used portions of those proceeds to repay the Revolving Credit Facility and finance the Ascyrus transaction and the remainder we anticipate continuing to use for general corporate purposes. We have also reevaluated the need for and timing of certain expenses and have taken pre-emptive steps to reduce spending. However, there can be no guarantee that these precautionary measures will provide us with all the liquidity we need going forward, particularly if the COVID-19 pandemic continues for an extended period of time, grows in severity or has impactsthis impact on our supply chain or operations, we face an increasing risk that we doupstream disruptions may occur. Risks relating to the lingering effects of global supply chain disruptions may even continue after COVID-19’s risk as a global pandemic has subsided.
Our workforce. As global economies have begun to emerge from the COVID-19 downturn, the expiration of COVID-related hiring freezes, increased opportunities for remote work, and increasing compensation pressure have resulted in a war for talent and an unprecedent number of career changes. The resulting worker shortages
at all levels have impacted supply chains and distribution channels and employers’ ability to adequately staff their operations. This has impacted not anticipate.only our own ability to attract and retain employees, but also the ability of our customers who face increasing staffing pressures throughout their healthcare organizations.
Our research and development projects. WeIn 2020 and year to date 2021 we have reduced spending on research and development projects, including clinical research projects. These reductions could adversely impact future revenue, and additional reductions in spending mightcould be required,implemented, further impacting future revenue. In addition, our ability to conduct our ongoing research and development projects in markets that are affected by COVID-19 has been, and could continue to be, adversely impacted. Enrollment and timelines for our clinical trials have been, and might continue to be, impacted as healthcare providers reprioritize resources, address staffing shortages, and limit access to healthcare facilities or as patients decline to participate or are hesitant to voluntarily visit healthcare facilities. In addition, COVID-19-related closures ofimpacts on government and regulatory agencies have slowed and might continue to slow the timelines for regulatory actions, including approvals.
If COVID-19 continuesor its variants continue to spread, if efforts to contain COVID-19 or its variants continue or are unsuccessful, if we experience new infections of COVID-19 in areas previously successful in containing its spread, if staffing shortages continue for us or our customers, if vaccine mandates become more prevalent, or if COVID-19, spreads among our employeesits variants, or impactsdisruptions to the global supply chain impact our supply chain or employee productivity, it could materially, adversely affect our revenues, financial condition, profitability, and cash flows. These futureThe nature and extent of these developments remainare highly uncertain and difficultunpredictable and may vary greatly by region. These adverse developments or a prolonged period of uncertainty could adversely affect our financial performance.
Our international operations subject us to a number of risks, which may intensifyvary significantly from the risks we face in our U.S. operations, including:
Greater difficulties and costs associated with staffing, establishing and maintaining internal controls, managing foreign operations and distributor relationships, and selling directly to customers;
Broader exposure to corruption and expanded compliance obligations, including under the Foreign Corrupt Practices Act, the U.K. Bribery Law, local anti-corruption laws, Office of Foreign Asset Control administered sanction programs, the European Union’s General Data Protection Regulation, and other emerging corruption and data privacy regulations;
Overlapping and potentially conflicting, or unexpected changes in, international legal and regulatory requirements or reimbursement policies and programs;
Longer and more expensive collection cycles in certain countries, particularly those in which our primary customers are government-funded hospitals;
Changes in currency exchange rates, particularly fluctuations in the Euro as compared to the U.S. Dollar;
Potential adverse tax consequences of overlapping tax structures; and
Potential adverse financial and regulatory consequences resulting from the exit of the U.K. from the European Union, or “Brexit.”
The market for our products and services is competitive and affected by new product introductions and activities of other industry participants. We face intense competition in virtually all of our product lines. A significant percentage of market revenues from competitive products are generated by Baxter International, Inc.; Ethicon (a Johnson & Johnson Company); Medtronic, Inc.; Abbott Laboratories; Edwards Lifesciences Corp.; Bard, a subsidiary of Becton, Dickinson and Company; Integra Life Sciences Holdings; LifeNet; Anteris Technologies, Inc.; Aziyo Biologics; Cook Medical; Gore & Associates; Terumo Aortic Corp.; LeMaitre Vascular, Inc.; Maquet, Inc.; Pfizer, Inc.; and BioCer Entwicklungs-GmbH. Several of our competitors enjoy competitive advantages over us, including:
Greater financial and other resources for research and development, commercialization, acquisitions, and litigation and to weather the impacts of COVID-19 and increased workforce competition;
Greater name recognition as well as more recognizable trademarks for products similar to products that we have already experienced. New information is continually emerging regarding the severitysell;
More established record of the pandemicobtaining and the various government,maintaining regulatory expert,product clearances or approvals;
More established relationships with healthcare providers and recommended actions to contain itpayors;
Lower cost of goods sold or address its impact.preservation costs; and
We may not realize all the anticipated benefits of the JOTEC Acquisition.Larger direct sales forces and more established distribution networks.
On December 1, 2017 we acquired JOTEC AG, a Swiss entity that we converted to JOTEC GmbH and subsequently merged with our Swiss acquisition entity, Jolly Buyer Acquisition GmbH (“JOTEC”), and its subsidiaries (the “JOTEC Acquisition”) for $169.1 million in cash and 2,682,754 shares of CryoLife common stock with a value of $53.1 million on the date of closing, for a total purchase price of approximately $222.2 million, including debt and cash acquired on the date of closing. We paid part of the cash portion of the purchase price using available cash on hand and financed the remainder of the cash portion of the purchase price and related expenses and refinanced our then existing approximately $69.0 million term loan, with a new $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility and a $30.0 million secured revolving credit facility.
Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of the JOTEC Acquisition depends on a number of factors including:
The continued growth of the global market for stent grafts used in endovascular and open repair of aortic disease;
Our ability to leverage our global infrastructure to sell JOTEC products, including in the markets in which JOTEC is already direct;
Our ability to foster cross-selling opportunities between the CryoLife and JOTEC product portfolios;
Our ability to bring JOTEC products to the U.S. market;
Our ability to harness the JOTEC new product pipeline and research and development capabilities to drive long-term growth, including our ability to obtain Conformité Européene Mark product certification (“CE Mark”) for pipeline products and obtain or maintain certification for pipeline and current products as the European Union adopted a new Medical Device Regulation (MDR 2017/745) (“MDR”) or as existing certifications may be deemed or may become out of date;
Our ability to drive gross margin expansion;
Our ability to compete effectively;
Our ability to carry, service, and manage significantly more debt and repayment obligations;
Our ability to manufacture and supply sufficient JOTEC products to meet market demand; and
Our ability to manage the unforeseen risks and uncertainties related to JOTEC’s business, including any related to intellectual property rights.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. These benefits may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the acquisition, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of the acquisition, we could experience an interruption or loss of momentum in our existing business activities, which could adversely affect our revenues, financial condition, profitability, and cash flows.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
Our current and future levels of indebtedness could:
Limit our ability to borrow money for our working capital, capital expenditures, development projects, strategic initiatives, or other purposes;
Require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;
Limit our flexibility in planning for, or reacting to, changes in our operations or business;
Make us more vulnerable to downturns in our business, the economy, or the industry in which we operate;
Restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities; and
Expose us to the risk of increased interest rates as most of our borrowings are at a variable rate of interest.
The agreements governing our indebtedness contain restrictions that limit our flexibility in operating our business.
The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us and certain of our subsidiaries, including (subject in each case to certain exceptions) restrictions or prohibitions on our and certain of our subsidiaries’ ability to, among other things:
Incur or guarantee additional debt;
Deviate from a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period;
Pay dividends on or make distributions in respect of our share capital, including repurchasing or redeeming capital stock or make other restricted payments, including restricted junior payments;
Enter into agreements that restrict our subsidiaries’ ability to pay dividends to us, repay debt owed to us or our subsidiaries, or make loans or advances to us or our other subsidiaries;
Comply with certain financial ratios set forth in the agreement;
Enter into any transaction or merger or consolidation, liquidation, winding-up, or dissolution; convey, sell, lease, exchange, transfer or otherwise dispose of all or any part of our business, assets or property; or sell, assign, or otherwise dispose of any capital stock of any subsidiary;
Create liens on certain assets;
Enter into certain transactions with our affiliates;
Enter into certain rate swap transactions, basis swaps, credit derivative transactions, and other similar transactions, whether relating to interest rates, commodities, investments, securities, currencies, or any other relevant measure, or transactions of any kind subject to any form of master purchase agreement governed by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement;
Amend, supplement, waive, or otherwise modify our organizational documents or the organizational documents of a subsidiary in a manner that would be materially adverse to the interests of the lenders, or change or amend the terms of documentation regarding junior financing in a manner that would be materially adverse to the interests of the lenders;
Change our, or permit a subsidiary to change its, fiscal year without notice to the administrative agent under the agreement;
Enter into agreements which restrict our ability to incur liens;
Engage in any line of business substantially different from that in which we are currently engaged; and
Make certain investments, including strategic acquisitions or joint ventures.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
We have pledged substantially all of our U.S. assets as collateral under our existing Credit Agreement. If we default on the terms of such credit agreements and the holders of our indebtedness accelerate the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness.
A failure to comply with the covenants contained in our existing Credit Agreement could result in an event of default under such agreements, which, if not cured or waived, could have a material, adverse effect on our business, financial condition, and profitability. In the event of any default under our existing debt agreement, the holders of our indebtedness:
Will not be required to lend any additional amounts to us;
Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or
Could require us to apply all of our available cash to repay such indebtedness.
If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against the collateral granted to them to secure that indebtedness. If the indebtedness under our existing debt agreements were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Our charges to earnings resulting from acquisition, restructuring, and integration costs may materially, adversely affect the market value of our common stock.
We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangible assets, amortizable intangible assets, and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required in purchase accounting including the following:
We will incur additional amortization expense over the estimated useful lives of some of the intangible assets acquired in connection with acquisitions during such estimated useful lives;
We will incur additional depreciation expense as a result of recording purchased tangible assets;
To the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets;
Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at its fair market value;
Earnings may be affected by changes in estimates of future contingent consideration to be paid when an earn-out is part of the consideration; or
Earnings may be affected by transaction and integration costs, which are expensed immediately.
Tissue preservation services are a significant source of our revenues, accounting for 26% and 30% of revenues infor the three months ended September 30, 2021 and 2020, respectively, and 2019. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows,as such, we face risks if we are unable to:
Source sufficient quantities of some tissue types from human donorstissue or address potential excess supply of other tissue types.others. We rely primarily upon the efforts of third-party procurement organizations, tissue banks (most of which are not-for-profit), and othersthird-parties to educate the public and foster a willingness to donate tissue. Factors beyond our control such as supply, regulatory changes, negative publicity concerning methods of tissue recovery or disease transmission from donated tissue, or public opinion of the donor process as well as our own reputation in the industry can negatively impact the supply of tissue;
Compete effectively, in tissue preservation services, as we may be unable to capitalize on our clinical advantageadvantages or our competitors may have advantages over us in terms of cost structure, pricing, back office automation, marketing, and sourcing tissue;sourcing; or
Mitigate sufficiently the risk that tissue can become contaminated during processing; that processed tissue cannot be sterilizedend-sterilized and hence carries an inherent risk of infection or disease transmission; there is no assurancetransmission or that our quality controls will be adequatecan eliminate that risk.
As an example of this risk, in the fourth quarter of 2020 we became aware that a supplier shipped to us a lot of saline solution that we use in our tissue processing that contained some contamination. The contamination was identified by our routine quality controls. While we were able to mitigate such risk.the impact of this contamination through our own efforts and additional testing that was reviewed with the FDA, the contaminated solution impacted a small percentage of the tissue processed with this lot of solution, requiring us to write-off approximately $826,000 in contaminated tissues in the fourth quarter of 2020. The written off and temporarily quarantined tissue impacted our ability to fully meet demand for certain tissues and sizes in the fourth quarter of 2020, the first quarter of 2021, and to a lesser extent the second quarter of 2021. Our inability to meet some demand for tissue in the third quarter resulted in part from a shortage of trained staff capable of meeting the increased demand for releasing this quarantined tissue. See also, Part I, Item 1A, “Risk Factors—Operational Risks— We are dependent on our specialized workforce.”
In addition, U.S. and foreign governments and regulatory agenciesgovernmental authorities have adopted restrictive laws and regulations and rules that apply to ourrestrict tissue preservation services. These include but are not limited to:
National Organ Transplant Act, which prohibits the acquisition or transfer of human organs for valuable consideration for use in human transplantation, but allows for the payment of reasonable expenses associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of human organs; and
U.S. Department of Labor, Occupational Safety and Health Administration, and U.S. Environmental Protection Agency requirements for prevention of occupational exposure to infectious agents and hazardous chemicals and protection of the environment.
Any of these laws regulations, and rules or othersregulations could change, including becoming more restrictive or our interpretation of them could be challenged by U.S., state, or foreign governments and regulatory agencies, or these governments and regulatory agencies could adopt more restrictive laws or regulations in the future regarding tissue preservation services that could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.governmental authorities.
We are significantly dependent on our revenues from BioGlue and are subject to a variety of risks affecting them.related risks.
BioGlue® Surgical Adhesive (“BioGlue”) is a significant source of our revenues, accounting for 24%23% and 23%24% of revenues infor the three months ended September 30, 2021 and 2020, respectively, and 2019, respectively. Theas such, any risk adversely affecting our BioGlue products or business would likely be material to our financial results. We face the following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:risks related to BioGlue:
Our ability to achieve anticipated BioGlue revenue in the U.S. and in international markets outside the U.S.;
BioGlue is a mature product, our U.S. Patent for BioGlue expired in mid-2012, and our patents in most of the rest of the world for BioGlue expired in mid-2013. Other companies may use the inventions disclosed in the expired patents to develop and make competing products;
Some companies have launched competitive products and others may pursue regulatory approval for competitive products in the future. These companies may have greater financial, technical, manufacturing, and marketing resources than we do and may be better established in their markets;
We may be unable to obtain regulatory approvals to commercialize BioGlue in certain countries other than the U.S. at the same rate as our competitors or at all. We also may not be able to capitalize on new regulatory approvals we obtain for BioGlue in countries other than the U.S., including approvals for new indications;
BioGlue contains a bovine blood protein. Animal-based products are subject to increased scrutiny from the public and regulators, who may have concerns about the use of animal-based products or concerns about the transmission of disease from animals to humans. These concerns could lead to additional regulations or product bans in certain countries;
Changes to components in the BioGlue product, including in the delivery system, require regulatory approval, which, if delayed, could cause prolonged disruptions to our ability to supply BioGlue; and
On June 13, 2019 our European Notified Body for BioGlue, Lloyd’s Register Quality Assurance Limited, which is headquartered in the U.K., informed us that it would no longer provide Notified Body services to companies in European Economic Area (“EEA”) effective September 2019. On July 5, 2019 the U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”) granted us a one-year grace period to transfer BioGlue (and PhotoFix) to a new Notified Body. Due to the Brexit transition period that currently is scheduled to end on December 31, 2020, and after which the MHRA will no longer be recognized as a competent authority in the European Union, we approached the governing German competent authority, the Regierungspraesidium-Tubingen (RP-T), to request an extension of the MHRA-granted grace period. On June 4, 2020, the RP-T provided a letter granting an additional one-year extension of the grace period, until September 30, 2021, provided that we meet certain conditions similar to those required by MHRA, including the demonstration of adequate progress in the CE Mark certification process with our new Notified Body. If we are delayed or unsuccessful in transferring to a new Notified Body for BioGlue (and PhotoFix) in the EEA, or if we are otherwise unable to timely meet applicable regulatory requirements, we may be unable to place BioGlue (or PhotoFix) on the market in the EEA until the situation is resolved.
We are significantly dependent on our revenues from JOTEC and are subject to a variety of risks affecting them.
JOTEC, inclusive of revenue from NEXUS and AMDS, is a significant source of our revenues, accounting for 24% and 23% of revenues in the three months ended September 30, 2020 and 2019, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:
Our ability to achieve anticipated JOTEC revenue in international markets outside the U.S.;
Our ability to meet demand for JOTEC products as we seek to expand our business globally;
Our ability to competeCompeting effectively with our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;
Our abilityWe may be unable to obtain approval to commercialize BioGlue in certain non U.S. countries as fast as our competitors do of their products or at all. We also may not be able to capitalize on new BioGlue approvals, including for new indications, in non U.S. countries;
BioGlue contains a bovine blood protein. Animal-based products are subject to increased scrutiny from the public and regulators, who may seek to impose additional regulations, regulatory hurdles or product bans in certain countries on such products; BioGlue is a mature product and other companies may use the inventions disclosed in expired BioGlue patents to develop and make competing products; and
BioGlue faces potential adverse regulatory consequences resulting from the exit of the U.K. from the European Union, or “Brexit.” See Part I, Item 1A, “Risk Factors—Industry Risks— Our products and tissues are highly regulated and subject to significant quality and regulatory risks.”
As an example of this risk, we recently experienced delayed regulatory processes with respect to our application for approval of BioGlue in China due, in part, to requests for additional information related to the fact that BioGlue contains a bovine blood protein.
Aortic stents and stent grafts is a significant source of our revenues, accounting for 29% and 24% of revenues for the three months ended September 30, 2021 and 2020, respectively, and as such, any risk adversely affecting aortic stents and stent grafts would likely be material to our financial results. We face the following aortic stents and stent grafts related risks based on our ability to:
Compete effectively with our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;
Develop innovative and in-demand products in the aortic surgery space;repair products;
Our abilityRespond adequately to contend with enhanced regulatory requirements and enforcement activities;activities, and particularly, our ability to obtain regulatory approvals and renewals globally;
Meet demand for aortic stents and stent grafts as we seek to expand our business globally; and
Our ability to maintainMaintain a productive working relationship with our Works Council in Germany.
On-X is a significant source of our revenues, accounting for 19% of revenues in bothfor the three months ended September 30, 2021 and 2020 and 2019. The following could materially,as such, any risk adversely affectaffecting our revenues,On-X products or business would likely be material to our financial condition, profitability, and cash flows:results. We face risks based on our ability to:
Our ability to achieve anticipated On-X revenue in the U.S. and in international markets outside the U.S.;
Our ability to capitalize on the FDA’s approved reduced International Normalized Ratio (“INR”) indication;
Our ability to competeCompete effectively with some of our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;
Our ability to manageTake market share in the risksmechanical heart valve market based on the FDA’s approved lower International Normalized Ratio (“INR”) indication or complete the associated with less favorable contract terms for On-X products on consignment at hospitals with more bargaining power;FDA mandated post-approval studies;
ClinicalAddress clinical trial data or changes in technology that may impactreduce the marketdemand for mechanical heart valves, such as transcatheter aortic valve replacement, or “TAVR” devices;
Enhanced regulatory enforcement activities or failure to receive renewed certifications that could cause interruption in our ability to sellManage risks associated with less favorable contract terms for On-X products in certain markets;on consignment at hospitals;
Respond adequately to enhanced OUS regulatory requirements or enforcement activities; and
Our ability to execute and complete the FDA mandated post-approval study to assess the occurrence of adverse events with the On-X Aortic Prosthetic Heart Valve when targeted at an INR level of 1.8 (1.5-2.0 range) during a 5-year follow-up.Receive timely renewal certifications in certain markets.
Our products and tissues are highly regulated and subject to significant quality and regulatory risks.
The manufacture and saleContinued fluctuation of medical devices and processing, preservation, and distribution of human tissues are highly complex and subjectforeign currencies relative to significant quality and regulatory risks in the U.S. and internationally. Any of the followingDollar could materially, adversely affect our revenues, financial condition, profitability, and cash flows:business.
Our products and tissues may be recalled or placed on hold by us, the FDA, or other regulatory bodies;
Our products and tissues allegedly have caused, and may in the future cause, injury to patients, which has exposed, and could in the future expose, us to product and tissue processing liability claims, and such claims could lead to additional regulatory scrutiny and inspections;
Our manufacturing and tissue processing operations are subject to regulatory scrutiny and inspections, including by the FDA and foreign regulatory agencies, and these agencies could require us to change or modify our manufacturing operations, processes, and procedures or take other adverse action. For example, in January 2013 we received a warning letter from the FDA related to the manufactureThe majority of our products and our processing, preservation, and distribution of human tissue, as well as a subsequent 2014 Form 483, after a FDA re-inspection related to the warning letter that included observations concerning design and process validations, environmental monitoring,foreign product controls and handling, corrective and preventive actions, and employee training. After an FDA re-inspectionrevenues are denominated in the first quarter of 2015, the FDA closed out the warning letter issued in 2013;
Regulatory agencies could reclassify, reevaluate, or suspend our clearances and approvals, or fail, or decline to timely issue, or reissue, our clearances and approvals, that are necessary to sell our products and distribute tissues;
Local and international regulatory and quality laws and standards are subject to change, which could adversely affect our clearances and approvals to sell our products and distribute tissues; and
Adverse publicity associated with our products or processed tissues or our industry could lead to a decreased use of our products or tissues, additional regulatory scrutiny, and/or product or tissue processing liability lawsuits.
Further, on May 25, 2017, the European Union adopted a new Medical Device Regulation (MDR 2017/745) (“MDR”). Although the MDR was originally scheduled to become effective on May 26, 2020, due to the COVID-19 pandemic, on April 23, 2020, the European Union enacted legislation postponing the full MDR implementation by one year until May 26, 2021. Upon implementation, among other changes, MDR will place more stringent requirements on manufacturers and European Notified Bodies regarding product classifications, pre- and post-market clinical studies, and other regulatory requirements for product clearances and approvals. These changes could result in product reclassifications and the imposition of other regulatory requirements that could delay, impede, or prevent our ability to commercialize existing, improved, or new products in the EEA. In addition, we or our Notified Bodies (or both) might be unable to timely meet the requirements of MDR. If either of the foregoing were to occur, it could materially, adversely affect our revenues, financial condition, profitability, and cash flows.
At the same time, European Notified Bodies have begun engaging in more rigorous regulatory enforcement activities and may continue to do so. For example, on November 22, 2016, our Notified Body for the On-X product line temporarily suspended the CE Mark for the On-X ascending aortic prosthesis (“AAP”), which has now returned to the market in the EEA. Further, in anticipation of MDR, Notified Bodies have declined to review routine submissions unless they are submitted in accordance with MDR, and they may continue to do so despite the postponement of MDR implementation. Our inability to timely adapt to these new requirements of our Notified Bodies could adversely impact our clearances and approvals, which could materially, adversely affect our revenues, financial condition, profitability, and cash flows.
We may not realize all the anticipated benefits of our agreements with Endospan.
On September 11, 2019, we entered into various agreements with Endospan, Ltd. (“Endospan”), an Israeli medical device manufacturer (the “Endospan Transaction”). The Endospan Transaction included an exclusive distribution agreement for NEXUS stent graft system (“NEXUS”) in certain countries in Europe for a fixed distribution fee of $9.0 million; a loan agreement (“Endospan Loan”) for a secured loan from CryoLife to Endospan in an amount up to $15.0 million, funded over three tranches of $5.0 million each upon the completion of certain milestones (the first and second tranche of which was paid in September 2019 and September 2020, respectively); and a security purchase option agreement providing CryoLife the option to purchase all the then outstanding securities of Endospan from Endospan’s existing securityholders for a price between $350.0 million and $450.0 million before or upon FDA approval of NEXUS, for which option CryoLife paid to Endospan $1.0 million.
Our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the Endospan Transaction depends on a number of factors including:
The continued growth of the global market for stent grafts used in endovascular repair of aortic disease;
Our ability to introduce and drive adoption of NEXUS in the European market, including our ability to manage the substantial requirements for product training, implant support, and proctoring for NEXUS procedures;
Our ability to foster cross-selling opportunities between JOTEC product portfolio and NEXUS;
Our ability to leverage our global infrastructure to sell NEXUS, including in the markets in which JOTEC is already direct;
Our ability to address unforeseen risks, uncertainties and opportunities given our obligations to Endospan;
Endospan’s ability to comply with the Endospan Loan, as well as other debt obligations, and avoid an event of default;
Endospan’s ability to successfully commercialize NEXUS in markets outside of Europe;
Endospan’s ability to meet demand for NEXUS;
Endospan’s ability to meet quality and regulatory requirements;
Endospan’s ability to manage any intellectual property risks and uncertainties associated with NEXUS;
Endospan’s ability to obtain FDA approval of NEXUS; and
Our ability to manage the unforeseen risks and uncertainties related to NEXUS.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. These benefits may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share and negatively impact the price of our common stock.
We may not realize all the anticipated benefits of the Ascyrus acquisition.
On September 2, 2020, we entered into a Securities Purchase Agreement (the “Ascyrus Agreement”) to acquire 100% of the outstanding equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus is the developer of the Ascyrus Medical Dissection Stent (“AMDS”), the world’s first aortic arch remodeling device for use in the treatment of acute Type A aortic dissections.
Under the terms of the Ascyrus Agreement, we will pay an aggregate of up to $200.0 million in consideration, consisting of: (i) a cash payment of approximately $60.0 million and the issuance of $20.0 million in shares of CryoLife common stock, in each case, delivered at the closing of the acquisition, (ii) if the FDA approves an Investigational Device Exemption (“IDE”) application for the AMDS, a cash payment of $10.0 million and the issuance of $10.0 million in shares of CryoLife common stock, (iii) if the FDA approves a Premarket Approval (“PMA”) application submitted for the AMDS, a cash payment of $25.0 million, (iv) if regulatory approval of the AMDS is obtained in Japan on or before June 30, 2027, a cash payment of $10.0 million, (v) if regulatory approval of the AMDS is obtained in China on or before June 30, 2027, a cash payment of $10.0 million, and (vi) a potential cash payment of up to $55.0 million (or up to $65.0 million to $75.0 million if the Japanese or Chinese approvals are not secured on or before June 30, 2027) calculated as two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a Premarket Approval application submitted for the AMDS.
Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of the acquisition of Ascyrus depends on a number of factors including:
Our ability to leverage our global infrastructure to sell the AMDS, including in its existing markets and expansion into new markets accessible with the AMDS’s existing CE Mark but not yet served;
Our ability to foster cross-selling opportunities between the AMDS and the JOTEC product portfolio;
Our ability to obtain regulatory approval for the AMDS in the U.S. and other markets;
Our ability to execute on the existing development and clinical trial timelines for the AMDS;
Our ability to meet demand for the AMDS; and
Our ability to manage the unforeseen risks and uncertainties related to Ascyrus’s business, including any related to intellectual property rights.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. These benefits may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the acquisition, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of the acquisition, we could experience an interruption or loss of momentum in our existing business activities, which could adversely affect our revenues, financial condition, profitability, and cash flows.
Some of our products and technologies are subject to significant intellectual property risks and uncertainty.
We own patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. In addition, we have certain proprietary technologies and methods that we believe provide us with important competitive advantages. We cannot be certain that our pending patent applications will issue as patents or that no one will challenge the validity or enforceability of any patent that we own or license. Furthermore, competitors may independently develop similar technologies either before or after our patents expire, or duplicate our technologies, or design around the patented aspects of such technologies.
Our technologies, products, or services could infringe patents or other rights owned by others, or others could infringe our patents. If we become involved in a patent dispute, the costs of the dispute could be expensive, and if we were to lose or decide to settle the dispute, the amounts or effects of the settlement or award by a tribunal could be costly.
We also have obtained licenses from third parties for certain patents and patent application rights. These licenses allow us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement, or strategy for many of these patents or patent application rightsEuros and, as such, are dependentsensitive to changes in part on the ownersexchange rates. In addition, a portion of the intellectual property rightsour dollar-denominated and euro-denominated product sales are made to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies.
Our investment in PerClot is subject to significant risks, including our ability to fully realize our investment by obtaining FDA approval and to successfully commercialize PerClot in the U.S. either directly or indirectly.
In 2010 and 2011, we entered into various agreements with SMI pursuant to which, among other things, we (i) may distribute PerClotin certain international markets and are licensed to manufacture PerClot in the U.S.; (ii) acquired some technology to assist in the production of a potentially key component in PerClot; and (iii) obtained the exclusive right to pursue, obtain, and maintain FDA Pre-Market Approval (“PMA”) for PerClot. We are currently conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S., and we completed enrollment in January 2019. We anticipate being in a position to submit to the FDA during the fourth quarter of 2020. There is no guarantee, however, that we will obtain FDA approval when anticipated or at all. The estimated timing of regulatory approval for PerClot is based on factors beyond our control, including but not limited to, unforeseen scheduling difficulties and unfavorable results at various stages in the PMA application process. We may also decide to delay or terminate our pursuit of U.S. regulatory approval for PerClot at any time due to changing conditions at CryoLife, in the marketplace, or in the economy in general.
Further, even if we receive FDA PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. By the time we secure approvals, competitors may have substantial market share or significant market protections due to contracts, among other things. We may also be unsuccessful in selling in countries other than the U.S. due, in part, to a proliferationcustomers in other countries who must convert local currencies into U.S. Dollars or Euros in order to purchase these products. We also have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of multiple generic competitors, any breach by SMI of its contractual obligations,Euros or other local currencies in relation to the lack of adequate
intellectual property protection or enforcement. Any of these occurrencesU.S. Dollar could materially adversely affectreduce our future revenues financial condition, profitability, and cash flows.
Reclassification by the FDA of CryoValve® SG pulmonary heart valve (“CryoValve SGPV”) may make it commercially infeasible to continue processing the CryoValve SGPV.
In October 2014 the FDA convened an advisory committee meeting to consider the FDA’s recommendation to re-classify more than minimally manipulated (“MMM”) allograft heart valves from an unclassified medical device to a Class III medical device. The class of allograft heart valves potentially covered by this recommendation includes our CryoValve SGPV. At the meeting, a majority of the advisory committee panel recommendedas compared to the FDA that MMM allograft heart valves be re-classified as a Class III product. In December 2019, we learned that the FDA is preparing to issue a proposed rule for reclassification of MMM allograft heart valves as Class III medical devices, which would be subject to a comment period before publication of a final rule. Upon publication of a final rule, should the CryoValve SGPV be determined to be MMM, we expect to have approximately thirty months to submit a PMA application, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers during review of the PMA application. To date, the FDA has not issued a final rule for reclassification of MMM allograft heart valves.
We have continued to process and ship our CryoValve SGPV tissues. If the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, and if there are delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant,comparable prior periods. Should this could materially, adversely affect our revenues, financial condition, profitability, and/or cash flows in future periods. In addition, we could decide that the requirements for obtaining a PMA make continued processing of the CryoValve SGPV too onerous, leading us to discontinue distribution of these tissues.
Our key growth areas may not generate anticipated benefits.
Our strategic plan is focused on four growth areas, primarily in the cardiac and vascular surgery segment, which are expected to drive our business in the near term. These growth areas and their key elements are described below:
New Products – Drive growth through product development and commercialization of new and next-generation products and services focused on aortic repair;
New Indications – Drive growth through new regulatory approvals and expanded indications for our existing products and services to increase the size of our addressable U.S. or international markets;
Global Expansion – Drive growth by entering new international markets, establishing new international direct sales territories, and developing our commercial infrastructure in new markets, including emerging markets, China and Brazil; and
Business Development – Drive growth by selectively pursuing acquisitions, licensing, and distribution opportunities that are aligned to our objectives and complement our existing products, services, and infrastructure. Examples include our acquisitions of JOTEC, On-X, and Ascyrus, and our distribution agreement and purchase option for NEXUS. To the extent that we identify, develop, or acquire non-core products or applications, we may dispose of these assets or pursue licensing or distribution agreements with third-party partners for development or commercialization.
Although we continue to implement these strategies, we cannot be certain that they will ultimately drive business expansion and enhance shareholder value.
We may not be successful in obtaining necessary clinical results and regulatory approvals for products and services in development, and our new products and services may not achieve market acceptance.
Our growth and profitability will depend, in part, upon our ability to complete development of, and successfully introduce, new products and services, or expand upon existing indications, which requires that we invest significant time and resources to obtain required regulatory approvals, including significant investment of time and resources into clinical trials and post-market clinical studies. Although we believe certain products and services under development may be effective in a particular application, we cannot be certain until we successfully execute on a clinical trial, and the results we obtain may be insufficient for us to obtain any required regulatory approvals or clearances. In addition, we must complete various post-market clinical studies to satisfy various regulatory and reimbursement requirements. These post-market clinical studies also require significant time and resources, and we cannot be certain that we will be able to successfully execute them or that the results we obtain will satisfy post-market regulatory and reimbursement requirements.
We are currently engaged in several clinical trials and post-market clinical studies for our products, including our PROACT Xa clinical trial to determine if patients with an On-X mechanical aortic valve can be maintained safely and effectively on apixaban (Eliquis®) rather than on warfarin, and we also have begun efforts to initiate future U.S. clinical trials for certain JOTEC products, initiate U.S. and international clinical trials for the AMDS, and support Endospan’s U.S. clinical trial efforts for NEXUS. Each of these trials or studies is subject to the risks outlined herein.
We cannot give assurance that the relevant regulatory agencies will clear or approve these products and services or indications, or any new products and services or new indications, on a timely basis, if ever, or that the products and services or new indications will adequately meet the requirements of the applicable market or achieve market acceptance. We may encounter delays or rejections during any stage of the regulatory approval process if clinical or other data fails to demonstrate satisfactorily compliance with, or if the service or product fails to meet, the regulatory agency’s requirements for safety, efficacy, and quality, or the regulatory agency otherwise has concerns about our quality or regulatory compliance. Regulatory requirements for safety, efficacy, quality, and the conduct of clinical trials and post-market clinical studies may become more stringent due to changes in applicable laws, regulatory agency policies, or the adoption of new regulations. Clinical trials and post-market clinical studies may also be delayed or halted due to the following, among other factors:
Unanticipated adverse events or side effects;
Lack of funding;
Inability to locate, recruit, and qualify sufficient numbers of clinical investigators or investigation sites;
Inability to locate, recruit, and qualify sufficient numbers of patients;
Redesign of clinical trial or post-market clinical study programs;
Inability to manufacture or acquire sufficient quantities of the products, tissues, drugs, or any other components required for clinical trials or post-market clinical study programs;
Changes in development focus; or
Disclosure of trial results by competitors.
Our ability to complete the development of any of our products and services is subject to all of the risks associated with the commercialization of new products and services based on innovative technologies. Such risks include unanticipated technical or other problems, manufacturing, or processing difficulties, and the possibility that we have allocated insufficient funds to complete such development. Consequently, we may not be able to successfully introduce and market our products or services, or we may not be able to do so on a timely basis. These products and services may not meet price or performance objectives and may not prove to be as effective as competing products and services.
If we are unable to successfully complete the development of a product, service, or application, or if we determine for financial, technical, competitive, or other reasons not to complete development or obtain regulatory approval or clearance of any product, service, or application, particularly in instances when we have expended significant capital, this could materially, adversely affect our revenues, financial condition, profitability, and cash flows. Research and development efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful products or services. Even the successful commercialization of a new product or service in the medical industry can be characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs. The introduction of new products or services may require significant physician training and years of clinical evidence derived from follow-up studies on human patients in order to gain acceptance in the medical community.
All of theseoccur, it could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
The expansionWe account for the completion of our international operations is subject toacquisitions using the purchase method of accounting. Our financial results could be adversely affected by a number of risks, which may vary significantly from the risks we face in our U.S. operations, including:financial adjustments required by purchase accounting such as:
Difficulties and costs associated with staffing, establishing and maintaining internal controls, managing foreign operations, including foreign distributor relationships, and developing direct sales operations in key foreign countries;We may incur added amortization expense over the estimated useful lives of some acquired intangible assets;
Expanded compliance obligations, including obligations associated with the Foreign Corrupt Practices Act, the U.K. Bribery Law, local anti-corruption laws, OfficeWe may incur additional depreciation expense as a result of Foreign Asset Control administered sanction programs, and the European Union’s General Data Protection Regulation;recording purchased tangible assets;
Broader exposureWe may be required to corruption;incur material charges relating to any impairment of goodwill and intangible assets;
Cost of sales may increase temporarily if acquired inventory is recorded at fair market value;
If acquisition consideration consists of earn-outs, our earnings may be affected by changes in estimates of future contingent consideration; or
Earnings may be affected by transaction and integration costs, which are expensed immediately.
Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those receivables;
Diminished protection for intellectual property and the presence of a growing number of generic or smaller competitors in some countries;
Changes in currency exchange rates, particularly fluctuationswe may be unable to obtain insurance in the Euro as compared to the U.S. Dollar;future.
Differing local product preferences and product requirements;
Differing local labor and employment laws, including those related to terminations, unionization, and the formation of works councils or other similar employee organizations;
Adverse economic or political changes or political instability;
Potential trade restrictions, exchange controls, and import and export licensing requirements including tariffs;
Potential adverse tax consequences of overlapping tax structures; and
Potential adverse financial consequences resulting from the exit of the U.K. from the European Union, or “Brexit,” including a potential disruption of sales into the U.K.
Our failure to adequately address these risks could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
We continuemaintain claims-made insurance policies to evaluate expansion through acquisitionsmitigate our financial exposure to product and tissue processing liability and securities, claims, among others, that are reported to the insurance carrier while the policy is in effect. These policies do not include coverage for punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, if we are unsuccessful in arranging cost-effective acceptable resolutions of claims, it is possible that our insurance program may not be adequate to cover any or licenses with, investmentsall possible claims or losses, including losses arising out of natural disasters or catastrophic circumstances. Any significant claim could result in and distribution arrangements with, other companiesan increase in our insurance rates or technologies, which may carry significant risks.
One ofjeopardize our growth strategies is to selectively pursue the potential acquisition, licensing, or distribution rights of companies or technologies that complement our existing products, services, and infrastructure. In connection with one or more of the acquisition transactions, we may:
Issue additional equity securities that would dilute our stockholders’ ownership interest in us;
Use cash that we may need in the future to operate our business;
Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;
Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax basis for the assets acquired;
Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;
Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;
Be unableability to secure or retain the services of key employees related to the acquisition;
Be unable to succeed in the marketplace with the acquisition; or
Assume material unknown liabilities associated with the acquired business.
As an example of these risks, in December 2017 we acquired JOTEC, which we financed by incurring further debt, using cashcoverage on hand, and issuing additional equity securities. This acquisition posed many of the same risks as set forth above.reasonable terms, if at all.
Any securities or product liability/tissue processing claim, even a meritless or unsuccessful one, could be costly to defend, and result in diversion of the above risks, should they occur, could materially, adversely affect our revenues, financial condition, profitability, and cash flows, including the inabilitymanagement’s attention from our business, adverse publicity, withdrawal of clinical trial participants, injury to recover our investmentreputation, or cause a write-down or write-offloss of such investment, associated goodwill, or assets.revenue.
The materials and supplies used in our product manufacturing and our tissue processing are subject to stringent quality standards andregulatory requirements and many of these materials and supplies are subject to significant regulatory oversight and action.oversight. If materials or supplies used in our processes fail to meet these standards and requirements or are subject to recallregulatory enforcement action, they may have to be scrapped, or other quality action, an outcome could be the rejection or recall of our products or tissues and/could be rejected during or the immediateafter processing, recalled, or rejected by customers. In these cases, we may have to immediately scrap raw or in process materials or expense of the costs of the manufacturing or preservation.
As an example of this risk, in the fourth quarter of 2020 we became aware that a supplier shipped to us a lot of saline solution that we use in our tissue processing that contained some contamination. The contamination was identified by our routine quality controls. While we were able to mitigate the impact of this contamination through our own efforts and additional testing that was reviewed with the FDA, the contaminated solution impacted a small percentage of the tissue processed with this lot of solution, requiring us to write-off those contaminated tissues in the fourth quarter of 2020 and impacting our ability to fully meet demand for certain tissues and sizes in the fourth quarter of 2020, the first quarter of 2021, and to a lesser extent the second quarter of 2021.
In addition, if these materials andor supplies or changes to them do not receive regulatory approval or are recalled, if the related suppliers and/or their facilities are shut down temporarily or permanently, whether by government order, natural disaster, or otherfor any reason, or if the related suppliers are otherwise unable or unwilling to supply us, therewe may not behave sufficient materials or supplies available for purchase to allow us to manufacture our products or
process tissues. In addition, we rely on contract manufacturers to manufacture some of our products or to provide additional manufacturing capacity for othersome products. If these contract manufacturers fail to meet our quality standards andor other requirements or if they are unable or unwilling to supply the products, we may not be able to meet demand for these products. AnyOur ability to fully recover all possible losses from these suppliers and contract manufacturers may have practical limitations imposed by factors like industry standard contractual terms or the financial resources of these occurrences or actions could materially, adversely affect our revenues, financial condition, profitability, and cash flows.the adverse party.
Finally, the COVID-19 pandemic has continued to impact the global supply chain; the pandemic’s impact on workforces, global mobility, material availability, and demand has reportedly continued or worsened in many cases. Although we have yet to experience any material effects of this impact on our supply chain or operations, we face an increasing risk that upstream disruptions may occur. Risks relating to the lingering effects of global supply chain disruptions may even continue after COVID-19’s risk as a global pandemic has subsided.
Some of the materials, supplies, and services that are key components ofused in our product manufacturing or ourand tissue processing, as well as some of our products, are sourced from single- or sole-source suppliers. As a result, our ability to negotiate favorable terms with those suppliers may be limited, and if those suppliers experience operational, financial, quality, or regulatory difficulties, or if those suppliers and/or their facilities refuse to supply us or cease operations temporarily or permanently, we could be forced to cease product manufacturing or tissue processing until the suppliers resume operations, until alternative suppliers could be identified and qualified, or permanently if the suppliers do not resume operations and no alternative suppliers could be identified and qualified. We could also be forced to purchase alternative materials, supplies, or services with unfavorable terms due to diminished bargaining power.
As an example of these risks, in 2019 we will not have alost our supply of handpieces for cardiac laser therapy untilresulting from a manufacturing location change at our supplier that ultimately required a Premarket Approval (“PMA“) supplement and FDA approval before handpiece manufacturing and distribution could resume. Even though the FDA approvesapproved the PMA-S, our supplier’s change in manufacturing location, pendingsupplier has been unable to fully resume production due to factors outside of our supplier’s resolutioncontrol. Due to these and other supplier issues, we had virtually no supply of several observationshandpieces during the FDA raised during a manufacturing site change inspection. We do not believe these observations relate to quality or safety. We currentlyfirst three quarters of 2021 but anticipate resumption of a limited supply during the first halflast quarter of 2021.
We also conduct nearly all of our internalown manufacturing operations at three facilities: Austin, Texas for our On-X product line,products, Hechingen, Germany for our JOTEC product line,products, and Kennesaw, Georgia for all our other products.products and services. The NEXUS product is solely producedmanufactured by Endospan in Herzelia, Israel, and the AMDS product is solely suppliedmanufactured by oura supplier in Charlotte, North Carolina. If one of these facilities ceases operations temporarily or permanently, due to natural disasterfor any reason including a pandemic or other reason,climate change related event, our business could be substantially disrupted.
Our business and future operating results depend in significant part upon the continued contributions of our specialized workforce, including key personnel, qualified personnel with medical device and tissue processing experience, and senior management with experience in the medical device or tissue processing space, some of whom would be difficult to replace. Our field-based workforce is increasingly being subject to public and private vaccine mandates, including mandates without exception, which may impact unvaccinated personnel’s ability to fulfill or stay in their roles. Our business and future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant part on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel. Our primary facilities are in Kennesaw, Georgia; Austin, Texas; and Hechingen, Germany, where the supply of qualified medical device and tissue processing and other personnel is limited, competition for such personnel is significant, and we cannot ensure that we will be successful in attracting or retaining them. We face risks if we lose any key employees to other employers or due to severe illness, death, or retirement, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled employees. This risk has been exacerbated in the first three quarters of 2021, and is expected to continue, as the competition for talent in the medical device industry and in the workforce generally has intensified substantially. As global economies have begun to emerge from the COVID-19 downturn, the expiration of COVID-related hiring freezes, increased opportunities for remote work, and increasing compensation pressure have resulted in a war for talent and an unprecedent number of career changes. The resulting competition and worker shortages at all levels have impacted supply chains and distribution channels and our ability to attract and retain the specialized workforce necessary for our business and operations.
One of our growth strategies is to pursue select acquisitions, licensing, or distribution rights with companies or technologies that complement our existing products, services, and infrastructure. In connection with one or more of these transactions, we may:
Issue additional equity securities that would dilute our stockholders’ ownership interest;
Use cash we may need in the future to operate our business;
Incur debt, including on terms that could be unfavorable to us or debt we might be unable to repay;
Structure the transaction resulting in unfavorable tax consequences, such as a stock purchase that does not permit a step-up in basis for the assets acquired;
Be unable to realize the anticipated benefits of the transaction; or
Assume material unknown liabilities associated with the acquired business.
As part of our efforts to drive growth by pursuing select acquisition, license, and distribution opportunities that are aligned to our objectives and complement our existing products, services, and infrastructure or to divest non-core product lines, we have completed several transactions in recent years and may pursue similar additional transactions in the future. Examples of these activities include the following:
On December 1, 2017 we acquired JOTEC AG, a Swiss entity that we converted to JOTEC GmbH and subsequently merged with our Swiss acquisition entity, Jolly Buyer Acquisition GmbH and its subsidiaries;
On September 11, 2019 we entered into various agreements with Endospan, Ltd. (“Endospan”), an Israeli medical device manufacturer (the “Endospan Transaction”). The Endospan Transaction included an exclusive distribution agreement for the NEXUS stent graft system (“NEXUS”) in Europe; an agreement (“Endospan Loan”) for a secured loan from CryoLife to Endospan; and a security purchase option agreement for CryoLife to purchase all the then outstanding Endospan securities from Endospan’s existing securityholders upon FDA approval of NEXUS;
On September 2, 2020 we acquired 100% of the outstanding shares of Ascyrus Medical LLC (“Ascyrus”), the developer of the Ascyrus Medical Dissection Stent (“AMDS”);
On July 28, 2021 we entered into various agreements with Baxter International, Inc. (“Baxter”) and Starch Medical, Inc. (“SMI”) related to the sale of our PerClot assets to Baxter and the termination of our existing material agreements with SMI.
Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of these transactions depends on a number of factors including our ability to:
Leverage our global infrastructure to sell and cross-market the acquired products;
Drive adoption of NEXUS and AMDS in the European and other markets, including our ability to manage the substantial requirements for NEXUS procedures for product training, implant support, and proctoring;
Bring acquired products to the U.S. market, including AMDS and the JOTEC products;
Harness the JOTEC product pipeline and research and development capabilities;
Obtain regulatory approvals in relevant markets, including our ability to timely obtain PMA for PerClot as contemplated under the terms of the Baxter Transaction, to obtain Conformité Européene Mark product certification (“CE Mark”) for pipeline products, and to obtain or maintain certification for pipeline and current products at all;
Execute on development and clinical trial timelines for acquired products;
Carry, service, and manage significant debt and repayment obligations; and
Manage the unforeseen risks and uncertainties related to these transactions, including any related to intellectual property rights.
Additionally, our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the Endospan Transaction depends on a number of additional factors including Endospan’s ability to: (a) comply with the Endospan Loan and other debt obligations, and avoid an event of default; (b) successfully commercialize NEXUS, raise capital and drive adoption in markets in and outside of Europe; (c) meet demand for NEXUS; (d) meet quality and regulatory requirements; (e) manage any intellectual property risks and uncertainties associated with NEXUS; (f) obtain FDA approval of NEXUS; and (g) develop NEXUS product improvements to meet competitive threats and physician demand.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy. The benefits of these transactions may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the acquisition, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of an acquisition, we could experience an interruption or loss of momentum in our existing business activities.
We rely upon a combination of sophisticated information technology systems as well as traditional recordkeeping to operate our business. In the ordinary course of business, we collect, store, and transmit confidential information (including, but not limited to, information about our business, financial information, personal data, intellectual property, and, in some instances, patient data). Our information technology and information security systems and records are potentially vulnerable to security breaches, service interruptions, data loss, or malicious attacks resulting from inadvertent or intentional actions by our employees, vendors, or other third parties. In addition, due to the COVID-19 pandemic, we have implemented remote work arrangements for some employees, and those employees may use outside technology and systems that are vulnerable to security breaches, service interruptions, data loss or malicious attacks, including by third parties.
As an example of these risks, on November 1, 2019 we were notified that we had become a victim of a business e-mail compromise. During the fourth quarter of 2019, a company email account was compromised by a third-party impersonator
and a payment intended for one of our U.S. vendors in the amount of $2.6 million was fraudulently re-directed into an individual bank account controlled by this third-party impersonator. Our cyber-insurance covered all but $25,000 of the unrecovered losses from this compromise.
While we have invested, and continue to invest, in our information technology and information security systems and employee information security training, there can be no assurance that our efforts will prevent all security breaches, service interruptions, or data losses. We have limited cyber-insurance coverage that may not cover all possible events, and this insurance is subject to deductibles and coverage limitations. Any security breaches, service interruptions, or data losses could adversely affect our business operations or result in the loss of critical or sensitive confidential information or intellectual property, or in financial, legal, business, and reputational harm to us or allow third parties to gain material, inside information that they may use to trade in our securities.
The commercialization of medical devices and processing and distribution of human tissues are highly complex and subject to significant global quality and regulatory risks and as such, we face the following risks:
Our products and tissues allegedly have caused, and may in the future cause, patient injury, which has exposed, and could in the future expose, us to liability claims that could lead to additional regulatory scrutiny;
Our manufacturing and tissue processing operations are subject to regulatory scrutiny, inspections and enforcement actions, and regulatory agencies could require us to change or modify our operations or take other action, such as issuing product recalls or holds;
Regulatory agencies could reclassify, re-evaluate, or suspend our clearances or approvals, or fail, or decline to, issue or reissue our clearances or approvals that are necessary to sell our products and distribute tissues;
Regulatory and quality requirements are subject to change, which could adversely affect our ability to sell our products or distribute tissues; and
Adverse publicity associated with our products, processed tissues or our industry could lead to a decreased use of our products or tissues, increased regulatory scrutiny, or product or tissue processing liability claims.
Further, on May 25, 2017 the European Union adopted a new Medical Device Regulation (MDR 2017/745) (“MDR”), which was fully implemented on May 26, 2021. The MDR places stricter requirements on manufacturers and European Notified Bodies regarding, among other things, product classifications and pre- and post-market clinical studies for product clearances and approvals which could result in product reclassifications or the imposition of other regulatory requirements that could delay, impede, or prevent our ability to commercialize existing, improved, or new products in the European Economic Area (“EEA”) and other markets that require CE Marking. Additionally, to the extent the MDR places stricter requirements on manufacturers of custom-made devices, those new requirements could delay, impede, or otherwise impact the availability of our E-xtra DESIGN ENGINEERING products. Finally, COVID-19 has impacted the predictability and timelines associated with the MDR transition.
Since the implementation of the MDR, Notified Bodies must review any proposed changes to determine if they require evaluation under the MDR or if they can still be evaluated under currently held MDD certifications. Our inability to obtain certifications for changes under the transitional provisions of the MDR’s Article 120 or successfully submit proposed changes requiring MDR evaluation will delay implementation of those changes which could adversely impact our ability to obtain or renew certifications, clearances, or approvals for our products.
Finally, we anticipate additional regulatory impact as a result of the United Kingdom’s exit from the European Union (“Brexit”). The U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”) has announced that CE Marking will continue to be recognized in the U.K. and certificates issued by EU-recognized Notified Bodies will continue to be valid in the U.K. market until June 30, 2023. Going forward, all devices marketed in the U.K. will require U.K. Conformity Assessed Marks certified by a U.K. Approved Body (the re-designation of the U.K. Notified Body). In 2019 we were informed of the cancellation of notified body services by our former Notified Body for BioGlue and PhotoFix, Lloyd’s Register Quality Assurance Limited. Presently, the MHRA and the German competent authority, Regierungspraesidium-Tubingen, have granted us extended grace periods to complete the transfers of our registrations to a new notified body, provided that we meet certain conditions, including the demonstration of adequate progress in the CE Mark certification process with our new Notified Body. If we are delayed or unsuccessful in transferring to a new notified body for BioGlue and PhotoFix in the EEA, or if we are otherwise unable to timely meet applicable regulatory requirements, we may be unable to place BioGlue or PhotoFix on the market in the EEA until we resolve the situation. Any delays in this process may also impact our Medical Device Single Audit Program (“MDSAP”) certifications, and failure to timely obtain new MDSAP certifications following their expiration may impact our ability to distribute covered products in Australia, Brazil, Canada, and Japan.
In December 2019 we learned that the FDA is preparing to issue a proposed rule for reclassification of more than minimally manipulated (“MMM”) allograft heart valves to Class III medical devices, which could include our CryoValve SGPV. Following a comment period and subsequent publication of any final rule, should the CryoValve SGPV be determined to be MMM, we expect to have approximately thirty months to submit a PMA application, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers during review of the PMA application. To date, the FDA has not issued such a proposed final rule.
If the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, and if there are delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant, we could decide that the requirements for continued processing of the CryoValve SGPV are too onerous, leading us to discontinue distribution of these tissues.
Our growth and profitability depends in part upon our ability to develop, and successfully introduce, new products and services, or expand upon existing indications, clearances, and approvals, requiring that we invest significant time and resources to obtain new regulatory clearances/approvals, including investment into pre- and post-market clinical studies. Although we believe certain products and services in our portfolio or under development may be effective in a particular application, we cannot be certain until we successfully execute on relevant clinical trials, and the results we obtain from pre- and post-market clinical studies may be insufficient for us to obtain or maintain any required regulatory approvals or clearances.
We are currently seeking regulatory approval for BioGlue in China, where the Chinese regulatory body has made additional requests, and expressed several concerns, related to the application. If we cannot satisfy the regulator’s requests and concerns and obtain approval by May 2022, the pending application will expire and no longer be eligible for allowance, requiring the Company to restart or decide to abandon the approval process.
Each of our trials, studies, and approvals is subject to the risks outlined herein.
We cannot give assurance that regulatory agencies will clear or approve these products and services or indications, or any new products and services or new indications, on a timely basis, if ever, or that the products and services or new indications will adequately meet the requirements of the market or achieve market acceptance. Pre- and post-market clinical studies may also be delayed or halted due to many factors beyond our control.
If we are unable to successfully complete the development of a product, service, or application, or if we determine for any reason not to complete development or obtain regulatory approval or clearance of any product, service, or application, particularly in instances when we have expended significant capital, this could materially, adversely affect our financial performance. Research and development efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful products or services. Even the successful commercialization of a new product or service in the medical industry can be characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs, among other things. The introduction of new products or services may require significant physician training or years of clinical evidence in order to gain acceptance in the medical community.
Some of our products, including our On-X products, are sterilized using ethylene oxideEthylene Oxide (“EtO”). Although we have a small-scale EtO facility in Austin, Texas, we rely primarily on large-scale EtO facilities to sterilize our products. In addition, some of our suppliers use, or rely upon third parties to use, EtO to sterilize some of our product components. Concerns about the release of EtO into the environment at unsafe levels have led to increased activism and lobbying as well as various regulatory enforcement activities against EtO facilities, including closures and temporary closures. For example, in February 2019, the Illinois Environmental Protection Agency issued an orderclosures, as well as proposals increasing regulations related to stop Sterigenics from using EtO at its Willowbrook, Illinois facility; Sterigenics subsequently announced that the facility would not reopen.EtO. The number of EtO facilities in the U.S. is limited, and any permanent or temporary closures or disruption to their operations could delay, impede, or prevent our ability to commercialize our products, which could materially, adversely affect our revenues, financial condition, profitability, and cash flows.products. In addition, any regulatory enforcement activities against us for our use of EtO could result in financial, legal, business, and reputational harm to us.
Our business and future growth depend on the continued use of our products for approved uses. Generally, regulators contend that, unless our products are approved or cleared by a regulatory body for alternative uses, we may not make claims about the safety or effectiveness of our products or promote them for such uses. Such limitations present a risk that law enforcement could allege that the nature and scope of our sales, marketing, or support activities, though designed to comply with all regulatory requirements, constitute unlawful promotion of our products for an unapproved use. We also face the risk that such authorities might pursue enforcement based on past activities that we discontinued or changed. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in highly competitive market segments,violation of the law, we may face competition from large, well-established medical device companies with significant resources,fines and penalties and may be required to substantially change our sales, promotion, grant, and educational activities. In addition, we or our officers could be excluded from participation in government healthcare programs such as Medicare and Medicaid.
In response to perceived increases in healthcare costs in recent years, there have been, and continue to be, proposals by the governmental authorities, third-party payors, and elected office holders and candidates to impact public health, control healthcare costs and, more generally, to reform the healthcare systems. Additional uncertainty is anticipated particularly in light of the recent presidential election in the United States and the impact the results of the presidential and congressional elections may have on U.S. law relating to the healthcare industry. Many U.S. healthcare laws, such as the Affordable Care Act, are complex, subject to change, and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our customers, or the specific services and relationships we have with our customers is not be ablealways clear. Our failure to compete effectively.anticipate accurately any changes to, or the repeal or invalidation of all or part of the Affordable Care Act and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity and negatively affect our business, results of operations, and financial condition. As an example, the President of the United States recently issued two vaccine mandates that may cover all, or groups of, our U.S. workforce. We are currently evaluating the applicability of these mandates to us. If we determine that either or both mandates apply to us, compliance with such laws could cause disruption in our workforce that could have an impact on our ability to attract or retain talent and increase our costs, and could adversely affect our business and profitability.
The market forFurther, the growth of our productsbusiness, results of operations and services is intensely competitive and significantly affected by new product introductions and activities of other industry participants. We face intense competition from other companies engagedfinancial condition rely, in part, on customers in the following lineshealthcare industry that receive substantial revenues from governmental and other third-party payer programs. A reduction or less than expected increase in government funding for these programs or a change in reimbursement or allocation methodologies, or a change in reimbursement related to products designated as “breakthrough devices” by the FDA, could negatively affect our customers’ businesses and, in turn, negatively impact our business, results of business:
The sale of endovascularoperations and surgical stents;
The sale of mechanical, synthetic, and animal-based tissue valves for implantation;
The sale of synthetic and animal-based patches for implantation;
The sale of surgical adhesives, surgical sealants, and hemostatic agents; and
The processing and preservation of human tissue.
financial
A significant percentage of market revenues from thesecondition. Any changes that lower reimbursement for our products was generated by Baxter International, Inc.; Ethicon (a Johnson & Johnson Company); Medtronic, Inc.; Abbott Laboratories; LivaNova PLC; Edwards Lifesciences Corp.; Bard, a subsidiary of Becton, Dickinson,or reduce medical procedure volumes, however, could adversely affect our business and Company; Integra Life Sciences Holdings; LifeNet; Admedus, Inc.; Aziyo Biologics; Cook Medical; Gore & Associates; Terumo Corp.; Endologix; Antegraft, Inc.; LeMaitre Vascular, Inc.; Maquet, Inc.; Vascutek; Novadaq Technologies, Inc.; Pfizer, Inc.; and BioCer Entwicklungs-GmbH.profitability.
Greater financial and other resources for product research and development, sales and marketing, acquisitions, and patent litigation;
Enhanced experience in, and resources for, launching, marketing, distributing, and selling products;
Greater name recognition as well as more recognizable trademarks for products similar to the products that we sell;
More established record of obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;
More established relationships with healthcare providers and payors;
Lower cost of goods sold or preservation costs;
Advanced systems for back office automation, product development, and manufacturing, which may provide certain cost advantages; and
Larger direct sales forces and more established distribution networks.
Our competitors may develop services, products, or processes with significant advantages over the products, services and processes that we offer or are seeking to develop, and our products and tissues may not be able to compete successfully. If we are unable to successfully market and sell innovative and in-demand products and services, our competitors may gain competitive advantages that may be difficult to overcome. In addition, consolidation among our competitors may make it more difficult for us to compete effectively. If we fail to compete effectively, this could materially, adversely affect our revenues, financial condition, profitability, and cash flows.
Our businesssubject to various U.S. and future operating results depend in significant part upon the continued contributions of our key personnel, including qualified personnel with medical deviceinternational bribery, anti-kickback, false claims, privacy, transparency, and tissue processing experience, and senior management with experience in the medical device or tissue processing space, many of whom would be difficult to replace. Our business and future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant part on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel for our operations. Our main facilities are in Kennesaw, Georgia; Austin, Texas; and Hechingen, Germany, where the local supply of qualified personnel in the medical device and tissue processing industries is limited. Competition for such personnel is intense, and we cannot ensure that we will be successful in attracting and retaining such personnel. If we losesimilar laws, any key employees to other employers or due to illness, death or retirement, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled employees as needed, this could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
Future tax reform regulations could have a material, adverse impact on us.
The December 2017 tax reform legislation known as H.R. 1, commonly referred to as the "Tax Cuts and Jobs Act" ("the Tax Act"), made significant changes to U.S. federal income tax law. In response, the U.S. Treasury Department issued multiple significant proposed and final regulation packages to further interpret certain provisions of the Tax Act. As of September 30, 2020, a number of significant regulations have been finalized, including those for Section 163(j) business interest expense limitations and Section 250 FDII and GILTI deductions. In general, these finalized regulation packages are not effective for our tax year beginning January 1, 2020 and we are not electing to early-adopt most of these finalized regulations. However, we have analyzed these final regulations to determine their potential impact for the current year, and we have found such impact to be immaterial. In addition, we continue to await responses from various state taxing jurisdictions on the impact of the Tax Act on their local taxing regimes. Additional uncertainty is anticipated particularly in light of the current presidential election in the United States and the impact the presidential and congressional elections may have on federal regulation and taxation relating to the healthcare industry. We will continue to monitor and account for the future impacts of federal regulatory and state guidance in the interim period in which such additional guidance is issued.
Our operating results may fluctuate significantly on a quarterly or annual basis as a result of a variety of factors, manybreach of which are outside our control.
Fluctuations in our quarterly and annual financial results have resulted, and will continue to result, from numerous factors, including:
Changes in demand for the products we sell;
Increased product and price competition, due to the announcement or introduction of new products by our competitors, market conditions, the regulatory landscape, or other factors;
Changes in the mix of products we sell;
Availability of products, materials, and supplies, including donated tissue used in preservation services;
Our pricing strategy with respect to different product lines;
Strategic actions by us, such as acquisitions of businesses, products, or technologies;
Unanticipated costs and expenses;
Effects of domestic and foreign economic conditions and exchange rates on our industry and/or customers;
The divestiture or discontinuation of a product line or other revenue generating activity;
The relocation and integration of manufacturing operations and other strategic restructuring;
Regulatory actions that may necessitate recalls of our products or warning letters that negatively affect the markets for our products;
Failure of government and private health plans to adequately and timely reimburse the users of our products or changes in reimbursement policies;
Costs incurred by us in connection with the termination of contractual and other relationships, including distributorships;
Our ability to collect outstanding accounts receivable in selected countries outside of the U.S.;
The expiration or utilization of deferred tax assets such as net operating loss carryforwards;
Market reception of our new or improved product offerings; and
The loss of any significant customer, especially in regard to any product that has a limited customer base.
We have based our current and future expense levels largely on our investment plans and estimates of future events, although some of our expense levels are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned expenditures would have an immediate, adverse effect on our business, results of operations, and financial condition. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or marketing decisions that could havecause a material, adverse effect on our business, results of operations,financial condition, and financial condition. Due to the foregoing factors, some of which are not within our control, the price of our common stock may fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results are not always meaningful and should not be relied upon as an indication of our future performance.profitability.
Significant disruptionsOur relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various U.S. and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, often referred to collectively as “healthcare compliance laws.” Healthcare compliance laws are broad, sometimes ambiguous, complex, and subject to change and changing interpretations. Possible sanctions for violation of information technology systemsthese healthcare compliance laws include fines, civil and criminal penalties, exclusion from government healthcare programs, and despite our compliance efforts, we face the risk of an enforcement activity or breachesa finding of information security systems could adversely affect our business. a violation of these laws.
We rely upon a combination of sophisticated information technology systemshave entered into consulting and traditional recordkeepingproduct development agreements with healthcare professionals and healthcare organizations, including some who may order our products or make decisions to operate our business. In the ordinary course of business, we collect, store, and transmit large amounts of confidential information (including, but not limited to, information about our business, personal information, intellectual property, and, in some instances, patient data).use them. We have also outsourced elementsadopted the AdvaMed Code of Conduct, the MedTech Europe Code of Ethical Business Practice, and the APACMed Code of Ethical Conduct which govern our operationsrelationships with healthcare professionals to third parties, including elementsbolster our compliance with healthcare compliance laws. While our relationships with healthcare professionals and organizations are structured to comply with such laws and we conduct training sessions on these laws and Codes, it is possible that enforcement authorities may view our relationships as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties or debarment. In any event, any enforcement review of our information technology systems and,or action against us as a result of such review, regardless of outcome, could be costly and time consuming. Additionally, we managecannot predict the impact of any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a number of independent vendor relationships with third parties who may or could have access to our confidential information. Our information technology and information security systems and records are potentially vulnerable to security breaches, service interruptions, or data loss from inadvertent or intentional actions by our employees or vendors. Our information technology and information security systems and records are also potentially vulnerable to malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of expertise and motives (including, but not limited to, financial crime, industrial espionage, and market manipulation). In addition, due to the COVID-19 pandemic, we have implemented remote work arrangements for employees we deem able to do so, and those employees may use outside technology and systems that are vulnerable to security breaches, service interruptions, data loss or malicious attacks by third parties.going-forward basis only.
As an example of these risks, on November 1, 2019, we were notified that we had become a victim of a business e-mail compromise. During the fourth quarter of 2019, a company email account was compromised by a third-party impersonator
and a payment intended for one of our U.S. vendors in the amount of $2.6 million was fraudulently re-directed into an individual bank account controlled by this third-party impersonator. The impersonator had taken a number of steps to deceive our employees and reduce the likelihood of detection. Our cyber-insurance covered all but a de minimis amount of the unrecovered losses from this compromise.
While we have invested, and continue to invest, significantly in our information technology and information security systems, there can be no assurance that our efforts will prevent further security breaches, service interruptions, or data losses. We have only limited cyber-insurance coverage that does not cover all possible events, and this insurance is subject to deductibles and coverage limitations. In addition, we may not be able to maintain this insurance. We thus do not have insurance coverage for all possible claims that could be raised and, for those where we do have coverage, those claims could exceed the limits of our coverage. Any security breaches, service interruptions, or data losses could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business, and reputational harm to us or allow third parties to gain material, inside information that they may use to trade in our securities.
An increasing number of federal, state, and foreign data privacy laws and regulations, which can be enforced by private parties or governmental entities, have been or are being promulgated and are constantly evolving. These privacy laws and regulations may include significant new requirements for companies that receive or process an individual’s personal data (including company employees), which increases our operating costs and requires significant management time and energy. Many of these laws and regulations, including the European Union’s General Data Protection Regulation (“GDPR”) also include significant penalties for noncompliance. Although our personal data practices, policies, and procedures are intended to comply with GDPR and other data privacy laws and regulations, there can be no assurance that regulatory or enforcement authorities will view theseour arrangements as being in compliance with applicable laws, or that one or more of our employees or agents will not disregard the rules we have established. Any privacy related government enforcement activities may be costly, to comply with, result in negative publicity, andor subject us to significant penalties, any of which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
Many healthcare industry companies, including health care systems, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our financial condition, profitability, and/or cash flows would suffer.
The success of some of our products and preservation services depends upon relationships with healthcare professionals.
If we fail to maintain our working relationships with healthcare professionals, many of our products and preservation services may not be developed and marketed to appropriately meet the needs and expectations of the professionals who use and support our products and preservation services or the patients who receive them.
The research, development, marketing, and sales of many of our new and improved products and preservation services are dependent upon us maintaining working relationships with healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and preservation services. Healthcare professionals assist us as researchers, marketing and training consultants, product consultants, and speakers. If we are unable to maintain our relationships with these professionals and do not continue to receive their advice and input, the development and commercialization of our products and preservation services could suffer, which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
We may be subject to fines, penalties, injunctions, and other sanctions if we are deemed to be promoting the use of our products for unapproved, or off-label, uses.
Our business and future growth depend on the continued use of our products for specific approved uses. Generally, unless the products are approved or cleared by the FDA for the alternative uses, the FDA contends that we may not make claims about the safety or effectiveness of our products, or promote them, for such uses. Such limitations present a risk that the FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales,
marketing, and/or support activities, though designed to comply with all FDA requirements, constitute the promotion of our products for an unapproved use in violation of the Federal Food, Drug, and Cosmetic Act. We also face the risk that the FDA or other governmental authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs, and other activities. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to substantially change our sales, promotion, grant, and educational activities. There is also a possibility that we could be enjoined from selling some or all of our products for any unapproved use. In addition, as a result of an enforcement action against us or our executive officers, we could be excluded from participation in government healthcare programs such as Medicare and Medicaid.
Our acquired federal tax net operating loss and general business credit carryforwards will be limited or may expire, which could result in greater future income tax expense and adversely impact future cash flows.
Our federal tax net operating loss and general business credit carryforwards include acquired net operating loss carryforwards. Such acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere and Cardiogenesis, as mandated by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). We believe that our acquisitions of these companies each constituted a change in control, and that prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in control. We also acquired net operating loss carryforwards in certain foreign jurisdictions with the JOTEC Acquisition, but we do not believe these carryforwards will be limited in any material way due to a change of control provision. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to these changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which we believe it is more likely than not that these deferred tax assets will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. Limitations on our federal tax net operating loss and general business credit carryforwards could result in greater future income tax expense and adversely impact future cash flows.
We are subject to various U.S. and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and profitability.
Our relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various U.S. and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, often referred to collectively as “healthcare compliance laws.” Healthcare compliance laws are broad, sometimes ambiguous, complex, and subject to changing interpretations. Possible sanctions for violation of these healthcare compliance laws include monetary fines, civil and criminal penalties, exclusion from government healthcare programs, and forfeiture of amounts collected in violation of such prohibitions. Any government investigation or a finding of a violation of these laws, despite our compliance efforts, could result in a material, adverse effect on our business, financial condition, and profitability.
We have entered into consulting agreements, speaker agreements, research agreements, and product development agreements with healthcare professionals or healthcare organizations, including some who may order our products or make decisions to use them. While these transactions were structured with the intention of complying with all applicable compliance laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties.
We have also adopted the AdvaMed Code of Conduct and the MedTech Europe Code of Ethical Business Practice into our Code of Business Conduct, which governs our relationships with healthcare professionals, including our payment of travel and lodging expenses, research and educational grant procedures, and sponsorship of third-party conferences. In addition, we conduct training sessions on these principles. There can be no assurance, however, that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard the rules we have established. Because our strategy relies on the involvement of healthcare professionals or healthcare organizations who consult with us on the design of our products, perform clinical research on our behalf, or educate the market about the efficacy and uses of our products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with healthcare professionals or healthcare organizations, who refer or order our products, to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of the healthcare professionals or healthcare organizations we engage to provide services on our behalf. In addition, the cost of noncompliance
with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from government funded healthcare programs, including Medicare and Medicaid, for noncompliance.
The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the scarcity of applicable precedent and regulations. There can be no assurance that regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material, adverse effect on our business, financial condition, and profitability. Any regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a going-forward basis only.
Healthcare policy changes may have a material, adverse effect on us.
In response to perceived increases in healthcare costs in recent years, there have been, and continue to be, proposals by the federal government, state governments, regulators, third-party payors, and elected office holders and candidates to control these costs and, more generally, to reform the U.S. healthcare system. Additional uncertainty is anticipated particularly in light of the current presidential election in the United States and the impact the presidential and congressional elections may have on federal regulation law relating to the healthcare industry. Many healthcare laws, such as the Affordable Care Act, are complex, subject to change, and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our customers or the specific services and relationships we have with our customers is not always clear. Our failure to anticipate accurately any changes to or the repeal of the Affordable Care Act and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity and negatively affect our business, results of operations and financial condition. Further, the growth of our business, results of operations and financial condition rely, in part, on customers in the healthcare industry that receive substantial revenues from governmental and other third-party payer programs. A reduction or less than expected increase in government funding for these programs or a change in reimbursement or allocation methodologies could negatively affect our customers’ businesses and, in turn, negatively impact our business, results of operations and financial condition. Some of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could have a material, adverse effect on our financial condition and profitability. We cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on us. Any changes that lower reimbursement for our products or reduce medical procedure volumes, however, could adversely affect our business and profitability.
Continued fluctuation of foreign currencies relative to the U.S. Dollar could materially, adversely affect our business.
The majority of our foreign product revenues are denominated in Euros and, as such, are sensitive to changes in exchange rates. In addition, a portion of our dollar-denominated product sales are made to customers in other countries who must convert local currencies into U.S. Dollars in order to purchase these products. We also have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of Euros or other local currencies in relation to the U.S. Dollar could materially reduce our future revenues as compared to the comparable prior periods. Should this occur, it could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
Our existing insurance coverage may be insufficient, and we may be unable to obtain insurance in the future.
Our products and tissues allegedly have caused, and may in the future cause, injury to patients using our products or tissues, and we have been, and may be, exposed to product and tissue processing liability claims. We maintain claims-made insurance policies to mitigate our financial exposure to product and tissue processing liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. In addition, our product and tissue processing liability insurance policies do not include coverage for any punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, it is possible that:
We could be exposed to product and tissue processing liability claims and security claims greater than the amount that we have insured;
We may be unable to obtain future insurance policies in an amount sufficient to cover our anticipated claims at a reasonable cost or at all; or
Because we are not insured against all potential losses, uninsured losses due to natural disasters or other catastrophes could adversely impact our business.
Any product liability claim, with or without merit, could result in an increase in our product insurance rates or our inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the future due to market, industry, or other factors. Any product liability claim, even a meritless or unsuccessful one, would be time-consuming and expensive to defend and could result in the diversion of our management’s attention from our business and result in adverse publicity, withdrawal of clinical trial participants, injury to our reputation, and loss of revenue.
If we are unsuccessful in arranging acceptable settlements of future product or tissue processing liability claims or future securities class action or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these obligations. If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future exposure from product or tissue processing liability or securities claims. Additionally, if one or more claims with respect to which we may become, in the future, a defendant should result in a substantial verdict rendered in favor of the plaintiff(s), such verdict(s) could exceed our available insurance coverage and liquid assets. If we are unable to meet required future cash payments to resolve any outstanding or any future claims, this will materially, adversely affect our financial condition, profitability, and cash flows. Further, although we have an estimated reserve for our unreported product and tissue processing liability claims for which we do expect that we will obtain recovery under our insurance policies, these costs could exceed our current estimates. Finally, our facilities could be materially damaged by tornadoes, flooding, other natural disasters, or catastrophic circumstances, for which we are not fully covered by business interruption and disaster insurance, and, even with such coverage, we could suffer substantial losses in our inventory and operational capacity, along with a potential adverse impact on our customers and opportunity costs for which our insurance would not compensate us.
Any of these events could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequentlyfrom time to time propose to involve themselves in the governance, strategic direction, and operations of a company. We may in the future become subject to such shareholder activism and demands. Such demandsinvolvement may disrupt our business and divert the attention of our management, and employees, and any perceived uncertainties as to our future direction resulting from such a situationinvolvement could result in the loss of potential business opportunities, be exploited by our competitors, cause concern tofor our current or potential customers, andcause significant fluctuations in stock price, or make it more difficult to attract and retain qualified personnel and business partners,partners.
We own trade secrets, patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. We cannot be certain that we will be able to maintain our trade secrets, that our pending patent applications will issue as patents, or that no one will challenge the validity or enforceability of any patent that we own or license. Competitors may independently develop our proprietary technologies or design non-infringing alternatives to patented inventions. We do not control the maintenance, prosecution, enforcement, or strategy for in-licensed intellectual property and as such are dependent in part on the owners of these rights to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies. Additionally, our technologies, products, or services could infringe intellectual property rights owned by others, or others could infringe our intellectual property rights.
If we become involved in intellectual property disputes, the costs could be expensive, and if we were to lose or decide to settle, the amounts or effects of the settlement or award by a tribunal could be costly.
The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us and certain of our subsidiaries, including (subject in each case to certain exceptions) restrictions or prohibitions on our and certain of our subsidiaries’ ability to, among other things:
Incur or guarantee additional debt or create liens on certain assets;
Deviate from a minimum liquidity of at least $12.0 million as of the last day of any of the first three quarters of 2021 when our Revolving Credit Facility is drawn in excess of 25% of the amount available as of the last day of any fiscal quarter during that period (currently $7.5 million);
Pay dividends on or make distributions of our share capital, including repurchasing or redeeming capital stock, or make other restricted payments, including restricted junior payments;
Enter into agreements that restrict our subsidiaries’ ability to pay dividends to us, repay debt owed to us or our subsidiaries, or make loans or advances to us or our other subsidiaries;
Comply with certain financial ratios set forth in the agreement;
Enter into certain transactions with our affiliates including any transaction or merger or consolidation, liquidation, winding-up, or dissolution; convey, sell, lease, exchange, transfer or otherwise dispose of all or any part of our business, assets or property; or sell, assign, or otherwise dispose of any capital stock of any subsidiary;
Enter into certain rate swap transactions, basis swaps, credit derivative transactions, and other similar transactions, whether relating to interest rates, commodities, investments, securities, currencies, or any other relevant measure, or transactions of any kind subject to any form of master purchase agreement governed by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement;
Amend, supplement, waive, or otherwise modify our or our subsidiaries organizational documents in a manner that would be materially adverse to the interests of the lenders, or change or amend the terms of documentation regarding junior financing in a manner that would be materially adverse to the interests of the lenders;
Make changes to our and our subsidiaries’ fiscal year without notice to the administrative agent under the agreement;
Enter into agreements which restrict our ability to incur liens;
Engage in any line of business substantially different from that in which we are currently engaged; and
Make certain investments, including strategic acquisitions or joint ventures.
Our current and future levels of activist shareholdersindebtedness could adversely affect our ability to raise additional capital, limit our operational flexibility, and hinder our ability to react to changes in the economy or our industry. It may cause significant fluctuationsalso limit our ability to borrow money, require us to dedicate substantial portions of our cash flow to repayment, and expose us to increased interest rate fluctuation risk as most of our borrowings are at a variable rate of interest.
A failure to comply with the covenants in our stock price basedexisting Credit Agreement could result in an event of default, which, if not cured or waived, could have a material, adverse effect on temporary or speculative market perceptions or other factors that do not necessarily reflectour business, financial condition, and profitability. In the underlying fundamentals and prospectsevent of any such default, the holders of our business.indebtedness:
Will not be required to lend any additional amounts to us;
Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or
Could require us to apply all of our available cash to repay such indebtedness.
If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against their secured collateral. If our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
In December 2015 our Board of Directors discontinued dividend payments on our common stock for the foreseeable future. If we do not pay cash dividends, our shareholders may receive a return on their investment in our common stock only if the market pricethrough appreciation of our common stock has increased when they sell shares of our common stock that they own. Future dividends, if any, will be authorized by our Board of Directors and declared by us based upon a variety of factors deemed relevant by our directors, including, among other things, our financial condition, liquidity, earnings projections, and business prospects. In addition, restrictions in our credit facility limit our ability to pay future dividends. We can provide no assurance of our ability to pay cash dividends in the future.
We are subject to the Florida affiliated transactions statute, which generally requires approval by the disinterested directors or supermajority approval by shareholders for “affiliated transactions” between a corporation and an “interested stockholder.” Additionally, our organizational documents contain provisions that restrict persons who may call shareholder meetings, allow the issuance of blank-check preferred stock without the vote of shareholders, and allow the Board of Directors to fill vacancies and fix the number of directors. These provisions of Florida law and our articles of incorporation and bylaws could prevent attempts by shareholders to remove current management, prohibit or delay mergers or other changes of control transactions, and discourage attempts by other companies to acquire us, even if such a transaction would be beneficial to our shareholders.
While we have recently sought shareholder approval to reincorporate into Delaware, these provisions of Florida law will continue to apply unless and until such reincorporation is effectuated. The effects of reincorporation in Delaware are detailed in our 2021 Special Proxy Statement and Notice of Special Meeting filed with the SEC on October 7, 2021.
(c) The following table provides information about purchases by us during the quarterthree months ended September 30, 20202021 of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934:
Total Number | ||||||||||
of Common Shares | Dollar Value | |||||||||
Total Number of | Purchased as | of Common Shares | ||||||||
Common Shares | Average Price | Part of Publicly | That May Yet Be | |||||||
and Common Stock | Paid per | Announced | Purchased Under the | |||||||
Period | Units Purchased | Common Share | Plans or Programs | Plans or Programs | ||||||
07/01/20 - 07/31/20 | -- | $ | -- | -- | $ | -- | ||||
08/01/20 - 08/31/20 | 1,199 | 21.06 | -- | -- | ||||||
09/01/20 - 09/30/20 | 846 | 17.63 | -- | -- | ||||||
Total | 2,045 | 19.64 | -- | |||||||
| ||||||||||
Total Number | ||||||||||
of Common Shares | Dollar Value | |||||||||
Total Number of | Purchased as | of Common Shares | ||||||||
Common Shares | Average Price | Part of Publicly | That May Yet Be | |||||||
and Common Stock | Paid per | Announced | Purchased Under the | |||||||
Period | Units Purchased | Common Share | Plans or Programs | Plans or Programs | ||||||
07/01/21 - 07/31/21 | -- | $ | -- | -- | $ | -- | ||||
08/01/21 - 08/31/21 | 1,882 | 26.80 | -- | -- | ||||||
09/01/21 - 09/30/21 | 648 | 24.63 | -- | -- | ||||||
Total | 2,530 | $ | 26.24 | -- | $ | -- | ||||
The common shares purchased during the quarterthree months ended September 30, 20202021 were tendered to us in payment of taxes on stock compensation and were not part of a publicly announced plan or program.
Under our Credit Agreement, we are prohibited from repurchasing our common stock, except for the repurchase of stock from our employees or directors when tendered in payment of taxes or the exercise price of stock options, upon the satisfaction of certain requirements.
None.
Not applicable.
On July 29, 2020, we filed Articles of Correction with the Florida Department of State (the “Department”) to correct a scrivener’s error contained in our Amended and Restated Articles of Incorporation (the “Articles”). As most recently filed with the Department in 2019, the Articles inadvertently omitted the $0.01 par value of our common stock, which omission has been corrected under the Articles of Correction. A complete copy of the Articles, as corrected, is filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q and incorporated by reference in this Item 5.
None.
The exhibit index can be found below.
Exhibit | Description | |
Securities Purchase Agreement, dated September 2, 2020, by and among CryoLife, Inc., Ascyrus Medical LLC, the securityholders of Ascyrus Medical LLC and the Securityholder Representative (as defined therein) (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed September 2, 2020.) | ||
Amended and Restated Articles of Incorporation of CryoLife, Inc. (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed July 31, 2020.) | ||
Amended and Restated By-Laws of CryoLife, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed February 22, 2018.) | ||
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31.1* | Certification by J. Patrick Mackin pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification by D. Ashley Lee pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
32** | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File – formatted as Inline XBRL and contained in Exhibit 101 | |
____________________________________________________
*Filed herewith.
**Furnished herewith.
†Portions of the exhibit have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CRYOLIFE, INC. | |
(Registrant) |
/s/ J. PATRICK MACKIN | /s/ D. ASHLEY LEE |
--------------------------------------- | ---------------------------------- |
J. PATRICK MACKIN | D. ASHLEY LEE |
Chairman, President, and | Executive Vice President, |
Chief Executive Officer | Chief Operating Officer, and |
(Principal Executive Officer) | Chief Financial Officer |
(Principal Financial and | |
Accounting Officer) |
November 5, 20202021
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DATE