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 March 31, 20212022
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
CRYOLIFEARTIVION, INC.
(Exact name of registrant as specified in its charter)
| 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 |
| 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 April | |
Common Stock, $0.01 par value |
|
CryoLife,Artivion, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
In Thousands, Except Per Share Data
(Unaudited)
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Revenues: | ||||||||||
Products | $ | 53,345 | $ | 46,420 | $ | 57,542 | $ | 53,345 | ||
Preservation services | 17,742 | 20,009 | 19,671 | 17,742 | ||||||
Total revenues | 71,087 | 66,429 | 77,213 | 71,087 | ||||||
Cost of products and preservation services: | ||||||||||
Products | 14,911 | 13,040 | 17,408 | 14,911 | ||||||
Preservation services | 8,338 | 9,218 | 9,086 | 8,338 | ||||||
Total cost of products and preservation services | 23,249 | 22,258 | 26,494 | 23,249 | ||||||
Gross margin | 47,838 | 44,171 | 50,719 | 47,838 | ||||||
Operating expenses: | ||||||||||
General, administrative, and marketing | 38,638 | 39,002 | 38,955 | 38,638 | ||||||
Research and development | 7,754 | 6,356 | 10,128 | 7,754 | ||||||
Total operating expenses | 46,392 | 45,358 | 49,083 | 46,392 | ||||||
Operating income (loss) | 1,446 | (1,187) | ||||||||
Operating income | 1,636 | 1,446 | ||||||||
Interest expense | 4,040 | 3,388 | 3,948 | 4,040 | ||||||
Interest income | (24) | (102) | (16) | (24) | ||||||
Other expense, net | 1,931 | 3,662 | 133 | 1,931 | ||||||
Loss before income taxes | (4,501) | (8,135) | (2,429) | (4,501) | ||||||
Income tax benefit | (1,363) | (1,470) | ||||||||
Income tax expense (benefit) | 960 | (1,363) | ||||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Loss per common share: | ||||||||||
Loss per share: | ||||||||||
Basic | $ | (0.08) | $ | (0.18) | $ | (0.08) | (0.08) | |||
Diluted | $ | (0.08) | $ | (0.18) | $ | (0.08) | $ | (0.08) | ||
Weighted-average common shares outstanding: | ||||||||||
Basic | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
Diluted | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Other comprehensive loss: | ||||||||||
Foreign currency translation adjustments | (10,290) | (4,463) | (3,775) | (10,290) | ||||||
Comprehensive loss | $ | (13,428) | $ | (11,128) | $ | (7,164) | $ | (13,428) | ||
See accompanying Notes to Condensed Consolidated Financial Statements
CryoLife,Artivion, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
In Thousands
March 31, | December 31, | March 31, | December 31, | |||||||
2021 | 2020 | 2022 | 2021 | |||||||
(Unaudited) | (Unaudited) | |||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 56,552 | $ | 61,412 | $ | 51,408 | $ | 55,010 | ||
Restricted securities | 550 | 546 | ||||||||
Trade receivables, net | 48,320 | 45,964 | 54,998 | 53,019 | ||||||
Other receivables | 2,416 | 2,788 | 4,577 | 5,086 | ||||||
Inventories | 73,375 | 73,038 | ||||||||
Deferred preservation costs | 39,250 | 36,546 | ||||||||
Inventories, net | 76,208 | 76,971 | ||||||||
Deferred preservation costs, net | 43,964 | 42,863 | ||||||||
Prepaid expenses and other | 15,220 | 14,295 | 13,378 | 14,748 | ||||||
Total current assets | 235,683 | 234,589 | 244,533 | 247,697 | ||||||
Goodwill | 253,950 | 260,061 | 247,829 | 250,000 | ||||||
Acquired technology, net | 178,964 | 186,091 | 162,458 | 166,994 | ||||||
Other intangibles, net | 39,274 | 40,966 | ||||||||
Operating lease right-of-use assets, net | 39,073 | 18,571 | 44,365 | 45,714 | ||||||
Property and equipment, net | 31,497 | 33,077 | 37,459 | 37,521 | ||||||
Other intangibles, net | 33,697 | 34,502 | ||||||||
Deferred income taxes | 1,657 | 1,446 | 3,489 | 2,357 | ||||||
Other assets | 14,734 | 14,603 | 8,026 | 8,267 | ||||||
Total assets | $ | 794,832 | $ | 789,404 | $ | 781,856 | $ | 793,052 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Current portion of contingent consideration | $ | 16,800 | $ | 16,430 | ||||||
Accounts payable | $ | 9,230 | $ | 10,395 | ||||||
Accrued compensation | 10,644 | 10,192 | 9,571 | 13,163 | ||||||
Accounts payable | 8,952 | 9,623 | ||||||||
Accrued expenses | 8,564 | 7,472 | 9,396 | 7,687 | ||||||
Taxes payable | 5,575 | 3,634 | ||||||||
Accrued procurement fees | 3,402 | 3,619 | 2,206 | 3,689 | ||||||
Current maturities of operating leases | 1,548 | 5,763 | 3,362 | 3,149 | ||||||
Current portion of long-term debt | 1,174 | 1,195 | 1,622 | 1,630 | ||||||
Taxes payable | 3,229 | 2,808 | ||||||||
Other liabilities | 3,705 | 3,366 | 1,875 | 1,606 | ||||||
Total current liabilities | 58,018 | 60,468 | 42,837 | 44,953 | ||||||
Long-term debt | 310,058 | 290,468 | 307,232 | 307,493 | ||||||
Contingent consideration | 44,100 | 43,500 | 47,600 | 49,400 | ||||||
Non-current maturities of operating leases | 38,441 | 14,034 | 43,679 | 44,869 | ||||||
Non-current finance lease obligation | 4,156 | 4,374 | ||||||||
Deferred income taxes | 29,272 | 34,713 | 26,373 | 28,799 | ||||||
Deferred compensation liability | 5,436 | 5,518 | 5,766 | 5,952 | ||||||
Other liabilities | 12,176 | 11,990 | 6,721 | 6,484 | ||||||
Total liabilities | $ | 497,501 | $ | 460,691 | $ | 484,364 | $ | 492,324 | ||
Commitments and contingencies |
|
|
|
| ||||||
Shareholders' equity: | ||||||||||
Preferred stock | -- | -- | -- | -- | ||||||
Common stock (issued shares of 40,585 in 2021 and 40,394 in 2020) | 406 | 404 | ||||||||
Common stock (issued shares of 41,688 in 2022 and 41,397 in 2021) | 417 | 414 | ||||||||
Additional paid-in capital | 301,449 | 316,192 | 326,799 | 322,874 | ||||||
Retained earnings | 13,671 | 20,022 | ||||||||
Accumulated other comprehensive (loss) income | (3,547) | 6,743 | ||||||||
Treasury stock, at cost, 1,487 shares as of March 31, 2021 and December 31, 2020, respectively | (14,648) | (14,648) | ||||||||
Retained (deficit) earnings | (1,414) | 1,975 | ||||||||
Accumulated other comprehensive loss | (13,662) | (9,887) | ||||||||
Treasury stock, at cost, 1,487 shares as of March 31, 2022 | (14,648) | (14,648) | ||||||||
Total shareholders' equity | 297,331 | 328,713 | 297,492 | 300,728 | ||||||
Total liabilities and shareholders' equity | $ | 794,832 | $ | 789,404 | $ | 781,856 | $ | 793,052 | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
Statements
CryoLife,
Artivion, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
In Thousands
(Unaudited)
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Net cash flows from operating activities: | ||||||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||||
Depreciation and amortization | 6,006 | 4,898 | 5,881 | 6,006 | ||||||
Non-cash compensation | 2,480 | 2,564 | 3,166 | 2,480 | ||||||
Non-cash lease expense | 1,758 | 1,746 | 1,920 | 1,758 | ||||||
Write-down of inventories and deferred preservation costs | 1,274 | 720 | 989 | 1,274 | ||||||
Change in fair value of contingent consideration | 970 | -- | (1,800) | 970 | ||||||
Deferred income taxes | (4,241) | (265) | (2,966) | (4,241) | ||||||
Other | 787 | 461 | 496 | 787 | ||||||
Changes in operating assets and liabilities: | ||||||||||
Prepaid expenses and other assets | 1,494 | (1,291) | ||||||||
Inventories and deferred preservation costs | (1,359) | (5,933) | ||||||||
Receivables | (1,710) | (3,301) | ||||||||
Accounts payable, accrued expenses, and other liabilities | 1,590 | (2,489) | (3,320) | 1,590 | ||||||
Prepaid expenses and other assets | (1,291) | 982 | ||||||||
Receivables | (3,301) | 3,557 | ||||||||
Inventories and deferred preservation costs | (5,933) | (2,874) | ||||||||
Net cash flows (used in) provided by operating activities | (3,039) | 2,635 | ||||||||
Net cash flows used in operating activities | (598) | (3,039) | ||||||||
Net cash flows from investing activities: | ||||||||||
Capital expenditures | (1,502) | (2,539) | (2,239) | (1,502) | ||||||
Other | 692 | (364) | (469) | 692 | ||||||
Net cash flows used in investing activities | (810) | (2,903) | (2,708) | (810) | ||||||
Net cash flows from financing activities: | ||||||||||
Proceeds from revolving line of credit | -- | 30,000 | ||||||||
Proceeds from exercise of stock options and issuance of common stock | 861 | 1,064 | 2,318 | 861 | ||||||
Repayment of debt | (694) | (701) | ||||||||
Redemption and repurchase of stock to cover tax withholdings | (1,813) | (1,712) | (1,730) | (1,813) | ||||||
Repayment of debt | (701) | (691) | ||||||||
Other | (442) | (146) | (129) | (442) | ||||||
Net cash flows (used in) provided by financing activities | (2,095) | 28,515 | ||||||||
Net cash flows used in financing activities | (235) | (2,095) | ||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted securities | 1,088 | 1,336 | ||||||||
(Decrease) increase in cash, cash equivalents, and restricted securities | (4,856) | 29,583 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (61) | 1,088 | ||||||||
Decrease in cash and cash equivalents | (3,602) | (4,856) | ||||||||
Cash, cash equivalents, and restricted securities beginning of period | 61,958 | 34,294 | ||||||||
Cash, cash equivalents, and restricted securities end of period | $ | 57,102 | $ | 63,877 | ||||||
Cash and cash equivalents beginning of period | 55,010 | 61,958 | ||||||||
Cash and cash equivalents end of period | $ | 51,408 | $ | 57,102 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
CryoLife,Artivion, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
In Thousands
(Unaudited)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Additional | Retained | Other | Total | ||||||||||||||||||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | Shareholders' | Common | Paid-In | Earnings | Comprehensive | Treasury | Shareholders' | |||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Loss | Stock | Equity | Stock | Capital | (Deficit) | Loss | Stock | Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 39,018 | 390 | 271,782 | 36,704 | (8,589) | (1,484) | (14,591) | 285,696 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 41,397 | $ | 414 | $ | 322,874 | $ | 1,975 | $ | (9,887) | (1,487) | $ | (14,648) | $ | 300,728 | ||||||||||||||||||||||||||||
Net loss | -- | -- | -- | (6,665) | -- | -- | -- | (6,665) | -- | -- | -- | (3,389) | -- | -- | -- | (3,389) | ||||||||||||||||||||||||||
Other comprehensive loss | -- | -- | -- | -- | (4,463) | -- | -- | (4,463) | -- | -- | -- | -- | (3,775) | -- | -- | (3,775) | ||||||||||||||||||||||||||
Equity compensation | 208 | 2 | 2,687 | -- | -- | -- | -- | 2,689 | 205 | 2 | 3,338 | -- | -- | -- | -- | 3,340 | ||||||||||||||||||||||||||
Exercise of options | 33 | -- | 376 | -- | -- | -- | -- | 376 | 140 | 2 | 1,678 | -- | -- | -- | -- | 1,680 | ||||||||||||||||||||||||||
Employee stock purchase plan | 30 | -- | 688 | -- | -- | -- | -- | 688 | 37 | -- | 638 | -- | -- | -- | -- | 638 | ||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (70) | -- | (1,712) | -- | -- | -- | -- | (1,712) | (91) | (1) | (1,729) | -- | -- | -- | -- | (1,730) | ||||||||||||||||||||||||||
Balance at March 31, 2020 | 39,219 | $ | 392 | $ | 273,821 | $ | 30,039 | $ | (13,052) | (1,484) | $ | (14,591) | $ | 276,609 | ||||||||||||||||||||||||||||
Balance at March 31, 2022 | 41,688 | $ | 417 | $ | 326,799 | $ | (1,414) | $ | (13,662) | (1,487) | $ | (14,648) | $ | 297,492 | ||||||||||||||||||||||||||||
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 loss | -- | -- | -- | (3,138) | -- | -- | -- | (3,138) | |||||||||||||
Other comprehensive loss | -- | -- | -- | -- | (10,290) | -- | -- | (10,290) | |||||||||||||
Impact of adoption of ASU 2020-06 | -- | -- | (16,426) | (3,213) | -- | -- | -- | (19,639) | |||||||||||||
Equity compensation | 207 | 2 | 2,635 | -- | -- | -- | -- | 2,637 | |||||||||||||
Exercise of options | 19 | -- | 271 | -- | -- | -- | -- | 271 | |||||||||||||
Employee stock purchase plan | 37 | 1 | 589 | -- | -- | -- | -- | 590 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (72) | (1) | (1,812) | -- | -- | -- | -- | (1,813) | |||||||||||||
Balance at March 31, 2021 | 40,585 | $ | 406 | $ | 301,449 | $ | 13,671 | $ | (3,547) | (1,487) | $ | (14,648) | $ | 297,331 | |||||||
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 loss | -- | -- | -- | (3,138) | -- | -- | -- | (3,138) | |||||||||||||
Other comprehensive loss | -- | -- | -- | -- | (10,290) | -- | -- | (10,290) | |||||||||||||
Impact of adoption of ASU 2020-06 | -- | -- | (16,426) | (3,213) | -- | -- | -- | (19,639) | |||||||||||||
Equity compensation | 207 | 2 | 2,635 | -- | -- | -- | -- | 2,637 | |||||||||||||
Exercise of options | 19 | -- | 271 | -- | -- | -- | -- | 271 | |||||||||||||
Employee stock purchase plan | 37 | 1 | 589 | -- | -- | -- | -- | 590 | |||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (72) | (1) | (1,812) | -- | -- | -- | -- | (1,813) | |||||||||||||
Balance at March 31, 2021 | 40,585 | $ | 406 | $ | 301,449 | $ | 13,671 | $ | (3,547) | (1,487) | $ | (14,648) | $ | 297,331 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements
CryoLife,Artivion, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Overview
The accompanying Condensed Consolidated Financial Statements include the accounts of CryoLife,Artivion, Inc. and its subsidiaries (“CryoLife,Artivion,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Condensed Consolidated Balance Sheet as of December 31, 20202021 has been derived from audited financial statements. The accompanying unaudited Condensed Consolidated Financial Statements as of, and for the three months ended, March 31, 20212022 and 20202021 have been prepared in accordance with (i) accounting principles generally accepted in the U.S.US for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S.US 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.US 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 months ended March 31, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in CryoLife’sArtivion’s Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the SEC on February 22, 2022.
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, 2021. 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 US, which require us to make estimates and assumptions. We did not experience any significant changes during the three months ended March 31, 2022 in any of our Significant Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2021.
New Accounting Standards
Recently Adopted
In August 2020 the FASBFinancial Accounting Standards Board (the “FASB”) issued ASCAccounting Standard Update (“ASU”) 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 instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature mode)model) and reducing the number of embedded conversion features that could be recognized separately from the host 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 using 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.approach. See Note 108 for further discussion of convertible debt.
Not Yet Effective
In December 2019March 2020 the FASB issued ASU 2020-04, ASC Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income TaxesReference Rate Reform Topic 848 (“ASU 2019-12”ASC 848”). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptionswere put forth in response to the generalmarket transition from the LIBOR and other interbank offered rates to alternative reference rates. Accounting principles generally accepted in Topic 740.the United States of America require 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 amendments also improve consistent application ofstandard provides this temporary election through December 31, 2022 and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for public entities in fiscal years beginningcannot be applied to contract modifications that occur after December 15, 2020, including interim periods within those fiscal years.31, 2022. We adopted ASU 2019-02 on January 1, 2021 andare in the process of evaluating the effect that the adoption did notof this standard will have an impact on our financial condition orposition and results of operation.operations.
The following is a summary of our financial instruments measured at fair value on a recurring basis (in thousands):
2. Acquisition of Ascyrus
March 31, 2022 | Level 1 | Level 2 | Level 3 | Total | |||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 10,018 | $ | -- | $ | -- | $ | 10,018 | |||
Total assets | $ | 10,018 | $ | -- | $ | -- | $ | 10,018 | |||
Long-term liabilities: | |||||||||||
Contingent consideration | -- | -- | (47,600) | (47,600) | |||||||
Total liabilities | $ | -- | $ | -- | $ | (47,600) | $ | (47,600) | |||
Overview
December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | |||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 10,015 | $ | -- | $ | -- | $ | 10,015 | |||
Total assets | $ | 10,015 | $ | -- | $ | -- | $ | 10,015 | |||
Long-term liabilities: | |||||||||||
Contingent consideration | -- | -- | (49,400) | (49,400) | |||||||
Total liabilities | $ | -- | $ | -- | $ | (49,400) | $ | (49,400) | |||
We used prices quoted from our investment advisors to determine the Level 1 valuation of our investments in money market funds.
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 developed the Ascyrus Medical Dissection Stent (“AMDS”) hybrid prosthesis,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, that were 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 additional consideration cash payment capped 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 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 Approval application submitted for the AMDS.
Accountingfor the Transaction
Upon closing of the acquisition on September 2, 2020, we paid $82.4 million consisting of $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 $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.earnout.
We recorded theThe contingent consideration liability of $16.8 million and $16.4 million in Current liabilities and $44.1 million and $43.5 million in Other long-term liabilities as of March 31, 2021 and December 31, 2020, respectively, in the Condensed Consolidated Balance Sheets, representingrepresents 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.hierarchy. We used a discount rate of approximately 10% and estimated future achievement of milestone dates between 2025 and 2026 to calculate the fair value of contingent consideration as of March 31, 2022. We will remeasure this liability at each reporting date and will record changes in the fair value of the contingent consideration in General, administrative, and marketing expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss. Increases or decreases in the fair value of the contingent consideration liability can result from changes in passage of time, discount rates, the timing and amount of our revenue estimates, and the timing and expectation of regulatory approvals.
We performed an assessment of the fair value of the contingent consideration asand recorded income of $1.8 million and expense of $970,000 in fair value adjustments for the three months ended March 31, 2022 and 2021, and recorded a $970,000 fair value adjustmentrespectively, in General, administrative, and marketing expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss, as a result of this assessment.
We recorded $62.5 million of preliminary goodwill, of which $61.2 million 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 Devices segment. The estimated allocation of assets acquired and liabilities assumed is based on the information available that would have been known as of the acquisition date. We are completing our procedures related to the purchase price allocation and if information regarding these values is received that would result in a material adjustment to the values recorded, we will recognize the adjustment, which may include the recognition of additional expenses or other allocation adjustments, in the period this determination is made. During the three months ended March 31, 2021 we received a $777,000 cash distribution from escrow related to the working capital adjustments which reduced the purchase price consideration. This adjustment was included in other cash flows used in investing activities on the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021.
The September 2, 2020 allocation of preliminary purchase consideration adjusted as of March 31, 2021 consisted of the following (in thousands):
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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 Ascyrus acquisition are included in results of operations from the date of acquisition and were not significant for the three months ended March 31, 2021.
Exclusive Distribution Agreement and Securities Purchase Option Agreement
On September 11, 2019 CryoLife, Inc.’s wholly-owned subsidiary, JOTEC GmbH, (“JOTEC”), entered into an exclusive distribution agreement (“Endospan Distribution Agreement”) with Endospan Ltd. (“Endospan”), an Israeli corporation, pursuant to which JOTEC obtained exclusive distribution rights for Endospan’s NEXUSTM 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 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 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 the NEXUS IDE from the 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. We paid an additional $5.0 million for the second tranche described above. We evaluated Endospan for VIE classification as of March 31, 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 March 31, 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. 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 Condensed 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 Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020. The Endospan Distribution Agreement was recorded at $7.2 million and $8.0 million in Other Intangibles, net in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 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. The fair value of the Endospan Loan was $409,000 as of March 31, 2021 and December 31, 2020.
The following is a summary of our financial instruments measured at fair value on a recurring basis (in thousands):
March 31, 2021 | Level 1 | Level 2 | Level 3 | Total | |||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 10,006 | $ | -- | $ | -- | $ | 10,006 | |||
Restricted securities: | |||||||||||
Money market funds | 550 | -- | -- | 550 | |||||||
Endospan loan | -- | -- | 409 | 409 | |||||||
Total assets | $ | 10,556 | $ | -- | $ | 409 | $ | 10,965 | |||
Current liabilities: | |||||||||||
Contingent consideration | -- | -- | (16,800) | (16,800) | |||||||
Long-term liabilities: | |||||||||||
Contingent consideration | -- | -- | (44,100) | (44,100) | |||||||
Total liabilities | $ | -- | $ | -- | $ | (60,900) | $ | (60,900) | |||
December 31, 2020 | Level 1 | Level 2 | Level 3 | Total | |||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 11,484 | $ | -- | $ | -- | $ | 11,484 | |||
Restricted securities: | |||||||||||
Money market funds | 546 | -- | -- | 546 | |||||||
Endospan loan | -- | -- | 409 | 409 | |||||||
Total assets | $ | 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 contingent consideration component of the Ascyrus acquisition was classified as aupdated using Level 3 financial instrument. See Note 2 and Note 3 for further discussion of the Ascyrus acquisition, and the Endospan Loan, respectively.inputs. 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, 2020 | $ | 409 | Balance as of December 31, 2020 | $ | (59,930) | |
Change in valuation | -- | Change in valuation | (970) | |||
Balance as of March 31, 2021 | $ | 409 | Balance as of March 31, 2021 | $ | (60,900) |
Contingent Consideration | ||
Balance as of December 31, 2021 | $ | (49,400) |
Change in valuation | 1,800 | |
Balance as of March 31, 2022 | $ | (47,600) |
The following is a summary of cash equivalents and restricted securities (in thousands):
Unrealized | Estimated | Unrealized | Estimated | |||||||||||||
Holding | Market | Holding | Market | |||||||||||||
March 31, 2021 | Cost Basis | Gains | Value | |||||||||||||
March 31, 2022 | Cost Basis | Gains | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 10,006 | $ | -- | $ | 10,006 | ||||||||||
Restricted securities: | ||||||||||||||||
Money market funds | 550 | -- | 550 | $ | 10,018 | $ | -- | $ | 10,018 | |||||||
Total assets | $ | 10,556 | $ | -- | $ | 10,556 | $ | 10,018 | $ | -- | $ | 10,018 | ||||
Unrealized | Estimated | Unrealized | Estimated | |||||||||||||
Holding | Market | Holding | Market | |||||||||||||
December 31, 2020 | Cost Basis | Gains | Value | |||||||||||||
December 31, 2021 | Cost Basis | Gains | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 11,484 | $ | -- | $ | 11,484 | $ | 10,015 | $ | -- | $ | 10,015 | ||||
Restricted securities: | ||||||||||||||||
Money market funds | 546 | -- | 546 | |||||||||||||
Total assets | $ | 12,030 | $ | -- | $ | 12,030 | $ | 10,015 | $ | -- | $ | 10,015 | ||||
As of March 31, 2021 and December 31, 2020 $550,000 and $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 months ended March 31, 20212022 and 2020. As of March 31, 2021 $550,000 of our restricted securities had a maturity date within three months. As of December 31, 2020 $546,000 of our restricted securities had a maturity date within three months.2021.
Inventories at March 31, 20212022 and December 31, 20202021 were comprised of the following (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||
2021 | 2020 | 2022 | 2021 | |||||||
Raw materials and supplies | $ | 34,789 | $ | 33,625 | $ | 35,075 | $ | 35,780 | ||
Work-in-process | 7,730 | 6,318 | 11,440 | 9,712 | ||||||
Finished goods | 30,856 | 33,095 | 29,693 | 31,479 | ||||||
Total inventories | $ | 73,375 | $ | 73,038 | ||||||
Total inventories, net | $ | 76,208 | $ | 76,971 | ||||||
Total deferred preservation costs were $39.3 million and $36.5 million as of March 31, 2021 and December 31, 2020, respectively.
To facilitate product usage, we maintain consignment inventory of our On-X heart valves at domestic hospital locations and On-X heart valves JOTEC and AMDS productsaortic stent grafts 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 March 31, 2022 we had $14.7 million in consignment inventory, with approximately 37% in domestic locations and 63% in international locations. As of December 31, 2021 we had $13.4$12.9 million in consignment inventory, with approximately 43% in domestic locations and 57% in international locations. As
Total deferred preservation costs were $44.0 million and $42.9 million as of March 31, 2022 and December 31, 2020 we had $11.92021, respectively.
Inventory and deferred preservation costs obsolescence reserves were $2.7 million in consignment inventory, with approximately 47% in domestic locations and 53% in international locations.$3.2 million as of March 31, 2022 and December 31, 2021, respectively.
Indefinite Lived Intangible Assets
As of March 31, 20212022 and December 31, 20202021 the carrying values of our indefinite lived intangible assets were as follows (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||
2021 | 2020 | 2022 | 2021 | |||||||
Goodwill | $ | 253,950 | 260,061 | $ | 247,829 | $ | 250,000 | |||
In-process R&D | 2,286 | 2,392 | 2,164 | 2,208 | ||||||
Procurement contracts and agreements | 2,013 | 2,013 | 2,013 | 2,013 | ||||||
Trademarks | 765 | 765 | 196 | 66 | ||||||
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. We did not record any impairment of indefinite lived intangible assets during the three months ended March 31, 2022. In-process research and development, procurement contracts and agreements, and trademarks are included in Other intangibles, net on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.
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 March 31, 20212022 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.
As of March 31, 20212022 and December 31, 20202021 our entire goodwill balance was related to our Medical Devicesdevices segment.
Medical Devices Segment | ||
Balance as of December 31, | $ |
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Definite Lived Intangible Assets
The definite lived intangible assets balance includes balances related to acquired technology, customer relationships, distribution and manufacturing rights and know-how, patents, and other definite lived intangible assets. As of March 31, 20212022 and December 31, 20202021 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 | Weighted Average | |||||||||||||||||
March 31, 2021 | Value | Amortization | Period | |||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Useful Life | |||||||||||||||||
March 31, 2022 | Value | Amortization | Value | (Years) | ||||||||||||||||
Acquired technology | $ | 217,238 | $ | 38,274 | 11 | – | 22 | Years | $ | 211,589 | $ | 49,131 | $ | 162,458 | 17.7 | |||||
Other intangibles: | ||||||||||||||||||||
Customer lists and relationships | 31,218 | 8,494 | 13 | – | 22 | Years | 31,108 | 9,987 | 21,121 | 20.5 | ||||||||||
Distribution and manufacturing rights and know-how | 14,254 | 5,780 | 5 | – | 15 | Years | 9,652 | 4,675 | 4,977 | 5.0 | ||||||||||
Patents | 3,963 | 3,120 | 17 | Years | 4,127 | 3,153 | 974 | 17.0 | ||||||||||||
Other | 3,403 | 1,234 | 4 | – | 5 | Years | 4,190 | 1,938 | 2,252 | 4.4 | ||||||||||
Total other intangibles | $ | 49,077 | $ | 19,753 | $ | 29,324 | 10.6 | |||||||||||||
Gross Carrying | Accumulated | Amortization | Weighted Average | |||||||||||||||||
December 31, 2020 | Value | Amortization | Period | |||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Useful Life | |||||||||||||||||
December 31, 2021 | Value | Amortization | Value | (Years) | ||||||||||||||||
Acquired technology | $ | 222,182 | $ | 36,091 | 11 | – | 22 | Years | $ | 213,626 | $ | 46,632 | $ | 166,994 | 17.7 | |||||
Other intangibles: | ||||||||||||||||||||
Customer lists and relationships | 31,316 | 8,132 | 13 | – | 22 | Years | 31,148 | 9,618 | 21,530 | 20.5 | ||||||||||
Distribution and manufacturing rights and know-how | 14,728 | 5,349 | 5 | – | 15 | Years | 9,847 | 4,308 | 5,539 | 5.0 | ||||||||||
Patents | 3,966 | 3,113 | 17 | Years | 4,083 | 3,144 | 939 | 17.0 | ||||||||||||
Other | 3,453 | 1,073 | 4 | – | 5 | Years | 3,969 | 1,762 | 2,207 | 4.4 | ||||||||||
Total other intangibles | $ | 49,047 | $ | 18,832 | $ | 30,215 | 10.6 | |||||||||||||
Amortization Expense
The following is a summary of amortization expense as recorded in general,General, administrative, and marketing expenses on our Condensed Consolidated Statement of Operations and Comprehensive Loss (in thousands):
Three Months Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Amortization expense | $ | 4,260 | $ | 3,033 | |
Three Months Ended | |||||
March 31, | |||||
2022 | 2021 | ||||
Amortization expense | $ | 4,084 | $ | 4,260 | |
As of March 31, 20212022 scheduled amortization of intangible assets for the next five years is as follows (in thousands):
Remainder | ||||||||||||||||||||
of 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | Total | ||||||||||||||
Amortization expense | $ | 12,540 | 16,175 | 15,727 | 15,381 | 13,246 | 12,826 | $ | 85,895 | |||||||||||
Remainder | ||||||||||||||||||||
of 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Total | ||||||||||||||
Amortization expense | $ | 11,625 | 15,131 | 14,754 | 12,785 | 12,559 | 12,496 | $ | 79,350 | |||||||||||
Income Tax Expense
Our effective income tax rate was an expense of 40% and a benefit of 30% and 18% for the three months ended March 31, 2022 and 2021, and 2020, respectively. The change in theOur income tax rate for the three months ended March 31, 2021 is2022 was primarily due to a changeimpacted by changes in pre-tax book loss, as well as a reduction inour valuation allowance against our net deferred tax assets, non-deductible executive compensation, the excess tax benefit related to stock compensation for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.foreign derived intangible
Theincome deduction, the research and development tax credit, changes in our uncertain tax position liabilities, and tax shortfalls on stock compensation. Our income tax rate for the three months ended March 31, 2021 was favorablyprimarily impacted by excessnon-deductible executive compensation, changes in our valuation allowance against our net deferred tax benefit deductions related to stock compensation,assets, changes in our uncertain tax position liabilities, the research and development tax credit, and the reduction of a valuation allowance on prior year items. These factors were partially offset by the unfavorable impacts of non-deductible operating expenses, executive compensation expenses, and the recording of a tax reserve on prior year items.
The income tax rate for the three months ended March 31, 2020 was favorably impacted by excess tax benefit deductions related tobenefits on stock compensation. 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, primarily net operating loss carryforwards, 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 thesecapital leases, net operating losses, will not have a material impact on income taxes for the 2021amortization of research and experimental expenses, excess interest carryforward, stock compensation, and accrued compensation. Our deferred tax year.liabilities are primarily made up of intangible assets acquired in previous years, capital leases, and unrealized gains and losses.
As of March 31, 2021 weWe maintained a total of $9.4 million in valuation allowances against deferred tax assets, including state and federal net operating loss carryforwards and interest expense disallowance carryforwards, and a net deferred tax liability of $27.6 million. As$22.9 million and $26.4 million as of March 31, 2022 and December 31, 2020 we maintained a total of $7.2 million in2021, respectively. Our valuation allowancesallowance against our deferred tax assets including statewas $14.8 million and federal$13.3 million as of March 31, 2022 and December 31, 2021, respectively, primarily related to net operating loss carryforwards and a net deferred tax liability of $33.3 million.disallowed excess interest carryforwards.
During the three months ended March 31, 2021, we released a valuation allowance and increased a tax reserve in the amount of a net $1.8 million related to immaterial prior period correction of errors in the calculation of the valuation allowance and an uncertain tax position. The valuation allowance adjustment, which comprises the majority of the adjustment primarily arises from the improper reversal in the prior period valuation allowance assessment of future temporary differences created from the accounting of its convertible debt. On correcting the errors, we recorded an income tax benefit of $1.8 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 provides 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 change to the 2019 Section 163(j) interest expense deduction limitation for the 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 Companycompany vehicles; and leases on a variety of office and other equipment.
On January 6, 2021 we executed a modification to extend the lease of our headquarters locationlocated in Kennesaw, Georgia. This modification resulted in an increase in the present value of future lease obligations and corresponding right-of-use asset of $23.3 million, using a discount rate of 6.41%.
Consolidated balance sheet informationInformation related to leases included in the Condensed Consolidated Balance Sheets is as follows (in thousands, except lease term and discount rate):
Operating leases: | March 31, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | ||||||
Operating lease right-of-use assets | $ | 48,859 | $ | 28,242 | $ | 57,532 | $ | 58,097 | ||
Accumulated amortization | (9,786) | (9,671) | (13,167) | (12,383) | ||||||
Operating lease right-of-use assets, net | $ | 39,073 | $ | 18,571 | $ | 44,365 | $ | 45,714 | ||
Current maturities of operating leases | $ | 1,548 | $ | 5,763 | $ | 3,362 | $ | 3,149 | ||
Non-current maturities of operating lease | 38,441 | 14,034 | ||||||||
Non-current maturities of operating leases | 43,679 | 44,869 | ||||||||
Total operating lease liabilities | $ | 39,989 | $ | 19,797 | $ | 47,041 | $ | 48,018 | ||
Finance leases: | ||||||||||
Property and equipment, at cost | $ | 7,208 | $ | 7,620 | $ | 6,625 | $ | 6,759 | ||
Accumulated amortization | (1,897) | (1,905) | (2,196) | (2,105) | ||||||
Property and equipment, net | $ | 5,311 | $ | 5,715 | $ | 4,429 | $ | 4,654 | ||
Current maturities of finance leases | $ | 578 | $ | 614 | $ | 520 | $ | 528 | ||
Non-current maturities of finance leases | 4,930 | 5,300 | 4,156 | 4,374 | ||||||
Total finance lease liabilities | $ | 5,508 | $ | 5,914 | $ | 4,676 | $ | 4,902 | ||
Weighted average remaining lease term (in years): | ||||||||||
Operating leases | 13.2 | 5.1 | 12.4 | 12.5 | ||||||
Finance leases | 9.5 | 9.8 | 8.6 | 8.8 | ||||||
Weighted average discount rate: | ||||||||||
Operating leases | 5.9% | 5.2% | 5.9% | 5.8% | ||||||
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 Condensed 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 Condensed Consolidated Statements of Operations and Comprehensive Income Loss are as follows (in thousands):
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Amortization of property and equipment | $ | 154 | $ | 162 | $ | 137 | $ | 154 | ||
Interest expense on finance leases | 29 | 29 | 25 | 29 | ||||||
Total finance lease expense | 183 | 191 | 162 | 183 | ||||||
Operating lease expense | 1,758 | 1,748 | 1,920 | 1,758 | ||||||
Sublease income | (124) | (226) | (92) | (124) | ||||||
Total lease expense | $ | 1,817 | $ | 1,713 | $ | 1,990 | $ | 1,817 | ||
A summary of our cash flow information related to leases is as follows (in thousands):
Three Months Ended | ||||||||||
Three Months Ended | Three Months Ended | March 31, | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | March 31, 2021 | March 31, 2020 | 2022 | 2021 | ||||||
Operating cash flows for operating leases | $ | 1,500 | $ | 29 | $ | 1,525 | $ | 1,500 | ||
Financing cash flows for finance leases | 144 | 1,745 | 130 | 144 | ||||||
Operating cash flows for finance leases | 28 | 147 | 24 | 28 | ||||||
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 2021 | $ | 512 | $ | 2,650 | $ | 275 | ||||||||||
2022 | 642 | 4,653 | 305 | |||||||||||||
Remainder of 2022 | $ | 436 | $ | 4,392 | $ | 214 | ||||||||||
2023 | 641 | 5,268 | -- | 616 | 5,630 | -- | ||||||||||
2024 | 637 | 4,973 | -- | 610 | 6,189 | -- | ||||||||||
2025 | 618 | 4,160 | -- | 587 | 5,162 | -- | ||||||||||
2026 | 568 | 4,767 | -- | |||||||||||||
Thereafter | 2,999 | 38,922 | -- | 2,272 | 42,021 | -- | ||||||||||
Total minimum lease payments | $ | 6,049 | $ | 60,626 | $ | 580 | $ | 5,089 | $ | 68,161 | $ | 214 | ||||
Less amount representing interest | (541) | (20,637) | (413) | (21,120) | ||||||||||||
Present value of net minimum lease payments | 5,508 | 39,989 | 4,676 | 47,041 | ||||||||||||
Less current maturities | (578) | (1,548) | (520) | (3,362) | ||||||||||||
Lease liabilities, less current maturities | $ | 4,930 | $ | 38,441 | $ | 4,156 | $ | 43,679 | ||||||||
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 our Term Loan and Revolving Credit Facility. The proceedsAs part of the amendment, the maturity dates of both our Term Loan and 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 triggered 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 amendmentif the Convertible Senior Notes’ own maturity date has been extended, the earlier of (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 March 31, 2021 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 Loss.
TheAs discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 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 some of 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 was 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 became subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. The new minimum liquidity covenant required 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 March 31, 2022.
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 March 31, 2021.2022. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. 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 if-converted method for assumed conversion of the Convertible Senior Notes for the diluted earnings per share calculation. The fair value and the effective interest rate of the Convertible Senior Notes as of March 31, 2022 was approximately $116.5 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 for the aggregate of the contractual coupon interest,interest, and the amortization of the debt issuance costs as of the three months ended March 31, 2022 and 2021. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually. As of March 31, 2022 there were $2.4 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
(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 March 31, 2021 we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes. We 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):
March 31, | December 31, | March 31, | December 31, | |||||||
2021 | 2020 | 2022 | 2021 | |||||||
Term loan balance | $ | 217,688 | $ | 218,250 | $ | 215,438 | $ | 216,000 | ||
Convertible senior notes | 100,000 | 79,555 | 100,000 | 100,000 | ||||||
2.45% Sparkasse Zollernalb (KFW Loan 1) | 782 | 886 | 493 | 566 | ||||||
1.40% Sparkasse Zollernalb (KFW Loan 2) | 1,319 | 1,457 | 971 | 1,061 | ||||||
Total loan balance | 319,789 | 300,148 | 316,902 | 317,627 | ||||||
Less unamortized loan origination costs | (8,557) | (8,485) | (8,048) | (8,504) | ||||||
Net borrowings | 311,232 | 291,663 | 308,854 | 309,123 | ||||||
Less short-term loan balance | (1,174) | (1,195) | (1,622) | (1,630) | ||||||
Long-term loan balance | $ | 310,058 | $ | 290,468 | $ | 307,232 | $ | 307,493 | ||
Interest Expense
Interest expense was $3.9 million and $4.0 million for the three months ended March 31, 2022 and 2021, as compared to $3.4 million for the three months ended March 31, 2020.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 $1.9 million asclaims may be asserted against us in the future based on past events that we are not aware of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020,at the related recoverablepresent time. We maintain claims-made insurance amounts were $1.0 million and $974,000, 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 March 31, 2021 could have been as high as $4.1 million, after including a reasonable margin2022 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.
Employment Agreements
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 third quarter of 2021.
As of March 31, 2021 we had $1.5 million in prepaid royalties, $1.7 million in intangible assets, net, and $1.2 million in property and equipment, net, on our Condensed 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.
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 months ended March 31, 20212022 and 20202021 the sources of revenue were as follows (in thousands):
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
(Unaudited) | (Unaudited) | |||||||||
Domestic hospitals | $ | 36,229 | $ | 36,336 | $ | 36,993 | $ | 36,229 | ||
International hospitals | 26,128 | 19,737 | 28,414 | 26,128 | ||||||
International distributors | 8,642 | 10,245 | 11,064 | 8,642 | ||||||
CardioGenesis cardiac laser therapy | 88 | 111 | 742 | 88 | ||||||
Total sources of revenue | $ | 71,087 | $ | 66,429 | $ | 77,213 | $ | 71,087 | ||
Also see segment disaggregation information in Note 1513 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 March 31, 20212022 and 2020.2021.
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 March 31, 20212022 and 20202021 was not material.
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 three months ended March 31, 20212022 the Compensation Committee of our Board of Directors (the “Committee”) authorized awards from approved stock incentive plans of RSUs and PSUs to certain employees and company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 452,000 shares and had an aggregate grant date market value of $8.3 million.
During the three months ended March 31, 2021 the Committee authorized awards from approved stock incentive plans of RSUs and PSUs to certain employees, and RSAs and PSUs to certain Company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 381,000 shares and had an aggregate grant date market value of $9.5 million.
During the three months ended March 31, 2020 the Committee authorized awards from approved stock incentive plans of RSUs to certain employees, and RSAs and PSUs to certain Company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 255,000 shares and had an aggregate grant date market value of $6.6 million. The PSUs granted in 2020 represent the right to receive from 60% to 150% of the target number of shares of common stock. In February 2021 the Committee used structured discretion to determine that the 2020 PSUs were earned and should be paid out at 100% of target resulting in a modification of the award which resulted in $960,000 compensation expense during the three months ended March 31, 2021 related to these performance awards.
The Committee authorized, from approved stock incentive plans, grants of stock options to purchase a total of 226,000314,000 and 212,000226,000 shares to certain Company officers during the three months ended March 31, 20212022 and 2020,2021, respectively. The exercise prices of the options were equal to the closing stock prices on their respective grant dates.
Employees purchased common stock totaling 37,000 and 36,000 shares in the three months ended March 31, 2022 and 2021, respectively, through the ESPP.
Employees purchased common stock totaling 36,000 and 30,000 shares in the three months ended March 31, 2021 and 2020, respectively, through the ESPP.
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 | Three Months Ended | ||||||||
March 31, 2021 | March 31, 2022 | ||||||||
Stock Options | ESPP | Stock Options | ESPP | ||||||
Expected life | 5.0 Years | 0.5 Years | 5.0 Years | 0.5 Years | |||||
Expected stock price volatility | 0.40 | 0.46 | 0.40 | 0.31 | |||||
Risk-free interest rate | 0.57% | 0.09% | 1.89% | 0.22% | |||||
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 | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
RSA, RSU, and PSU expense | $ | 2,050 | $ | 2,156 | $ | 2,768 | $ | 2,050 | ||
Stock option and ESPP expense | 587 | 533 | 572 | 587 | ||||||
Total stock compensation expense | $ | 2,637 | $ | 2,689 | $ | 3,340 | $ | 2,637 | ||
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 $174,000 and $157,000 in the three months ended March 31, 2022 and 2021, and $125,000 in the three months ended March 31, 2020,respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.
As of March 31, 2021 we had total unrecognized compensation costs of $14.8 million related to RSAs, RSUs, and PSUs and $3.2 million related to unvested stock options. As of March 31, 2021 this expense is expected to be recognized over a weighted-average period of 1.7 years for PSUs, 2.3 years for stock options, 2.4 years for RSUs, and 1.7 years for RSAs.
The following table sets forth the computation of basic and diluted loss per common share (in thousands, except per share data):
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
Basic loss per common share | 2021 | 2020 | 2022 | 2021 | ||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Net loss allocated to participating securities | 23 | 43 | 18 | 23 | ||||||
Net loss allocated to common shareholders | $ | (3,115) | $ | (6,622) | $ | (3,371) | $ | (3,115) | ||
Basic weighted-average common shares outstanding | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
Basic loss per common share | $ | (0.08) | $ | (0.18) | $ | (0.08) | $ | (0.08) | ||
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
Diluted loss per common share | 2021 | 2020 | 2022 | 2021 | ||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Net loss allocated to participating securities | 23 | 43 | 18 | 23 | ||||||
Net loss allocated to common shareholders | $ | (3,115) | $ | (6,622) | $ | (3,371) | $ | (3,115) | ||
Basic weighted-average common shares outstanding | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
Effect of dilutive stock options and awards | -- | -- | ||||||||
Diluted weighted-average common shares outstanding | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
Diluted loss per common share | $ | (0.08) | $ | (0.18) | $ | (0.08) | $ | (0.08) | ||
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. Accordingly, forFor the three months ended March 31, 20212022 and 20202021 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.
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 aortic stents and stent grafts, surgical sealants, On-X, and other product revenues. Aortic stents and stent grafts include JOTEC,aortic arch stent grafts, abdominal stent grafts, and synthetic vascular grafts. Aortic arch stent grafts include our E-vita Open NEO, E-vita Open Plus, AMDS, NEXUS, E-vita Thoracic 3G, and NEXUS product revenues.E-nya products. Abdominal stent grafts include our E-xtra Design Engineering, E-nside, E-tegra, E-ventus BX, and E-liac products. Surgical sealants include BioGlue Surgical Adhesive product revenues.products. The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular 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 | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Revenues: | ||||||||||
Medical devices | $ | 53,345 | $ | 46,420 | $ | 57,542 | $ | 53,345 | ||
Preservation services | 17,742 | 20,009 | 19,671 | 17,742 | ||||||
Total revenues | 71,087 | 66,429 | 77,213 | 71,087 | ||||||
Cost of products and preservation services: | ||||||||||
Medical devices | 14,911 | 13,040 | 17,408 | 14,911 | ||||||
Preservation services | 8,338 | 9,218 | 9,086 | 8,338 | ||||||
Total cost of products and preservation services | 23,249 | 22,258 | 26,494 | 23,249 | ||||||
Gross margin: | ||||||||||
Medical devices | 38,434 | 33,380 | 40,134 | 38,434 | ||||||
Preservation services | 9,404 | 10,791 | 10,585 | 9,404 | ||||||
Total gross margin | $ | 47,838 | $ | 44,171 | $ | 50,719 | $ | 47,838 | ||
The following table summarizes net revenues by product and service (in thousands):
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Products: | ||||||||||
Aortic stents and stent grafts | $ | 20,205 | 15,468 | |||||||
Aortic stent grafts | $ | 25,506 | $ | 20,205 | ||||||
Surgical sealants | 17,828 | 16,737 | 15,681 | 17,828 | ||||||
On-X | 13,095 | 12,202 | 14,371 | 13,095 | ||||||
Other | 2,217 | 2,013 | 1,984 | 2,217 | ||||||
Total products | 53,345 | 46,420 | 57,542 | 53,345 | ||||||
Preservation services | 17,742 | 20,009 | 19,671 | 17,742 | ||||||
Total revenues | $ | 71,087 | $ | 66,429 | $ | 77,213 | $ | 71,087 | ||
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;
The potential impact of the COVID-19 pandemic and the war in Ukraine on demand for and sales of our products and services, 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.US Dollars depending on the relative price of goods in their local currencies;
Our beliefs that the use of surgical adhesives and sealants, with or without sutures and staples, infor certain areasindications can enhance the efficacy and cost-effectiveness of certain procedures through more effective and rapid wound closure;
Our beliefs and anticipation regarding the favorable attributes and benefits of our products and services, the basis on which our products and services compete, our physician education activities, the advantages of our relationships with OPOs,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 activitiescertifications, clearances, renewals, and approvals;
Our beliefs about potential competition and competitive products and services, 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;
The 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 timelines for certain clinical trial milestones for the regulatory approvals of the NEXUS stent graft system in the U.S.US and the AMDS globally;
Our plans, costs,beliefs regarding the fair value of our acquisitions, divestitures, and anticipated timeline regarding regulatory approval for PerClotother business development activities and the 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 anticipated benefits from our corporate reincorporation and additional international marketsrebranding and the distributionrisks posed by the same;
Our beliefs about the present value and potential impairment of PerClot in those markets after the requisite regulatory approvals are obtained;our intangible assets and leases;
Our beliefs about handpiece availability and CardioGenesis cardiac laser therapy revenue;
Our beliefs regarding the impact alternative anticoagulation therapy and transcatheter heart valve replacement may have on the number of patients choosing On-X mechanical heart valves;
Our beliefs about our ability to make timely transitions to our notified bodies and obtain renewals for our CE Marks impacted by Brexit and the transition to the Medical Device Regulation (“MDR”) in Europe, our ability to obtain derogations related to the same, and the impact these renewals and derogations may have on our business;
Our beliefs about our R&D and product pipeline, including our beliefs about the timing of our clinical trials and product launches;
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 debt financing or equity financing;
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 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 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 On-X, PerClot, aortic stents and stent grafts, and BioGlue 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; the robustness and reliability of our workforce and supply chain; 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, 20202021 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,Artivion, Inc. (“CryoLife,Artivion,” 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 cardiac and implantablevascular human tissues. Aortic stents and stent grafts include JOTECaortic arch stent grafts, abdominal stent grafts, and surgical products (“JOTEC”), the synthetic vascular grafts. Aortic arch stent grafts include our E-vita Open NEO, E-vita Open Plus, AMDS,
NEXUS, E-vita Thoracic 3G, and the NEXUS endovascularE-nya products. Abdominal stent graft system (“NEXUS”).grafts include our E-xtra Design Engineering, E-nside, E-tegra, E-ventus BX, and E-liac products. Surgical sealants include BioGlueBioGlue® Surgical Adhesive (“BioGlue”) products.In addition to these four major product families, we sell or distribute PhotoFix® bovine surgical patch, PerClot hemostatic powder,patches, CardioGenesis® cardiac laser therapy, Therion® chorioamniotic allografts (previously marketed as NeoPatch®), and NeoPatch chorioamniotic allograft.PerClot® hemostatic powder (prior to the sale to a subsidiary of Baxter International, Inc (“Baxter”)).
We reported quarterly revenues of $71.1$77.2 million for the three months ended March 31, 2021,2022, a 7%9% increase from the three months ended March 31, 2020.2021. The increase in revenues for the three months ended March 31, 20212022 was primarily due to increases in revenues from aortic stents and stent grafts surgical sealants,revenues, preservation service revenues, and On-X product revenues, partially offset by decreases in tissue processing servicesurgical sealants and other product revenues.
See the “Results of Operations” section below for additional analysis of the three months ended March 31, 2021.2022.
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.”
Beginning in March 2020 we took steps to address the potential impact of COVID-19 on 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 aggregate principal amount convertible senior notes (“Convertible Senior Notes”); using portions of those proceeds to repay our Revolving Credit Facility and the remainder for general corporate purposes (see the “Liquidity and Capital Resources” identified in Part I, Item 2 of this form 10-Q for further detail of this 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 CryoLifeArtivion stock instead of cash compensation for a six month period through October 2020; and suspending management merit increases for seven months 2020 management merit increases.in 2020.
Our efforts to protect our supply chain and reduce the spread of COVID-19 among our employees, including our work-from-home arrangements, were largelyhave been successful in 2020 and the first quarter of 2021to date as we have continued to operate all manufacturing sites at near full production. 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,procedures; however, there is no guarantee that these efforts and arrangements, if they are continued, will continue to be successful in the future. Further, our reductions or delays in expenditures slowed our progress on certain key R&D initiatives and could in the future continue to adversely impact our business operations or further delay our recovery from the pandemic.
WeAlthough we have scaled back many of our COVID-19 mitigation efforts, we continue to monitor the impact of the COVID-19 pandemic and the emergence of new variants on our business and recognize that itCOVID-19 and its effects could continue to negatively impact our business and results of operations during the remainder of 20212022 and beyond. As an example, the COVID-19 pandemic has impacted certain aspects of the global supply chain and resulted in supply chain inflation. 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 or worsen. As global economies continue to recover from the COVID-19 downturn, the expiration of COVID-19 related hiring freezes, increased opportunities for remote work, and increasing compensation pressure have resulted in a competition for talent and an unprecedent number of retirements or career changes. The resulting worker shortages at all levels have impacted supply chains and distribution channels and employers’ and our own ability to adequately staff operations. Impact from these shortages to date, including a shortage of trained staff capable of meeting the increased demand associated with releasing quarantined tissue, have impacted, and may impact our operations going forward. Hospitals and other healthcare providers have also experienced staffing shortages impacting our business including increased restrictions on elective and non-emergent procedures, restrictions on access to healthcare facilities, cancellation of elective procedures, and the re-allocation of scarce resources to some critically ill patients. 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 financial performance will be impacted by the pandemic duringfor the remainder of 20212022 and beyond will depend largely on future developments, including changes in hospital utilization rates and staffing, prevalence and severity of new variants, the impact of vaccine mandates or vaccine encouragement programs on the spread of COVID-19 and its variants, global availability and acceptance of vaccines and their effectiveness against variants, the vaccine.prevalence of vaccine mandates generally, disruptions to workforce availability, and any continuing impact on the global supply chain. If COVID-19 becomesor its variants become more contagious, including through the spread of variants, if efforts to further contain the effects of COVID-19 or its variants, including vaccine mandates or adoption, are unsuccessful, if COVID-19, impactsits 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 cash flows.
See the “Risk Factors” identified in Part II, Item 1A of this form 10-Q for risks related to COVID-19.
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 months ended March 31, 2021 in any of our Critical Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2020.
See Note 1 of “Notes to Condensed 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 | Percent | Revenues as a Percentage of | |||||||||||||||||
Revenues for the | Change | Total Revenues for the | Revenues for the | Change | Total Revenues for the | |||||||||||||||
Three Months Ended | From Prior | Three Months Ended | Three Months Ended | From Prior | Three Months Ended | |||||||||||||||
March 31, | Year | March 31, | March 31, | Year | March 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Products: | ||||||||||||||||||||
Aortic stents and stent grafts | $ | 20,205 | $ | 15,468 | 31% | 28% | 23% | |||||||||||||
Aortic stent grafts | $ | 25,506 | $ | 20,205 | 26% | 33% | 28% | |||||||||||||
Surgical sealants | 17,828 | 16,737 | 7% | 26% | 26% | 15,681 | 17,828 | -12% | 20% | 26% | ||||||||||
On-X | 13,095 | 12,202 | 7% | 18% | 18% | 14,371 | 13,095 | 10% | 19% | 18% | ||||||||||
Other | 2,217 | 2,013 | 10% | 3% | 3% | 1,984 | 2,217 | -11% | 3% | 3% | ||||||||||
Total products | 53,345 | 46,420 | 15% | 75% | 70% | 57,542 | 53,345 | 8% | 75% | 75% | ||||||||||
Preservation services | 17,742 | 20,009 | -11% | 25% | 30% | 19,671 | 17,742 | 11% | 25% | 25% | ||||||||||
Total | $ | 71,087 | $ | 66,429 | 7% | 100% | 100% | $ | 77,213 | $ | 71,087 | 9% | 100% | 100% | ||||||
Products
Revenues from products increased 15%8% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021. The increase for the three months ended March 31, 20212022 was primarily due to increases in revenues from all product lines.aortic stent grafts and On-X products, partially offset by decreases in revenues from surgical sealants and other products. A discussion of the changes in product revenues for aortic stents and stent grafts, surgical sealants, On-X, and other product revenuesproducts 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 months ended March 31, 20212022, as compared to the three months ended March 31, 2020,2021, the U.S.US Dollar weakenedstrengthened in comparison to major currencies, resulting in revenue increasedecreases when these foreign currency denominated transactions were translated into U.S.US 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.US 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.US Dollars depending on the relative price of these goods in their local currencies.
Aortic Stents and Stent Grafts
Aortic stents and stent grafts including JOTEC,include aortic arch stent grafts, abdominal stent grafts, synthetic vascular grafts, and OEM aortic stent grafts products. Aortic arch stent grafts include our E-vita Open NEO, E-vita Open Plus, AMDS, NEXUS, E-vita Thoracic 3G, and NEXUS products,E-nya products. Abdominal stent grafts include our E-xtra Design Engineering, E-nside, E-tegra, E-ventus BX, and E-liac products. Aortic stent grafts are used in endovascular and open vascular and cardiac surgery as well as for the treatment of complex aortic arch, thoracic, and thoracicabdominal aortic diseases. Our aortic 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 and accessories in certain countries in Europe.
On September 2, 2020 CryoLife entered into an agreement to acquire all of the equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus has developed AMDS, anRevenues from aortic arch remodeling device used for the treatment of acute Type A aortic dissections. AMDS is currently distributed in Europe, the Middle East, and Africa (collectively, “EMEA”) and Canada and is included as a component of aortic stents and stent grafts revenues from the date of the acquisition.
Aortic stents and stent graft revenues increased 31%26% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021.
Aortic stents andRevenues from aortic stent grafts, revenues, excluding original equipment manufacturing (“OEM”),OEM, increased 28%27% for the three months ended March 31, 20212022, as compared to the three months ended March 31, 2020.2021. This increase was primarily due to a changean increase in mix of units sold, which increased revenues by 28%36%, andpartially offset by the effect of foreign exchange rates, which increaseddecreased revenues by 6%8%, partially offset byand a changedecrease in average sales prices of certain products in certain regions, which decreased revenues by 6%1%.
On a constant currency basis, revenues for aortic stents and stent grafts, excluding OEM, increased 19% in35% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021. The increase in revenues was partially due to improved conditions from the COVID-19 pandemic for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Revenues for the three months ended March 31, 20212022 increased primarily in EMEA, partially offset by decreases primarily in Latin America.Europe, the Middle East, and Africa (collectively, “EMEA”) and Asia Pacific (“APAC”). The revenue increase in EMEA iswas primarily due to customer buying patterns in certain direct markets. The revenue increase in APAC was primarily due to an increase in sales of JOTEC new product launches, as well asnewly launched aortic stent grafts. OEM sales of 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. The decrease in Latin America was primarily in direct markets due to the delay in surgical procedures due to the COVID-19 pandemic. Aortic stents andaortic stent graft OEM salesgrafts accounted for less than 1% of product revenues for the three months ended March 31, 20212022 and 2020.2021.
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 7%decreased 12% for the three months ended March 31, 20212022, as compared to the three months ended March 31, 2020.2021. This increasedecrease was primarily due to an increasea decrease in productsvolume of milliliters sold, in higher priced regions, which increased revenues by 6%, and the effect of foreign exchange rates, which increased revenues by 2%, partially offset by a change in average sales prices, which decreased revenues by 1%12%.
On a constant currency basis, revenues from the sales of surgical sealants increased 5% indecreased 11% for the three months ended March 31, 20212022, as compared to the three months ended March 31, 2020 primarily from2021. The decrease in revenue increases in North America and EMEA, partially offset by decreases primarily in Latin America. The revenue increase in North America marketfor the three months ended March 31, 2022 was primarily due to an increaserevenue decreases in North America. During the three months ended March 31, 2021 revenues from the sales of surgical proceduressealants in North America were larger than in the three months ended March 31, 2022 primarily due to inventory restocking orders placed in the first quarter of 2021 as hospitals experienced reduced impact from the COVID-19 pandemic and began resuming more normal operations. Revenues were negatively impacted during the three months ended March 31, 2021 as compared to March 31, 2020. The decrease in Latin America was primarily2022 due to continued delays and cancellations of some surgical procedures due to thehospital staffing challenges as a result of a new COVID-19 pandemic.variant.
See Part II, Item 1A, “Risk Factors—Operational Risks— We are currently seekingmay not be successful in obtaining necessary clinical results or regulatory approvalclearances/approvals for BioGlue in China,new and if this effort is successful, management believes this will provide an additional international growth opportunity for BioGlue in future years.existing products and services, and our approved products and services may not achieve market acceptance.”
Domestic revenues from surgical sealants accounted for 53%48% and 49%53% of total surgical sealant revenues for the three months ended March 31, 20212022 and 20202021, respectively.
On-X
The On-X catalogue of products includesinclude 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 7%10% for the three months ended March 31, 2021 as compared to the three months ended Mach 31, 2020.
On-X product revenues, excluding OEM, increased 8% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021.
On-X revenues, excluding OEM, increased 10% for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. This increase was primarily due to an increase in productsvolume of units sold, in certain regions which increased revenues by 9%, and the effect of foreign exchange rates, which increased revenues by 1%, partially offset by a change in average sales prices which decreased revenues by 2%10%.
On a constant currency basis, On-X revenues, excluding OEM, increased 7% in10% for the three months ended March 31, 20212022, as compared to the three months ended March 31, 20202021. The increase in revenues for the three months ended March 31, 2022 was primarily fromdue to revenue increases in Asia Pacific and North America partially offset by decreases primarilyand EMEA. Revenues were positively impacted in EMEA. Increases in Asia Pacific andthe North America wereAmerican
market due to increases in market share. Decreaseshare and in EMEA was due to delays and cancellationsan increase of surgical procedures due to the COVID-19 pandemic.shipments in direct markets. On-X OEM sales accounted for less than 1% of product revenues for botheach of the three months ended March 31, 2022 and 2021.
Domestic revenues from On-X accounted for 65% and 64% of total On-X revenues for the three months ended March 31, 2022 and 2021, and 2020.respectively.
Other
Other revenues are comprised of PhotoFix, PerClot (prior to the Baxter Transaction, described below), and CardioGenesis Cardiac Laser Therapycardiac laser therapy product revenues. The increase in otherOther revenues of 10%decreased 11% for the three months ended March 31, 20212022, as compared to March 31, 2020 was primarily due to a 17% increase in PhotoFix revenues primarily due to a 15% increase in units sold. The increase in PhotoFix units sold for the three months ended March 31, 2021 was primarily due to an increase in the number of physicians who implant the product compared to the three months ended March 31, 2020 as this product continues to increase penetration in domestic and European markets.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 to Baxter, and an agreement to terminate all of our material agreements with Starch Medical, Inc. (“SMI”) related to PerClot (collectively the “Baxter Transaction”).
The decrease in other revenues for the three months ended March 31, 2022 was primarily due to a decrease in PerClot product revenues, partially offset by an increase in CardioGenesis cardiac laser therapy product revenues. The decrease in PerClot product revenues for the three months ended March 31, 2022 was due to the Baxter Transaction, described in more detail in Part II, Item 7, “Sale of PerClot” of our annual report on Form 10-K for the year ended December 31, 2021. The increase in CardioGenesis cardiac laser therapy product revenues for the three months ended March 31, 2022 was primarily due to our ability to resume limited sales of handpieces during the fourth quarter of 2021, as further described below.
We are conductingRevenues from our pivotal clinical trial to gain approval to commercialize PerClot for surgical indicationsCardioGenesis cardiac laser therapy product line historically consisted primarily of sales of handpieces and, in certain periods, the U.S. Enrollment was completed in January 2019, andsale of laser consoles. During the three months ended March 31, 2021 we anticipate being inhad minimal revenues from the CardioGenesis cardiac laser therapy product line as we did not have a position to submit the PMAsupply of handpieces due to the FDAFDA’s review of our supplier’s change in manufacturing location. After obtaining approval, our supplier resumed manufacturing a limited supply of handpieces allowing us to resume limited sales during the thirdfourth quarter of 2021. See also Part I, Item 1A, “Risk Factors—Operational Risks—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.”
Preservation Services
Preservation services includesinclude service revenues from processing cardiac and vascular tissues. 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. 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: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 is currentlywas 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. We currently believe that the remainingAn additional $5.0 million of tissue was quarantined in quarantinedprocess pending further testing. Upon completion, and FDA acceptance of the testing, we began releasing tissue processed with this lotmeeting our release criteria late in the second quarter of saline should be available to release for distribution at a later date.2021. We believe that the written-off and quarantined tissue impacted the availability of tissue for distribution, andwhich had a negative impact on revenue in the first quarter of 2021. If the tissues held in quarantine are not released, we may record an additional write-off of up to $5.0 million.
Revenues from tissue processing decreasedincreased 11% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020 resulting primarily from a decrease2021. The increase in cardiac preservation service revenues primarily due to a 15% decrease in unit shipments of cardiac tissues, which decreased revenues by 18%.
The decrease in unit shipments for the three months ended March 31, 20212022 was primarily due to a decreasemix of tissues shipped which increased revenues by 10%, and an increase in pulmonary and aortic valve shipments due to tissues being held in quarantine as a result of the saline solution lot that contained some contamination as described above.average sales prices which increased revenues by 1%.
Cost of Products
Three Months Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Cost of products | $ | 14,911 | $ | 13,040 | |
Three Months Ended | |||||
March 31, | |||||
2022 | 2021 | ||||
Cost of products | $ | 17,408 | $ | 14,911 | |
Cost of products increased 14%17% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021. Cost of products for the three months ended March 31, 20212022 and 20202021 included costs related to aortic stents and stent grafts, surgical sealants, On-X, and other products.
The increase in cost of products for the three months ended March 31, 20212022 was primarily due to an increase in costs relatedshipments in certain regions due to write-downs of certain products and a changeimproved conditions from the COVID-19 pandemic as well as an increase in the mixcost of products sold duringsurgical sealants and aortic stent grafts as compared to the three months ended March 31, 2021.
Cost of Preservation Services
Three Months Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Cost of preservation services | $ | 8,338 | $ | 9,218 | |
Three Months Ended | |||||
March 31, | |||||
2022 | 2021 | ||||
Cost of preservation services | $ | 9,086 | $ | 8,338 | |
Cost of preservation services decreased 10%increased 9% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021. Cost of preservation services includes costs for cardiac and vascular tissue preservation services.
CostThe increase in cost of preservation services for the three months ended March 31, 2022 was primarily due to an increase in shipments due to improved conditions from the COVID-19 pandemic as well as an increase in the processing cost of cardiac and vascular tissues, as compared to the three months ended March 31, 2021.
Gross Margin
Three Months Ended | |||||
March 31, | |||||
2022 | 2021 | ||||
Gross margin | $ | 50,719 | $ | 47,838 | |
Gross margin as a percentage of total revenues | 66% | 67% | |||
Gross margin increased 6% for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was primarily due to an increase in shipments of aortic stent grafts, On-X products, and cardiac tissues partially offset by a decrease in shipments of surgical sealants. Gross margin as a percentage of total revenues decreased infor the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 primarily due to a reductionan unfavorable mix of unit shipments of cardiac tissueaortic stent grafts and to a lesser degree, the cost of unit shipments of cardiac and vascular tissue.
Gross Margin
Three Months Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Gross margin | $ | 47,838 | $ | 44,171 | |
Gross margin as a percentage of total revenues | 67% | 66% | |||
Gross margin increased 8% for the three months ended March 31, 2021,surgical sealants sold as compared to the three months ended March 31, 2020 primarilywell as an increase in product costs due to a mixinflationary pressures of products soldmaterials and labor during the three months ended March 31, 2021. Gross margin as a percentage of total revenues increased in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily due to a mix of products sold, partially offset by write-downs and price reductions of certain products shipped during the three months ended March 31, 2021.2022.
General, Administrative, and Marketing Expenses
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
General, administrative, and marketing expenses | $ | 38,638 | $ | 39,002 | $ | 38,955 | $ | 38,638 | ||
General, administrative, and marketing expenses | 54% | 59% | 50% | 54% | ||||||
as a percentage of total revenues | ||||||||||
General, administrative, and marketing expenses decreasedincreased 1% for the three months ended March 31, 2021,2022, as compared to the three months ended March 31, 2020.2021. The decreaseincrease in general,General, administrative, and marketing expenses for the three months ended March 31, 20212022 was primarily due to a decrease in marketing and travel expenses from reduced and cancelled travel and events, partially offset by an increase in personnel commission, and amortizationstock compensation expenses partially offset by a decrease in business development expenses.
General, administrative, and marketing expenses included $1.5$1.6 million of business development integration and severance expenses as ofincome for the three months ended March 31, 20212022, as compared to $823,000 as of$1.5 million expense for the three months ended March 31, 2020.2021. Business development integration and severance expenses during the three months ended March 31, 2021 were primarily comprised2022 included $1.8 million of chargesincome related to the fair value adjustments for the Ascyrus acquisition.contingent consideration as compared to $970,000 of expense during the three months ended March 31, 2021.
Research and Development Expenses
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Research and development expenses | $ | 7,754 | $ | 6,356 | $ | 10,128 | $ | 7,754 | ||
Research and development expenses | 11% | 10% | 13% | 11% | ||||||
as a percentage of total revenues | ||||||||||
Research and development expenses increased 22%31% for the three months ended March 31, 2021,2022, as compared to March 31, 2020. Research and development spending in the three months ended March 31, 2021. Research and development spending for the three months ended March 31, 2022 and 2021 was primarily focused on clinical work to gain regulatory approvals for On-X, PerClot,certain aortic stent grafts, and JOTEC products. Research and development spending in the three months ended March 31, 2020 was primarily focused on clinical work to gain regulatory approval for On-X and JOTECPerClot products.
Interest expense was $3.9 million and $4.0 million for the three months ended March 31, 2022 and 2021, as compared to $3.4 million for the three months ended March 31, 2020.respectively. Interest expense for the three months ended March 31, 20212022 and 20202021 relates to interest on debt and uncertain tax positions.
Other expense, net was $133,000 for the three months ended March 31, 2022, as compared to $1.9 million for the three months ended March 31, 2021, as compared to $3.7 million2021. Other expense, net for the three months ended March 31, 2020. Other expense, net2022 and 2021 primarily includes the realized and unrealized effects of foreign currency gains and losses.
Three Months Ended | Three Months Ended | |||||||||
March 31, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Loss before income taxes | $ | (4,501) | $ | (8,135) | $ | (2,429) | $ | (4,501) | ||
Income tax benefit | (1,363) | (1,470) | ||||||||
Income tax expense (benefit) | 960 | (1,363) | ||||||||
Net loss | $ | (3,138) | $ | (6,665) | $ | (3,389) | $ | (3,138) | ||
Diluted loss per common share | $ | (0.08) | $ | (0.18) | $ | (0.08) | $ | (0.08) | ||
Diluted weighted-average common shares outstanding | 38,738 | 37,390 | 39,850 | 38,738 | ||||||
We experiencedincurred a loss before income taxes for the three months ended March 31, 20212022 and 2020.2021. The loss before income taxes for the three months ended March 31, 2022 and 2021 was negatively impacted by the increase in operating expenses to support revenue expansion and 2020an increase in research, development, and clinical expenses. The loss before income taxes for three months ended March 31, 2021 was primarily due toalso negatively impacted by 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 patient reluctance to undergo procedures once the adverse impacts to capacity and restrictions decreased. These events had an adverse impact on revenues in certain regions as well as the fixed nature of certain operating expenses and an increase in research, development, and clinical expenses.pandemic.
Our effective income tax rate was an expense of 40% and a benefit of 30% and 18% for the three months ended March 31, 20212022 and March 31, 2020,2021, respectively. The change in the tax rate for the three months ended March 31, 2021 is2022 was primarily due to a changechanges in pre-tax book loss, as well asincome, a reductiondecrease in the excess tax benefit related to stock compensation, forand an increase in the estimated current year valuation allowance, as compared to the three months ended March 31, 2021.
TheOur income tax rate for the three months ended March 31, 2022 was primarily impacted by changes in our valuation allowance against our net deferred tax assets, non-deductible executive compensation, the foreign derived intangible income deduction, the research and development tax credit, changes in our uncertain tax position liabilities, and tax shortfalls on stock compensation.
Our income tax rate for the three months ended March 31, 2021 was favorablyprimarily impacted by excessnon-deductible executive compensation, changes in our valuation allowance against our net deferred tax benefit deductions related to stock compensation,assets, changes in our uncertain tax position liabilities, the research and development tax credit, and the reduction of a valuation allowance on prior year items. These factors were partially offset by the unfavorable impacts of non-deductible operating expenses, executive compensation expenses, and the recording of a tax reserve on prior year items.
The income tax rate for the three months ended March 31, 2020 was favorably impacted by excess tax benefit deductions related tobenefits on stock compensation. 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 provides 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 change to the 2019 Section 163(j) interest expense deduction limitation for the three months ended March 2020.
We experienced a net loss and diluted loss per common share for the three months ended March 31, 20212022, and 2020.2021. Net loss and diluted loss per common share for the three months ended March 31, 2022 and 2021 was primarily due to a loss before income taxes, as discussed above.
Seasonality
WeAs a 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 2021 and 2022 and potentially beyond.
Historically, we believe the demand for most of our aortic stents and stent grafts is seasonal, with a decline in demand generally occurring in the third quarter due to the summer holiday season in Europe. However,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 have been obscured due to integration activities subsequent to the JOTEC Acquisition including the implementation of our distributor-to-direct strategy and our European sales force realignment as well as the recent market introduction of AMDS and NEXUS products.not yet be obvious.
WeHistorically, 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 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.US.
We do not believe the demand for our other products is seasonal.
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 iswas 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 has been obscured in 2021 and may be obscured for the remainder of 2021 and potentially beyond.
Net Working Capital
As of March 31, 20212022 net working capital (current assets of $235.7$244.5 million less current liabilities of $58.0$42.8 million) was $177.7$201.7 million, with a current ratio (current assets divided by current liabilities) of 46 to 1, compared to net working capital of $174.1$202.7 million and a current ratio of 46 to 1 at December 31, 2020.2021.
Overall Liquidity and Capital Resources
Our primary cash requirements for the three months ended March 31, 20212022 were for general working capital needs, capital expenditures for facilities and equipment, interest and principal payments under our Credit Agreement defined below, 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.
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 agreements related to the Endospan and Ascyrus agreements.transactions. 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
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 our Term Loan and Revolving Credit Facility. The proceedsAs part of the amendment, the maturity dates of both our Term Loan and 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 triggered 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) paycase of the outstanding balance of our prior credit facility. The Revolving Credit Facility, mayif the Convertible Senior Notes are still outstanding on December 31, 2024, the Revolving Credit Facility’s Maturity Date will be used for working capital, capital expenditures, acquisitions permitted undereither December 31, 2024 or, if the Credit Agreement, and other general corporate purposes pursuantConvertible Senior Notes’ own maturity date has been extended, the earlier of (i) 182 days prior to the terms ofConvertible Senior Notes’ new maturity date and (ii) June 1, 2025. Under the Credit Agreement.
In October 2018 we finalized an amendment, to the Credit Agreement to reprice interest rates, resulting in a reduction in the interest rate margins over base rates on the Term Loan Facility. The loan under 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 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 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. As of March 31, 2021 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.
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 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 was 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 became subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. The new minimum liquidity covenant required 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 (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 March 31, 2021.2022. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. 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 if-converted method for assumed conversion of the Convertible Senior Notes for the diluted earnings per share calculation. The fair value and the effective interest rate of the Convertible Senior Notes as of March 31, 2022 was approximately $116.5 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 for the aggregate of the contractual coupon interest and the amortization of the debt issuance costs as offor the three months ended March 31, 2022, and 2021. 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 March 31, 2021 we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes. We 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, that were 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 additional consideration cash payment capped 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 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 Approval application submitted for the AMDS. Upon closing of the acquisition on September 2, 2020, we paid $82.4 million consisting of $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 of March 31, 20212022 approximately 37%38% of our cash and cash equivalents were held in foreign jurisdictions.
The following table summarizes cash flows from operating activities, investing activities, and financing activities for the periods indicated (in thousands):
Three Months Ended | |||||
March 31, | |||||
2022 | 2021 | ||||
Cash flows used in: | |||||
Operating activities | $ | (598) | $ | (3,039) | |
Investing activities | (2,708) | (810) | |||
Financing activities | (235) | (2,095) | |||
Effect of exchange rate changes on cash and cash equivalents | (61) | 1,088 | |||
Decrease in cash and cash equivalents | $ | (3,602) | $ | (4,856) | |
Net Cash Flows from Operating Activities
Net cash used in operating activities was $598,000 and $3.0 million for the three months ended March 31, 2022 and 2021, as compared to cash provided by operating activities of $2.6 million for the three months ended March 31, 2020.respectively.
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 three months ended March 31, 20212022 these non-cash items included $6.0$5.9 million in depreciation and amortization expenses, $2.5$3.2 million in non-cash compensation, and $4.2$3.0 million of deferred income tax changes.changes, $1.9 million of lease expenses, and $1.8 million in fair value adjustments of financial instruments.
Our working capital needs, or changes in operating assets and liabilities, also affected cash from operations. For the three months ended March 31, 20212022 these included the unfavorable effect of a $5.9$3.3 milliondue to timing differences between the recording of accounts payable and other current liabilities, $1.7 million due to the timing differences between recording receivables and the receipt of cash, $1.4 million due to an increase in inventory balances and deferred preservation costs, the unfavorable effect ofpartially offset by $1.5 million due to a $3.3 million increase in receivables, and the unfavorable effect of a $1.3 million increasedecrease in prepaid expenses and other assets, partially offset by the favorable effect of a $1.6 million increase in accounts payable, accrued expenses, and other liabilities.assets.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $2.7 million and $810,000 for the three months ended March 31, 2022 and 2021, as compared to $2.9 million for the three months ended March 31, 2020.respectively. During the three months ended March 31, 20212022 cash flows used in investing activities primarily included $1.5$2.2 million related toof cash used for capital expenditures.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $235,000 and $2.1 million for the three months ended March 31, 2022 and 2021, as compared to cash provided by financing activities of $28.5 million for the three months ended March 31, 2020.respectively. The current year cash used in financing activities was primarily due to $1.8$1.7 million for repurchases of common stock to cover tax withholdings.
We have no off-balance sheet arrangements. withholdings and $694,000 for the repayment of debt, partially offset by $2.3 million of proceeds from the exercise of stock options and issuances of common stock.
Our long-term debt obligations and interest payments include $319.8$316.9 million of scheduled principal payments and $63.8 million in anticipated interest payments related to our Credit Agreement, Convertible Senior Notes, and JOTECother governmental loans.
We have contingent payment obligations that include up to $120.0$100.0 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 makingare obliged to make 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. We have other contingent payment obligationsAs part of the Baxter Transaction, we may be required to pay up to $9.0 million 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.met.
Our operating and finance lease obligations result from the lease of land and buildings that comprise our corporate headquarters and our various manufacturing facilities,facilities; leases related to additional manufacturing, office, and warehouse space,space; leases on Company vehicles,vehicles; and leases on a variety of office equipment and other equipment.
We have purchase commitments that 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.
Capital expenditures were $1.5$2.2 million and $2.5$1.5 million for the three months ended March 31, 20212022 and 2020,2021, respectively. Capital expenditures infor the three months ended March 31, 20212022 were primarily related to routine purchases of manufacturing and tissuestissue processing equipment, leasehold improvements needed to support our business, computer equipment,software, and software.computer 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.US interest rates. In this regard, changes in U.S.US interest rates affect the interest earned on our cash and cash equivalents of $56.6$51.4 million as of March 31, 20212022 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 three months ended March 31, 2021,2022, 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.US 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,aortic stent grafts, surgical sealants, On-X, PerClot, and JOTECother product 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.US Dollar equivalent of net income from transactions conducted in other currencies. As a result, we could recognize a reduction in revenues andor an increase in 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 March 31, 20212022 affecting our third-party balances denominated in foreign currencies could impact our financial position or cash flows by approximately $10.0$8.0 million. An additional 10% adverse change in exchange rates from the weighted-average exchange rates experienced by us for the three months ended March 31, 20212022 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 CryoLifeArtivion 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 March 31, 2021,2022, 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.US Securities and Exchange Commission’s rules and forms.
Changes 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 March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
Risks Relating to 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 Annualthis Quarterly Report on Form 10-Q 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 uncertaintyuncertainties not presently known or knowable to us, or that we currently believe to be immaterial, may also adversely affect our business.
DuringSince early 2020, and 2021, businesses, communities, and governments worldwide have taken, and continue to take, a wide range of actions to mitigate the spread and impact of COVID-19, leading to an unprecedented impact on the global economy. Hospitals and other healthcare providers have adopted differing approaches to address the surge and resurgence of COVID-19 cases, including their impact on healthcare workers, such as postponing elective and non-emergent procedures, restricting access to their facilities, cancelling elective procedures, or re-allocating scarce resources to some critically ill patients. Although somemany areas have seen a decline in COVID-19 cases, the potential for additional impact from new variants of COVID-19 and longer than anticipated timelines for widespread therapeutic and vaccine availability remain.remains. These conditions have impacted and could continue to impact our business activities, including the following activities:including:
Our product sales. Certain regions have experienced ancontinued impact on revenues in the three months ended March 31, 2021,first quarter of 2022 due to the COVID-19 pandemic.pandemic, and in particular, the Omicron variant. 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 observed additional downstream effects on our business, including an increase in delays or difficulty in collecting certain outstanding receivables, particularly with certain governmental payors in regions heavily impacted by COVID-19. The extent to which our financial performance will be impacted by the pandemic in 2021through the remainder of 2022 and beyond will depend largely on future developments, including changes in hospital utilization rates and staffing, the prevalence and severity of new variants, global availability and acceptance of COVID-19 vaccines and their effectiveness against variants, and the vaccine.prevalence of public and private vaccine mandates and local lockdowns. 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. In 2020 we took several steps to address the impact of COVID-19 on our employees, cash consumption, and operations, including reducing expenditures and delaying investments. The reductions and delays we adopted could adversely impact our business operations or delay our recovery from the effects of the pandemic. TheAlthough we have begun to scale back many of these steps in most geographies, the COVID-19 virus
and its variants areremain highly contagious and may have additional impact on our effortsbusiness operations. COVID-19 also continues to containimpact our business partners, including the spreadvarious regulators and notified bodies that we rely on, which increases the regulatory risks we face, and specifically, the risks we face with respect to timely review and approval of COVID-19new and its variants amongrenewal certifications, clearances, and approvals for our employees, including our key personnel, and to protect our supply chain may not succeed.products.
Our managementmanufacturing operations. The COVID-19 pandemic has continued to impact the global supply chain; the pandemic’s impact on workforces, global mobility, material availability, demand, costs, and shipping and reorder time and reliability 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.
Our workforce. As some global economies have begun to emerge from the COVID-19 downturn, the expiration of COVID-19-related hiring freezes, increased opportunities for remote work, the Great Resignation 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 only our own ability to attract and retain employees, but also the ability of our indebtedness. Partly as a precautionary measure to increase cash and maintain maximum financial flexibility during the COVID-19 pandemic, 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”), using portions of those proceeds to repay our Revolving Credit Facility and retaining the remainder for general corporate purposes which may limit our operational flexibility and adversely affect our ability to raise additional capital.customers who face increasing staffing pressures throughout their healthcare organizations.
Our research and development projects. WeIn 2020 and parts of 2021 we 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 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, staffing shortages and COVID-19-related impacts on government and regulatory agencies have slowed and might continue to slow timelines for regulatory actions, including approvals.approvals and re-certifications.
If COVID-19 or its variants continue to spread, if efforts to contain COVID-19 or its variants continue or are unsuccessful, if we experience new infectionsoutbreaks of COVID-19 in areas previously successful in containing its spread, if staffing shortages continue to impact us, governmental or regulatory bodies, or our customers, if vaccine mandates become more prevalent, or if COVID-19, or its variants, spread among our employees 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. The nature and extent of these developments are highly uncertain and unpredictable 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 vary significantly from the risks we face in our U.S.US operations, including:
DifficultiesGreater 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.UK Bribery Law, local anti-corruption laws, Office of Foreign Asset Control administered sanction programs, and the European Union’s General Data Protection Regulation;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.US Dollar;
Potential adverse financial impact and negative erosion of our operating profit margin over time due to increasing inflationary pressures, particularly through our supply chain; our exposure may be increased through our limited ability to raise prices and through global expansion where business occurs with, or pricing is set directly by, government entities, or we are party to long term pricing agreements with governments or local distributors, impacting our ability to pass on rising costs;
Potential adverse tax consequences of overlapping tax structures; and
Potential adverse financial and regulatory consequences resulting from the exit of the U.K.UK from the European Union, or “Brexit.”
Our operations and performance may also be impacted by regional and global geopolitical conditions, domestic and foreign trade and monetary policies, and other factors beyond our control. As an example of these risks, Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from the US and foreign governments and retaliatory actions from Russia, resulting in significant banking and trade disruptions. The war has also resulted in significant devastation to the people and infrastructure in the region, significantly impacting trade and transportation which may impact our global supply chain, increase prices, and limit our ability to continue to do business in affected regions.
To date, sanctions and other disruptions in the region have not materially impacted our business or ability to supply products to Russia, Belarus, Ukraine, and the region generally, however; continuation or escalation of the war or increased export controls or additional sanctions imposed on or by Russia, its allies, or related entities could adversely affect our financial performance. Although we do not have any direct operations in Russia or Ukraine, it is difficult to predict the ultimate course of the war and we may face business operations and supply chain disruptions as a result, including disruptions related to shortages of materials, higher costs of materials and freight, freight delays, increased energy costs or energy shortages, travel disruptions, currency fluctuation, and disruptions to banking systems or capital markets.
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.; C.R. Bard, Inc., a subsidiary of Becton, Dickinson and Company; Integra Life Sciences Holdings; LifeNet; CORCYM; 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;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 sell;
More established record of obtaining and maintaining regulatory product clearances or approvals;
More established relationships with healthcare providers and payors;
Lower cost of goods sold or preservation costs; and
Larger direct sales forces and more established distribution networks.
Tissue preservation services are a significant source of our revenues, accounting for 25% and 30% of revenues for the three months ended March 31, 2021 and 2020, respectively, and as such, we face risks if we are unable to:
Source sufficient quantities of some human tissue or address potential excess supply of others. We rely primarily upon the efforts of third-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, as we may be unable to capitalize on our clinical advantages or our competitors may have advantages over us in terms of cost structure, pricing, back officeback-office automation, marketing, and sourcing; or
Mitigate sufficiently the risk that tissue can become contaminated during processing; that processed tissue cannot be end-sterilized and hence carries an inherent risk of infection or disease transmission or that our quality controls can 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 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.US and foreign governmental authorities have adopted laws and regulations that restrict tissue preservation services. Any of these laws or regulations could change, including becoming more restrictive or our interpretation of them could be challenged by governmental authorities.
BioGlue Surgical Adhesive (“BioGlue”) is a significant source of our revenues, accounting for 26% of revenues for the three months ended March 31, 2021 and 2020and as such, any risk adversely affecting our BioGlue products or business would likely be material to our financial results. We face the following risks related to BioGlue:
Competing 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;
We may be unable to obtain approval to commercialize BioGlue in certain non U.S.US 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.US 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.UK from the European Union, or “Brexit.”“Brexit, as well as the impact of COVID-19 on regulatory authorities’ ability to timely recertify the Conformité Européene Mark (“CE Mark”) for BioGlue” See Part I, Item 1A, “Risk Factors—Industry Risks— Our products and tissues are highly regulated and subject to significant quality and regulatory risks.”
Aortic stents and stent grafts isare a significant source of our revenues, accounting for 28% and 23% of revenues for the three months ended March 31, 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, high quality, and in-demand aortic repair products;
Respond adequately to 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
Maintain a productive working relationship with our Works Council in Germany.
On-X isproducts are a significant source of our revenues,accounting for 18% of revenues for the three months ended March 31, 2021 and 2020 and as such, any risk adversely affecting our On-X products or business would likely be material to our financial results. We face risks based on our ability to:
Compete 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;
Take market share in the mechanical heart valve market based on the FDA’s approved lower International Normalized Ratio (“INR”) indication for the On-X aortic heart valve or complete the associated FDA mandated post-approval studies;
Address clinical trial data or changes in technology that may reduce the demand for mechanical heart valves, such as data regarding transcatheter aortic valve replacement, or “TAVR” devices;
Manage risks associated with less favorable contract terms for On-X products on consignment at hospitals;
Respond adequately to enhanced OUSinternational regulatory requirements or enforcement activities; and
Receive timely renewal certifications in certain markets.
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 and euro-denominated product sales are made to customers in other countries who must convert local currencies into U.S.US 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. Additionally, as a result of recent sanctions against Russia and the ongoing war in Ukraine, it is possible that foreign currency restrictions or the development of multiple exchange rates could arise in certain countries. It is also likely that inflation spikes will occur in Russia and neighboring countries putting those economies at risk of becoming highly inflationary. Fluctuations in exchange rates of Euros or other local currencies in relation to the U.S.US 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.
We account for the completion of acquisitions using the purchase method of accounting. Our financial results could be adversely affected by a number of financial adjustments required by purchase accounting such as:
We may incur added amortization expense over the estimated useful lives of some acquired intangible assets;
We may incur additional depreciation expense as a result of recording purchased tangible assets;
We may be required to 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.
Our existing insurance coverage may be insufficient, and we may be unable to obtain insuranceAs an example of this risk, in the future.
We maintain claims-made insurance policies to mitigate our financial exposure to securities, as well as productfourth quarter of 2021, we fully impaired the value of the Endospan Option and tissue processing liability, claims that are reported tofully wrote-down the insurance carrier whilevalue of the policy isEndospan Loan, primarily driven by a decrease in effect. These policies do not include coverage for punitive damages. Although we have insurance for productforecasted operating results. This impairment, 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 programother potential risks like those mentioned above, may not be adequate to cover any or all possible claims or losses, including losses arising out of natural disasters or catastrophic circumstances. Any significant claim could result in an increase in our insurance rates or jeopardize our ability to secure coverage on 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 diversionadversely affect the market value of our management’s attention from our business, adverse publicity, withdrawal of clinical trial participants, injury to our reputation, or loss of revenue.common stock.
The materials and supplies used in our product manufacturing and tissue processing are subject to regulatory requirements and oversight. If materials or supplies used in our processes fail to meet these requirements or are subject to regulatory enforcement action, they may have to be scrapped, or our products or tissues could be rejected during or after processing, recalled, or rejected by customers. In these cases, we may have to immediately scrap raw or in process materials or expense the costs of 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. TheWhile 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 is currently estimated to have impacted a small percentage of the tissue processed with this lot of solution, causingrequiring us to write-off those contaminated tissues. We are conducting further reviewtissues in the fourth quarter of 2020 and impacting our ability to determine iffully meet demand for certain tissues and sizes in the remaining tissue processed with this lotfourth quarter of solution can be released for distribution.2020, the first quarter of 2021, and to a lesser extent the second quarter of 2021.
In addition, if these materials or 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, for any reason, or if the related suppliers are otherwise unable or unwilling to supply us, we may not have sufficient materials or supplies 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 some products. If these contract manufacturers fail to meet our quality standards or other requirements or if they are unable or unwilling to supply the products, we may not be able to meet demand for these products. Our 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 the adverse party.
As a further example of this risk, our supplier of TMR handpieces was informed in the fourth quarter of 2021 that the sole-source manufacturer of
tubing used in the handpiece assembly had gone out of business, requiring us to work with our supplier to identify and qualify a new supplier before a disruption in handpiece availability occurs.
Finally, the COVID-19 pandemic has continued to impact the global supply chain; the pandemic’s impact on workforces, global mobility, material availability, demand, and shipping and reorder time and reliability has reportedly continued or worsened in many cases. The ongoing war in Ukraine may add to or exacerbate challenges faced by the global supply chain. See Part I, Item 1A, “Risk Factors – Business and Economic Risks - We are subject to a variety of risks due to our international operations and continued global expansion.” 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 and the war in Ukraine have subsided.
Some of the materials, supplies, and services used in our product manufacturing orand 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, or if those suppliers take unreasonable business positions, 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 lost our supply of handpieces for cardiac laser therapy resulting from a manufacturing location change at our supplier that ultimately required a PMAPremarket Approval (“PMA”) supplement and FDA approval before handpiece manufacturing and distribution could resume. We anticipate resumptionEven though the FDA approved the PMA-S, our supplier was unable to fully resume production due to factors outside of a very limitedour control. Due to these and other supplier issues, we had virtually no supply of handpieces during the first halfthree quarters of 2021. Although handpiece supply resumed on a limited basis during the last quarter of 2021, we remain dependent on a sole-source manufacturer for these handpieces.
By way of additional non-limiting examples, our BioGlue product has three main product components: bovine protein, a cross linker, and a molded plastic resin delivery device. The bovine protein and cross linker are obtained from a small number of qualified suppliers. The delivery devices are manufactured by a single supplier, using resin supplied by a single supplier. We purchase grafts for our On-X AAP from a single supplier and various other components for our On-X valves come from single source suppliers.
Our preservation services business and our ability to supply needed tissues is dependent upon donation of tissues from human donors by donor families. Donated human tissue is procured from deceased human donors by OPOs and tissue banks. We must rely on the OPOs and tissue banks that we work with to educate the public on the need for donation, to foster a willingness to donate tissue, to follow our donor screening and procurement procedures, and to send donated tissue to us. We have active relationships with 59 OPOs and tissue banks throughout the US. As with any vendor, we believe these relationships with our OPOs are critical in the preservation services industry and that the breadth of these existing relationships provides us with a significant advantage over potential new entrants to this market. We also use various raw materials, including medicines and solutions, in our tissue processing. Some of these raw materials are manufactured by single suppliers or by a small group of suppliers.
Our aortic stent graft systems consist of two main product components: the stent graft and the delivery system. The stent graft is manufactured from several different raw materials that are manufactured internally or at various external suppliers, including single suppliers. The delivery systems we manufacture are comprised of several different raw materials and subassemblies. Our internal manufacturing processes include injection molding and machining of plastic parts, suturing of stent grafts, processing of Nitinol, and weaving of textiles. Our conventional polyester grafts consist of two main product components: polyester fabric and collagen coating. The polyester fabric is woven from a few different yarns that are supplied by an external supplier. The collagen suspension we manufacture is comprised of a collagenous tissue that is supplied by a single supplier. The conventional ePTFE grafts we manufacture are comprised of various raw materials supplied by several suppliers. For some products the ePTFE grafts are heparin coated. For these products, the heparin suspension we manufacture is comprised of a heparin solution that is also supplied by an external supplier.
We also conduct all of our own manufacturing operations at three facilities: Austin, Texas for On-X products, Hechingen, Germany for JOTEC products,internally manufactured aortic stent grafts, and Kennesaw, Georgia for all other products.BioGlue, PerClot, PhotoFix, and tissue preservation services. The NEXUS product is solely manufactured by Endospan in Herzelia, Israel, and the AMDS product is solely manufactured by a supplier in Charlotte, North Carolina.Carolina, the CardioGensis
handpieces are solely manufactured by a supplier in Merrilville, Indiana, and the NEXUS product is solely manufactured by Endospan in Herzlia, Israel. If one of these facilities ceases operations temporarily or permanently, for any reason including a pandemic or climate change related event, our business could be substantially disrupted.
Although we work diligently to maintain adequate inventories of raw materials, components, supplies, subassemblies, and finished goods, there can be no assurance that we will be able to avoid all disruptions to our global supply chain, or disruptions to our sterilization or distribution networks. Any of these disruptions could have a material, adverse effect on our revenues, reputation, or profitability.
Our business and future operating results depend in significant part upon the continued contributions of our specialized workforce, including key personnel, including 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 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. Competitionlimited, 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 was exacerbated during 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 some global economies have begun to emerge from the COVID-19 downturn, the expiration of COVID-19 related hiring freezes, the Great Resignation, 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 CryoLifeArtivion to Endospan; and a security purchase option agreement for CryoLifeArtivion to purchase all the then outstanding Endospan securities from Endospan’s existing securityholders upon FDA approval of NEXUS; and
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”); and
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 (collectively the “Baxter Transaction”).
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.US market, including AMDS, and the JOTEC products;our acquired aortic stent grafts;
Harness the JOTECaortic stent graft product pipeline and our research and development capabilities;
Obtain regulatory approvals in relevant markets, including our ability to timely obtain FDA PMA for PerClot as contemplated under the terms of the Baxter Transaction, to obtain Conformité Européene Mark product certification (“CE Mark”) product certification for pipeline products, and to obtain or maintain certification for pipeline and current products at all;all, and obtain timely CE Mark recertification for BioGlue;
Execute on development and clinical trial timelines for acquired products;
Manage global inventories, including our ability to manage inventories for product lines with large numbers of product configurations and manage manufacturing and demand cycles to avoid excess inventory obsolescence due to shelf life expiration, particularly for processed tissues and aortic stent grafts;
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 toto: (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; and (f) obtain FDA approval of NEXUS.NEXUS; and (g) develop NEXUS product improvements to meet competitive threats and physician demand. As an example of this risk, the forecasted operating results related to NEXUS decreased in the fourth quarter of 2021, resulting in an impairment in the value of the Endospan Option, and a full write-down the value of the Endospan Loan, reflecting decreased expectations with respect to the anticipated benefits of the Endospan Transaction.
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,transaction, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of an acquisition,a transaction, we could experience an interruption or loss of momentum in our existing business activities.
In order to reflect our evolution to focus on providing innovative technologies to surgeons who treat patients with aortic disease, we changed our name to Artivion, Inc., effective January 18, 2022 (the “Corporate Rebrand”). The Corporate Rebrand also involved the adoption of a new ticker symbol on the New York Stock Exchange, “AORT.” We may face unanticipated disruptions to our business arising from the Corporate Rebrand, and it may expose us to additional risks, including:
Disruptions to our day-to-day business operations including disruptions to our ability to receive or our customers’ ability to make timely payments;
Disruptions to access to certain markets or segments due to delays or other issues with regulatory approvals or updates arising from the Corporate Rebrand;
Unanticipated delays or other impact on our pending regulatory applications or clinical trials arising from the Corporate Rebrand;
Our investment
Confusion within the marketplace, particularly with multiple points of contact in PerClot is subject to significantour downstream product flow involving purchasing and accounts payable departments and end users;
Intellectual property risks associated with the adoption of a new corporate identity and trade dress; and
Loss of brand equity associated with our legacy brands, including our ability to fully realize our investment by obtaining FDA approvalCryoLife and to successfully commercialize PerClot in the U.S. either directly or indirectly.JOTEC brands that will become less prominent over time.
In 2010The Corporate Rebrand involved significant financial and 2011,resource investment and will continue to do so as we entered into various agreements with SMI pursuant to which, among other things, we (i)complete our global brand transitions over the coming years. The anticipated benefits of the Corporate Rebrand may distribute PerClotin certain international markets.; (ii) acquired technology to assist innot be achieved within the production of a 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 trial to gain PMA for PerClot for surgical indications, and we completed enrollment in January 2019. We anticipate being in a position to submit to the FDA during the third quarter of 2021. There is no guarantee, however, that we will obtain FDA approval when anticipated timeframe, without additional near or long-term investment, or at all including based onall. Any of these factors such as, unforeseen scheduling difficultiescould negatively impact our revenues, earnings per share, decrease or delay the expected accretive effect of the Corporate Rebrand, and unfavorable results at stages innegatively impact the PMA process. We may also decide to delay or terminateprice of our pursuit of PMA at any time due to changing conditions at CryoLife, in the marketplace, or in the economy in general. Even if we receive 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. We may also be unsuccessful in selling outside the U.S. due, in part, to a proliferation of generic competitors, any breach by SMI of its contractual obligations, or the lack of adequate intellectual property protection or enforcement.common stock.
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 information,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.US 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, reevaluate,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 is currently scheduled to bewas fully implemented byon May 26, 2021. Upon implementation, among other changes,The MDR will placeplaces 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.
AtSince the same time, European Notified Bodies have begun engaging in more rigorous regulatory enforcement and may continue to do so. For example, in anticipationimplementation of the MDR, Notified Bodies have declinedmust review any proposed changes to review many routine submissions unlessdetermine if they are in accordance withrequire evaluation under the MDR and Notified Bodies may continue to do so despite the postponement of MDR implementation.or if they can still be evaluated under currently held MDD certifications. Our inability to timely adapt to these new requirementsobtain certifications for changes under the transitional provisions of our Notified Bodiesthe 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.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.UK Medicines and Healthcare Products Regulatory Agency (“MHRA”) has announced that CE Marking will continue to be recognized in the U.K.UK and certificates issued by EU-recognized Notified bodiesBodies will continue to be valid in the U.K.UK market until June 30, 2023. Going forward, all devices marketed in the U.K.UK will require U.K.UK Conformity Assessed (“UKCA”) Marks certified by a U.K.UK Approved Body (the re-designation of the U.K.UK Notified Body).
In 2019, we were informed of the cancellation ofour notified body services by our formerin the UK, Lloyd’s Register Quality Assurance Limited (“LRQA”), informed us that it would no longer provide Notified Body services for medical devices effective September 2019. The governing German competent authority, the Regierungspraesidium-Tubingen, granted us an extended grace period until December 31, 2021 to transfer LRQA-issued certifications 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 forBody. We are currently in the process of transferring BioGlue and PhotoFix in the EEA, or if we are otherwiseto our new Notified Body, DEKRA. While positive progress has been made, DEKRA has been unable to timely meet applicable regulatory requirements, we may becomplete the registration and the renewal of our BioGlue CE Mark because DEKRA has been unable to placecomplete its last audit, a Phase 2 onsite audit, due to COVID-19 restrictions on travel, staffing shortages, and workload related to the transition to the MDR. We are currently requesting derogations from certain individual European countries to allow us to continue to commercialize BioGlue or PhotoFix on the market in the EEAthose countries until we resolvecan complete the situation.certification process with DEKRA. Failure to timely obtain key derogations in certain countries, or any other delays in this transition, may have a material adverse effect on our ability to supply demand in affected jurisdictions, have a material, adverse impact on our business, and may also impact our Medical Device Single Audit Program (“MDSAP”) certifications. 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 aan FDA 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 prepre- 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 arelevant clinical trial,trials, and the results we obtain from prepre- and post-market clinical studies may be insufficient for us to obtain or maintain any required regulatory approvals or clearances.
We are currently engaged in several pre and post-market clinical studies, including PROACT Xa which will determine if patients with an On-X mechanical aortic valve can be maintained safely and effectively on apixaban (Eliquis®) rather than on warfarin, and a U.S. IDE for PerClot. We also have begun to initiate U.S. clinical trials for certain JOTEC products, initiate U.S. and international clinical trials for the AMDS, and we support Endospan’s U.S. clinical trial efforts for NEXUS. We are currently seeking regulatory approval for BioGlue in China, where the Chinese regulatory body has requestedmade additional datarequests, and informationexpressed several concerns, related to the application. We have obtained an extension of time until February 2024 in which to secure approval for BioGlue in China. If we cannot obtain approval by then or the costs to do so are prohibitive, we ultimately may require additional testing. be unable to see BioGlue in China.
Each of theseour 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 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, as well as proposals increasing regulations related to EtO. The number of EtO facilities in the U.S.US is limited, and any permanent or temporary closures or disruption to their operations could delay, impede, or prevent our ability to commercialize our 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 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. 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 thesehealthcare costs and, more generally, to reform the healthcare systems. Additional uncertainty is anticipated particularlyas debates about healthcare, vaccines, and public health continue in light of the recent presidential election in the United States and the impact the results of the presidential and congressional electionsCOVID-19 pandemic which may have an impact on U.S.US law relating to the healthcare industry. Many U.S.US 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 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.
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, 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 operations and financial condition. Any changes that lower reimbursement for our products or reduce medical procedure volumes, however, could adversely affect our business and profitability.
Our products and processed tissues allegedly have caused, and may in the future cause, injury or result in other serious complications that may result in product or other liability claims from our customers or their patients. If our products are defectively designed, manufactured, or labeled, or contain inadequate warnings, defective components, or are misused, or are used contrary to our warnings, instructions, and approved indications, we may become subject to costly litigation that can have unpredictable and sometimes extreme outcomes.
We maintain claims-made insurance policies to mitigate 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 all possible claims or losses, including losses arising out of natural disasters or catastrophic circumstances. Any significant claim could result in an increase in our insurance rates or jeopardize our ability to secure coverage on 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 our management’s attention from our business, adverse publicity, withdrawal of clinical trial participants, injury to our reputation, or loss of revenue.
Our relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various U.S.US 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. The ongoing war in Ukraine and the current and future sanctions imposed on Russia and others as a result may exacerbate these risks. See also Part I, Item 1A, “Risk Factors – Business and Economic Risks - We are subject to a variety of risks due to our international operations and continued global expansion.” Possible sanctions for violation of these 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 a finding of a violation of these laws.
We have entered into consulting and product development agreements with healthcare professionals orand healthcare organizations, including some who may order our products or make decisions to use them. We have also adopted the AdvaMed
Code of Conduct, and the MedTech Europe Code of Ethical Business Practice, and the APACMed Code of Ethical Conduct which govern our relationships with healthcare professionals to bolster our compliance with healthcare compliance law.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 or action against us as a result of such review, regardless of outcome, could 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.
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 laws and regulations may include new requirements for companies that receive or process an individual’s personal data (including 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 our 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, result in negative publicity, or subject us to significant penalties.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists from time to time propose to involve themselves in the governance, strategic direction, and operations of a company. Such involvement may disrupt our business and divert the attention of our management, and any perceived uncertainties as to our future direction resulting from such involvement could result in the loss of business opportunities, be exploited by our competitors, cause concern for our current or potential customers, cause significant fluctuations in stock price, or make it more difficult to attract and retain qualified personnel and business partners. We have had investors who we believe to be activist investors with respect to some of their positions recently invest in our stock.
We own trade secrets, patents, patent applications, and licenses relating to our technologies and trademarks and goodwill related to our products and services, 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 patentintellectual property that we adopt, 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 an intellectual property dispute,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 indebtedness 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 also limit our ability to borrow money, require us to dedicate substantial portions of our cash flow to repayment, and expose usrestrict our ability to increased interest rate fluctuation risk asinvest in business opportunities. Because most of our borrowings are at a variable rate of interest.interest, we are exposed to interest rate fluctuations.
A failure to comply with the covenants in our existing Credit Agreement could result in an event of default, which, if not cured or waived, could have a material, adverse effect on our business, financial condition, and profitability. In the event of any such default, the holders of our indebtedness:
Will not be required to lend any additional amounts to us; and
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.applicable.
If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against their secured collateral.collateral to seek repayment out of proceeds from the sale or liquidation of our assets. 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 recent years, shareholder activists have become involved in numerous public companies. Shareholder activists from time to time propose to involve themselves in the governance, strategic direction, and operations of a company. Such involvement may disrupt our business and divert the attention of our management, and any perceived uncertainties as to our future direction resulting from such involvement could result in the loss of business opportunities, be exploited by our competitors, cause concern for our current or potential customers, cause significant fluctuations in stock price, or make it more difficult to attract and retain qualified personnel and business partners.
Investors and other key stakeholders are increasingly focusing on areas of corporate responsibility, and particularly matters related to environmental, social, and governance (“ESG”) factors. Institutional investors have expressed expectations with respect to ESG matters that they use to guide their investment strategies and may, in some cases, choose not to invest in us if they believe our ESG policies are lagging or inadequate. Other stakeholders also have expectations regarding ESG factors, such as employees or potential employees who desire to work for a company that reflects their personal values. These areas of focus are continuing to evolve, as are the criteria that investors assess companies’ performance in these areas. Investors are increasingly looking to companies that demonstrate strong ESG and sustainability practices as an indicator of long-term resilience, especially in light of events such as the COVID-19 pandemic. Keeping up with and meeting these expectations may disrupt our business and divert the attention of our management, and we may be unable to make the investments in ESG that our competitors with greater financial resources are able to make. Failure to meet the expectations of investors and other
stakeholders in these areas may damage our reputation, impact employee retention, impact the willingness of our customers to do business with us, or otherwise impact our financial results and stock price.
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 through appreciation of shares of our common stock that they own. In addition, restrictions in our credit facility limit our ability to pay future dividends.
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” betweenEffective January 1, 2022, we reincorporated in Delaware. Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an “interested stockholder.” Additionally,interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, the organizational documents adopted in connection with our reincorporation 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 FloridaDelaware 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. 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.
Our strategic plan is focused on four areas – new products, new indications, global expansion and business development – to drive growth and/or increase the size of our total addressable markets, primarily in the cardiac and vascular surgery segment, but we cannot be certain that these strategies will ultimately drive business expansion and enhance shareholder value.
(c) The following table provides information about purchases by us during the three months ended March 31, 20212022 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 | ||||||
01/01/21 - 01/31/21 | -- | $ | -- | -- | $ | -- | ||||
02/01/21 - 02/28/21 | 23,008 | 25.33 | -- | -- | ||||||
03/01/21 - 03/31/21 | 49,408 | 24.88 | -- | -- | ||||||
Total | 72,416 | $ | 25.03 | -- | $ | -- | ||||
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 | ||||||
01/01/22 - 01/31/22 | -- | $ | -- | -- | $ | -- | ||||
02/01/22 - 02/28/22 | 61,891 | 17.80 | -- | -- | ||||||
03/01/22 - 03/31/22 | 29,352 | 21.39 | -- | -- | ||||||
Total | 91,243 | $ | 18.95 | -- | $ | -- | ||||
The common shares purchased during the three months ended March 31, 20212022 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.
None.
The exhibit index can be found below.
Exhibit | Description | ||
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10.4†* | Form of Artivion, Inc. Equity and | ||
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 | ||
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.Indicates management contract or compensatory plan or arrangement
SIGNATURESNATURES
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.
| |
(Registrant) |
/s/ J. PATRICK MACKIN | /s/ D. ASHLEY LEE |
--------------------------------------- | ---------------------------------- |
J. PATRICK MACKIN | D. ASHLEY LEE |
Chairman, President, and | Executive Vice President, and |
Chief Executive Officer | Chief |
(Principal Executive Officer) |
|
(Principal Financial and | |
Accounting Officer) | |
April 30, 2021May 6, 2022
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DATE