☒
2022
☐
________________
CRYOLIFE,
59-2417093 | ||||||||
(State or other jurisdiction of | ||||||||
incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1655 Roberts Boulevard, NW, Kennesaw, Georgia | 30144 | |||||||
(Address of principal executive offices) | (Zip Code) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.01 par value | AORT | New York Stock Exchange |
Yes
x No oLarge | x | Accelerated | ||||||||||||
| ||||||||||||||
Non-accelerated Filer | o | Smaller Reporting Company | o | |||||||||||
Emerging | o |
Yes
o No xClass | Outstanding at | |||||||||
Common Stock, $0.01 par value | 40,316,054 |
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||
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(Unaudited) | (Unaudited) | |||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 27,029 | $ | 28,004 | $ | 84,519 | $ | 85,067 | ||||||||
Preservation services | 16,970 | 17,248 | 52,357 | 50,284 | ||||||||||||
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Total revenues | 43,999 | 45,252 | 136,876 | 135,351 | ||||||||||||
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Cost of products and preservation services: | ||||||||||||||||
Products | 6,220 | 6,598 | 21,196 | 21,299 | ||||||||||||
Preservation services | 7,917 | 8,872 | 23,401 | 26,348 | ||||||||||||
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Total cost of products and preservation services | 14,137 | 15,470 | 44,597 | 47,647 | ||||||||||||
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Gross margin | 29,862 | 29,782 | 92,279 | 87,704 | ||||||||||||
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Operating expenses: | ||||||||||||||||
General, administrative, and marketing | 24,756 | 20,592 | 71,016 | 69,302 | ||||||||||||
Research and development | 4,277 | 3,714 | 13,098 | 9,602 | ||||||||||||
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Total operating expenses | 29,033 | 24,306 | 84,114 | 78,904 | ||||||||||||
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Gain from sale of business components | -- | -- | -- | (7,915) | ||||||||||||
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Operating income | 829 | 5,476 | 8,165 | 16,715 | ||||||||||||
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Interest expense | 851 | 742 | 2,486 | 2,256 | ||||||||||||
Interest income | (64 | ) | (18) | (159 | ) | (48) | ||||||||||
Other expense (income), net | 21 | 21 | (70 | ) | (146) | |||||||||||
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Income before income taxes | 21 | 4,731 | 5,908 | 14,653 | ||||||||||||
Income tax (benefit) expense | (1,304 | ) | 1,738 | (803 | ) | 6,772 | ||||||||||
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Net income | $ | 1,325 | $ | 2,993 | $ | 6,711 | $ | 7,881 | ||||||||
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Income per common share: | ||||||||||||||||
Basic | $ | 0.04 | $ | 0.09 | $ | 0.20 | $ | 0.24 | ||||||||
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Diluted | $ | 0.04 | $ | 0.09 | $ | 0.19 | $ | 0.24 | ||||||||
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Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 32,887 | 32,151 | 32,665 | 31,731 | ||||||||||||
Diluted | 34,057 | 33,165 | 33,851 | 32,568 | ||||||||||||
Net income | $ | 1,325 | $ | 2,993 | $ | 6,711 | $ | 7,881 | ||||||||
Other comprehensive income (loss) | 217 | (31) | 582 | (459) | ||||||||||||
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Comprehensive income | $ | 1,542 | $ | 2,962 | $ | 7,293 | $ | 7,422 | ||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Products | $ | 58,936 | $ | 56,076 | $ | 116,478 | $ | 109,421 | |||||||||||||||
Preservation services | 21,404 | 20,072 | 41,075 | 37,814 | |||||||||||||||||||
Total revenues | 80,340 | 76,148 | 157,553 | 147,235 | |||||||||||||||||||
Cost of products and preservation services: | |||||||||||||||||||||||
Products | 18,230 | 16,178 | 35,638 | 31,089 | |||||||||||||||||||
Preservation services | 9,938 | 9,457 | 19,024 | 17,795 | |||||||||||||||||||
Total cost of products and preservation services | 28,168 | 25,635 | 54,662 | 48,884 | |||||||||||||||||||
Gross margin | 52,172 | 50,513 | 102,891 | 98,351 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
General, administrative, and marketing | 38,983 | 40,830 | 77,938 | 79,468 | |||||||||||||||||||
Research and development | 8,648 | 8,360 | 18,776 | 16,114 | |||||||||||||||||||
Total operating expenses | 47,631 | 49,190 | 96,714 | 95,582 | |||||||||||||||||||
Operating income | 4,541 | 1,323 | 6,177 | 2,769 | |||||||||||||||||||
Interest expense | 4,101 | 4,855 | 8,049 | 8,895 | |||||||||||||||||||
Interest income | (30) | (18) | (46) | (42) | |||||||||||||||||||
Other expense (income), net | 3,770 | (1,331) | 3,903 | 600 | |||||||||||||||||||
Loss before income taxes | (3,300) | (2,183) | (5,729) | (6,684) | |||||||||||||||||||
Income tax expense (benefit) | 959 | (5) | 1,919 | (1,368) | |||||||||||||||||||
Net loss | $ | (4,259) | $ | (2,178) | $ | (7,648) | $ | (5,316) | |||||||||||||||
Loss per share: | |||||||||||||||||||||||
Basic | $ | (0.11) | $ | (0.06) | $ | (0.19) | $ | (0.14) | |||||||||||||||
Diluted | $ | (0.11) | $ | (0.06) | $ | (0.19) | $ | (0.14) | |||||||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||||||
Basic | 40,031 | 38,943 | 39,941 | 38,841 | |||||||||||||||||||
Diluted | 40,031 | 38,943 | 39,941 | 38,841 | |||||||||||||||||||
Net loss | $ | (4,259) | $ | (2,178) | $ | (7,648) | $ | (5,316) | |||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||
Foreign currency translation adjustments | (14,796) | 2,973 | (18,571) | (7,317) | |||||||||||||||||||
Comprehensive (loss) income | $ | (19,055) | $ | 795 | $ | (26,219) | $ | (12,633) |
2
Statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, 2017 | December 31, 2016 | |||||||
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(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 54,242 | $ | 56,642 | ||||
Restricted securities | 771 | 699 | ||||||
Receivables, net | 33,659 | 30,096 | ||||||
Inventories | 27,763 | 26,293 | ||||||
Deferred preservation costs | 35,008 | 30,688 | ||||||
Prepaid expenses and other | 4,142 | 2,815 | ||||||
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Total current assets | 155,585 | 147,233 | ||||||
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Property and equipment, net | 20,607 | 18,502 | ||||||
Goodwill | 78,294 | 78,294 | ||||||
Patents, net | 827 | 1,008 | ||||||
Trademarks and other intangibles, net | 62,454 | 65,633 | ||||||
Deferred income taxes | 1,190 | -- | ||||||
Investment in company owned life insurance | 4,360 | 2,991 | ||||||
Other | 2,823 | 2,479 | ||||||
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Total assets | $ | 326,140 | $ | 316,140 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,066 | $ | 5,744 | ||||
Accrued expenses and other | 17,813 | 19,796 | ||||||
Current portion of long-term debt | 3,234 | 4,562 | ||||||
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Total current liabilities | 26,113 | 30,102 | ||||||
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Long-term debt | 64,835 | 67,012 | ||||||
Deferred compensation liability | 3,753 | 2,600 | ||||||
Deferred rent obligations | 2,982 | 2,355 | ||||||
Other | 5,101 | 5,088 | ||||||
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Total liabilities | 102,784 | 107,157 | ||||||
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Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock | -- | -- | ||||||
Common stock (issued shares of 34,844 in 2017 and 34,230 in 2016) | 348 | 342 | ||||||
Additionalpaid-in capital | 194,958 | 187,061 | ||||||
Retained earnings | 40,616 | 34,143 | ||||||
Accumulated other comprehensive income (loss) | 153 | (429) | ||||||
Treasury stock at cost (shares of 1,387 in 2017 and 1,356 in 2016) | (12,719 | ) | (12,134) | |||||
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Total shareholders’ equity | 223,356 | 208,983 | ||||||
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Total liabilities and shareholders’ equity | $ | 326,140 | $ | 316,140 | ||||
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June 30, 2022 | December 31, 2021 | ||||||||||
(Unaudited) | |||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 40,382 | $ | 55,010 | |||||||
Trade receivables, net | 57,558 | 53,019 | |||||||||
Other receivables | 7,995 | 5,086 | |||||||||
Inventories, net | 74,318 | 76,971 | |||||||||
Deferred preservation costs, net | 44,785 | 42,863 | |||||||||
Prepaid expenses and other | 15,390 | 14,748 | |||||||||
Total current assets | 240,428 | 247,697 | |||||||||
Goodwill | 240,939 | 250,000 | |||||||||
Acquired technology, net | 154,866 | 166,994 | |||||||||
Operating lease right-of-use assets, net | 42,659 | 45,714 | |||||||||
Property and equipment, net | 36,268 | 37,521 | |||||||||
Other intangibles, net | 32,470 | 34,502 | |||||||||
Deferred income taxes | 9,916 | 2,357 | |||||||||
Other assets | 7,318 | 8,267 | |||||||||
Total assets | $ | 764,864 | $ | 793,052 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 10,545 | $ | 10,395 | |||||||
Accrued compensation | 9,732 | 13,163 | |||||||||
Accrued expenses | 7,842 | 7,687 | |||||||||
Taxes payable | 4,709 | 3,634 | |||||||||
Accrued procurement fees | 2,130 | 3,689 | |||||||||
Current maturities of operating leases | 3,207 | 3,149 | |||||||||
Current portion of long-term debt | 1,590 | 1,630 | |||||||||
Other liabilities | 1,891 | 1,606 | |||||||||
Total current liabilities | 41,646 | 44,953 | |||||||||
Long-term debt | 306,941 | 307,493 | |||||||||
Contingent consideration | 44,400 | 49,400 | |||||||||
Non-current maturities of operating leases | 42,141 | 44,869 | |||||||||
Non-current finance lease obligation | 3,766 | 4,374 | |||||||||
Deferred income taxes | 32,609 | 28,799 | |||||||||
Deferred compensation liability | 5,154 | 5,952 | |||||||||
Other liabilities | 6,698 | 6,484 | |||||||||
Total liabilities | $ | 483,355 | $ | 492,324 | |||||||
Commitments and contingencies | 0 | 0 | |||||||||
Shareholders' equity: | |||||||||||
Preferred stock | — | — | |||||||||
Common stock (issued shares of 41,744 in 2022 and 41,397 in 2021) | 417 | 414 | |||||||||
Additional paid-in capital | 329,871 | 322,874 | |||||||||
Retained (deficit) earnings | (5,673) | 1,975 | |||||||||
Accumulated other comprehensive loss | (28,458) | (9,887) | |||||||||
Treasury stock, at cost, 1,487 shares as of June 30, 2022 and December 31, 2021 | (14,648) | (14,648) | |||||||||
Total shareholders' equity | 281,509 | 300,728 | |||||||||
Total liabilities and shareholders' equity | $ | 764,864 | $ | 793,052 |
3
Statements
CRYOLIFE, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended September 30, | ||||||||
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2017 | 2016 | |||||||
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(Unaudited) | ||||||||
Net cash flows from operating activities: | ||||||||
Net income | $ | 6,711 | $ | 7,881 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Gain from sale of business components | -- | (7,915) | ||||||
Depreciation and amortization | 6,683 | 6,248 | ||||||
Non-cash compensation | 5,652 | 4,617 | ||||||
Othernon-cash adjustments to income | 879 | 5,595 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivables | (4,303 | ) | 3,729 | |||||
Inventories and deferred preservation costs | (6,901 | ) | (5,739) | |||||
Prepaid expenses and other assets | (3,040 | ) | (46) | |||||
Accounts payable, accrued expenses, and other liabilities | (855 | ) | 304 | |||||
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Net cash flows provided by operating activities | 4,826 | 14,674 | ||||||
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Net cash flows from investing activities: | ||||||||
Acquisition ofOn-X, net of cash acquired | -- | (91,152) | ||||||
Acquisition of PhotoFix technology | -- | (1,226) | ||||||
Proceeds from sale of business components | 740 | 19,795 | ||||||
Decrease in restricted cash | -- | 5,000 | ||||||
Capital expenditures | (5,384 | ) | (3,511) | |||||
Other | 5 | (12) | ||||||
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Net cash flows used in investing activities | (4,639 | ) | (71,106) | |||||
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Net cash flows from financing activities: | ||||||||
Proceeds from issuance of term loan | -- | 75,000 | ||||||
Repayment of term loan | (3,916 | ) | (1,406) | |||||
Payment of debt issuance costs | -- | (2,289) | ||||||
Proceeds from exercise of stock options and issuance of common stock | 2,599 | 2,116 | ||||||
Redemption and repurchase of stock to cover tax withholdings | (1,600 | ) | (599) | |||||
Other | (3 | ) | 571 | |||||
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Net cash flows (used in) provided by financing activities | (2,920 | ) | 73,393 | |||||
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Effect of exchange rate changes on cash | 333 | (418) | ||||||
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(Decrease) increase in cash and cash equivalents | (2,400 | ) | 16,543 | |||||
Cash and cash equivalents, beginning of period | 56,642 | 37,588 | ||||||
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Cash and cash equivalents, end of period | $ | 54,242 | $ | 54,131 | ||||
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Six Months Ended June 30, | |||||||||||
2022 | 2021 | ||||||||||
Net cash flows from operating activities: | |||||||||||
Net loss | $ | (7,648) | $ | (5,316) | |||||||
Adjustments to reconcile net loss to net cash from operating activities: | |||||||||||
Depreciation and amortization | 11,497 | 11,999 | |||||||||
Non-cash compensation | 6,100 | 4,595 | |||||||||
Non-cash lease expense | 3,803 | 3,575 | |||||||||
Write-down of inventories and deferred preservation costs | 2,177 | 2,988 | |||||||||
Change in fair value of contingent consideration | (5,000) | 4,270 | |||||||||
Deferred income taxes | (1,611) | (4,269) | |||||||||
Other | 940 | 2,174 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Prepaid expenses and other assets | (205) | (2,076) | |||||||||
Inventories and deferred preservation costs | (3,653) | (11,712) | |||||||||
Receivables | (9,635) | (5,454) | |||||||||
Accounts payable, accrued expenses, and other liabilities | (5,677) | (1,166) | |||||||||
Net cash flows used in operating activities | (8,912) | (392) | |||||||||
Net cash flows from investing activities: | |||||||||||
Capital expenditures | (4,055) | (7,249) | |||||||||
Other | (939) | 205 | |||||||||
Net cash flows used in investing activities | (4,994) | (7,044) | |||||||||
Net cash flows from financing activities: | |||||||||||
Proceeds from exercise of stock options and issuance of common stock | 2,318 | 2,321 | |||||||||
Payment of debt issuance costs | — | (2,219) | |||||||||
Redemption and repurchase of stock to cover tax withholdings | (1,739) | (1,831) | |||||||||
Repayment of term loan | (1,370) | (1,405) | |||||||||
Other | (241) | (603) | |||||||||
Net cash flows used in financing activities | (1,032) | (3,737) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 310 | 242 | |||||||||
Decrease in cash and cash equivalents | (14,628) | (10,931) | |||||||||
Cash and cash equivalents beginning of period | 55,010 | 61,958 | |||||||||
Cash and cash equivalents end of period | $ | 40,382 | $ | 51,027 |
4
Statements
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Stock | Additional Paid-In Capital | Retained Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 41,688 | $ | 417 | $ | 326,799 | $ | (1,414) | $ | (13,662) | (1,487) | $ | (14,648) | $ | 297,492 | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | (4,259) | — | — | — | (4,259) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (14,796) | — | — | (14,796) | |||||||||||||||||||||||||||||||||||||||
Equity compensation | 57 | — | 3,081 | — | — | — | — | 3,081 | |||||||||||||||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (1) | — | (9) | — | — | — | — | (9) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 41,744 | $ | 417 | $ | 329,871 | $ | (5,673) | $ | (28,458) | (1,487) | $ | (14,648) | $ | 281,509 |
Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 41,397 | $ | 414 | $ | 322,874 | $ | 1,975 | $ | (9,887) | (1,487) | $ | (14,648) | $ | 300,728 | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | (7,648) | — | — | — | (7,648) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (18,571) | — | — | (18,571) | |||||||||||||||||||||||||||||||||||||||
Equity compensation | 262 | 2 | 6,419 | — | — | — | — | 6,421 | |||||||||||||||||||||||||||||||||||||||
Exercise of options | 140 | 2 | 1,678 | — | — | — | — | 1,680 | |||||||||||||||||||||||||||||||||||||||
Employee stock purchase plan | 37 | — | 638 | — | — | — | — | 638 | |||||||||||||||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (92) | (1) | (1,738) | — | — | — | — | (1,739) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 41,744 | $ | 417 | $ | 329,871 | $ | (5,673) | $ | (28,458) | (1,487) | $ | (14,648) | $ | 281,509 |
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 40,585 | $ | 406 | $ | 301,449 | $ | 13,671 | $ | (3,547) | (1,487) | $ | (14,648) | $ | 297,331 | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | (2,178) | — | — | — | (2,178) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 2,973 | — | — | 2,973 | |||||||||||||||||||||||||||||||||||||||
Equity compensation | 37 | — | 2,267 | — | — | — | — | 2,267 | |||||||||||||||||||||||||||||||||||||||
Exercise of options | 121 | 1 | 1,459 | — | — | — | — | 1,460 | |||||||||||||||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (1) | — | (18) | — | — | — | — | (18) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 40,742 | $ | 407 | $ | 305,157 | $ | 11,493 | $ | (574) | (1,487) | $ | (14,648) | $ | 301,835 |
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' 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 | — | — | — | (5,316) | — | — | — | (5,316) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (7,317) | — | — | (7,317) | |||||||||||||||||||||||||||||||||||||||
Impact of adoption of ASU 2020-06 | — | — | (16,426) | (3,213) | — | — | — | (19,639) | |||||||||||||||||||||||||||||||||||||||
Equity compensation | 244 | 2 | 4,902 | — | — | — | — | 4,904 | |||||||||||||||||||||||||||||||||||||||
Exercise of options | 140 | 1 | 1,730 | — | — | — | — | 1,731 | |||||||||||||||||||||||||||||||||||||||
Employee stock purchase plan | 37 | 1 | 589 | — | — | — | — | 590 | |||||||||||||||||||||||||||||||||||||||
Redemption and repurchase of stock to cover tax withholdings | (73) | (1) | (1,830) | — | — | — | — | (1,831) | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 40,742 | $ | 407 | $ | 305,157 | $ | 11,493 | $ | (574) | (1,487) | $ | (14,648) | $ | 301,835 |
and Summary of Significant Accounting Policies
Change22, 2022.
Asthe year ended December 31, 2021. Management believes that the consistent application of January 1, 2017 we made an entity-wide accounting policy electionthese 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 ASU2016-09,Improvements to Employee Share-Based Payment Accounting, (“ASU2016-09”) to change our accounting policy to account for stock compensation forfeituresprinciples generally accepted in the period awards are forfeited rather than estimating the effect of forfeitures. We electedUS, which require us to make this accounting policy change to simplifyestimates and assumptions. We did not experience any significant changes during the three and six months ended June 30, 2022 in any of our Significant Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2021.
Additionally, as of January 1, 2017 and in accordance with the guidance in ASU2016-09, we made a change to account for excess tax benefits and deficiencies resultingmarket transition from the settlementLIBOR and other interbank offered rates to alternative reference rates. Accounting principles generally accepted in the United States of America require entities to evaluate whether a contract modification, such as the replacement or vestingchange of share-based awardsa reference rate, results in income tax expensethe establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022 and cannot be applied to contract modifications that occur after December 31, 2022.
September 30, 2017 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money market funds | $ | 371 | $ | -- | $ | -- | $ | 371 | ||||||||||||||||||||
Restricted securities: | ||||||||||||||||||||||||||||
Money market funds | 771 | -- | -- | 771 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total assets | $ | 1,142 | $ | -- | $ | -- | $ | 1,142 | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
December 31, 2016 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money market funds | $ | 3,466 | $ | -- | $ | -- | $ | 3,466 | ||||||||||||||||||||
Restricted securities: | ||||||||||||||||||||||||||||
Money market funds | 699 | -- | -- | 699 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total assets | $ | 4,165 | $ | -- | $ | -- | $ | 4,165 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
5
June 30, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||
Money market funds | $ | 10,025 | $ | — | $ | — | $ | 10,025 | ||||||||||||||||||
Total assets | $ | 10,025 | $ | — | $ | — | $ | 10,025 | ||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||||||
Contingent consideration | — | — | (44,400) | (44,400) | ||||||||||||||||||||||
Total liabilities | $ | — | $ | — | $ | (44,400) | $ | (44,400) |
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) |
Contingent Consideration | |||||
Balance as of December 31, 2021 | $ | (49,400) | |||
Change in valuation | 5,000 | ||||
Balance as of June 30, 2022 | $ | (44,400) |
September 30, 2017 | Cost Basis | Unrealized Holding Gains | Estimated Market Value | |||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||
Money market funds | $ | 371 | $ | -- | $ | 371 | ||||||||||||||||||
Restricted securities: | ||||||||||||||||||||||||
Money market funds | 771 | -- | 771 | |||||||||||||||||||||
December 31, 2016 | Cost Basis | Unrealized Holding Gains | Estimated Market Value | |||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||
Money market funds | $ | 3,466 | $ | -- | $ | 3,466 | ||||||||||||||||||
Restricted securities: | ||||||||||||||||||||||||
Money market funds | 699 | -- | 699 |
As of September 30, 2017 and December 31, 2016 $771,000 and $699,000, 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 primarily to international tax obligations.
June 30, 2022 | Cost Basis | Unrealized Holding Gains | Estimated Market Value | |||||||||||||||||
Cash equivalents: | ||||||||||||||||||||
Money market funds | $ | 10,025 | $ | — | $ | 10,025 | ||||||||||||||
Total assets | $ | 10,025 | $ | — | $ | 10,025 |
December 31, 2021 | Cost Basis | Unrealized Holding Gains | Estimated Market Value | |||||||||||||||||
Cash equivalents: | ||||||||||||||||||||
Money market funds | $ | 10,015 | $ | — | $ | 10,015 | ||||||||||||||
Total assets | $ | 10,015 | $ | — | $ | 10,015 |
2021.
Overview
On December 22, 2015 we entered into an agreement and plan of merger to acquireOn-X Life Technologies Holdings, Inc.(“On-X”), an Austin, Texas-based, privately held mechanical heart valve company, for approximately $130.0 million, subject to certain adjustments. The transaction closed on January 20, 2016, andOn-X is being operated as a wholly owned subsidiary of CryoLife.
TheOn-X catalogue of products includes theOn-X prosthetic aortic and mitral heart valves and theOn-X ascending aortic prosthesis.On-X also distributes CarbonAid CO2 diffusion catheters and manufacturesChord-X ePTFE sutures for mitral chordal replacement.On-X also generates revenue from pyrolytic carbon coating products produced for other medical device manufacturers. We believe that theOn-X products fit well into our product portfolio of medical devices for cardiac surgery and that we are capitalizing on the significant opportunity for CryoLife’s sales team to leverage their strong relationships with cardiac surgeons to introduce and to expand utilization of theOn-X valves in the U.S. and internationally.
Accounting for the Transaction
The purchase price of theOn-X transaction totaled $128.2 million, consisting of cash of $93.6 million and 3,703,699 shares of CryoLife common stock, with a value of $34.6 million as determined on the date of the closing. We recorded an allocation of the $128.2 million purchase price toOn-X’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of January 20, 2016. Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of theInventories, net assets acquired and is not deductible for tax purposes. Goodwill from this transaction has been allocated to our Medical Devices segment.
6
The purchase price allocation is as follows (in thousands):
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We incurred transaction and integration costs of $7.4 million for the year ended December 31, 2016 related to the acquisition, which include, among other costs, expenses related to the termination of international and domestic distribution agreements. These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on our Summary Consolidated Statements of Operations and Comprehensive Income.
We paid approximately $10 million of the purchase price into an escrow account upon closing of theOn-X transaction. We are currently in litigation with the representative of the formerOn-X shareholders concerning the resolution of these escrow funds. We believe that we are entitled to recover the escrow funds and additional damages, but the outcome of litigation is inherently uncertain, and we may not recover any of the escrow funds.
Pro Forma Results
On-X revenues were $34.2 million from the date of acquisition through December 31, 2016. Our pro forma results of operations for the years ended December 31, 2016 and 2015, assuming theOn-X acquisition had occurred as of January 1, 2015, are presented for comparative purposes below. These amounts are based on available information of the results of operations ofOn-X prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2015. This unaudited pro forma information does not project operating results post acquisition.
This pro forma information is as follows (in thousands, except per share amounts):
Twelve Months Ended December 31, | ||||||||
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2016 | 2015 | |||||||
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Total revenues | $ | 182,007 | $ | 179,266 | ||||
Net income (loss) | 17,692 | (4,787) | ||||||
Pro forma income (loss) per common share - basic | $ | 0.54 | $ | (0.15) | ||||
Pro forma income (loss) per common share - diluted | $ | 0.53 | $ | (0.15) |
Pro forma net income (loss) was calculated using a normalized tax rate of approximately 38%.
5. Sale of Business Components
Divestiture of the HeRO Graft Product Line
On February 3, 2016 we sold our Hemodialysis Reliable Outflow Graft (“HeRO® Graft”) product line to Merit Medical Systems, Inc. (“Merit”) for $18.5 million in cash (“HeRO Sale”), of which $17.8 million was received on the transaction date and the remaining $740,000 was received in the first quarter of 2017. Under terms of the agreement, Merit acquired the HeRO Graft product line, including worldwide marketing rights, customer relationships, intellectual property, inventory, and certain property and equipment. We continued to manufacture the HeRO Graft under a transition supply agreement until the manufacturing transfer to Merit was completed in the second quarter of 2016. Sales prices under the transition supply agreement were at lower average prices than our previous sales to hospitals atend-user prices. The HeRO Graft product line was included as part of our Medical Devices segment. We recorded apre-tax gain of approximately $8.8 million on the HeRO Sale.
7
ProCol Distribution Agreement and Divestiture of the ProCol Product Line
In 2014 we acquired the exclusive worldwide distribution rights to ProCol® Vascular Bioprosthesis (“ProCol”) from Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”). In accordance with the terms of the agreement, we made payments to Hancock Jaffe totaling $3.4 million for which we obtained the right to receive a designated amount of ProCol inventory for resale. As of March 18, 2016 we had received $1.7 million in inventory. The remaining $1.7 million in prepayments for inventory not yet delivered to us were settled as part of the ProCol Sale, described below.
On March 18, 2016 we sold our ProCol distribution rights and purchase option to LeMaitre Vascular, Inc. (“LeMaitre”) for $2.0 million in cash (“ProCol Sale”), all of which was received by March 31, 2016. Under the terms of the agreement, LeMaitre acquired the ProCol related assets, including inventory, customer lists, related marketing assets, and our purchase option to acquire ProCol. LeMaitre exercised the option to acquire ProCol from Hancock Jaffe. The ProCol product was included as part of our Medical Devices segment. We recorded apre-tax loss of approximately $845,000 on the ProCol Sale.
Disclosure of the HeRO Sale and the ProCol Sale
Financial Accounting Standards Board ASU2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, (“ASU2014-08”) defines the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report a disposal as a discontinued operation only if the disposal represents a strategic shift in operations that has a major effect on our operations and financial results.
In the first quarter of 2016 we completed and recorded the HeRO Sale and the ProCol Sale and received cash for these transactions. Therefore, as of March 31, 2016 both transactions met the disposed of by sale criteria under ASU2014-08.
We evaluated the impact of the HeRO Sale and the ProCol Sale on our business to determine whether these disposals represent a strategic shift that has, or will have, a major effect on our financial position, results of operations, or cash flows. As the HeRO Graft and ProCol product lines combined represented less than 10% of our total revenues for the year ended December 31, 2015 and our total assets as of December 31, 2015, we believe that these transactions did not have a major effect on our operations and financial condition, either individually or in the aggregate, and therefore, we did not disclose these transactions as discontinued operations. The combined net gain from the HeRO Sale and ProCol Sale was therefore reported as gain from sale of business components on our Summary Consolidated Statements of Operations and Comprehensive Income.
6. PhotoFix Distribution Agreement and Acquisition
Overview
In 2014 we entered into an exclusive supply and distribution agreement with Genesee Biomedical, Inc. (“GBI”) to acquire the distribution rights to PhotoFixTM, a bovine pericardial patch stabilized using adye-mediated photo-fixation process that requires no glutaraldehyde. PhotoFix has received U.S. Food and Drug Administration (“FDA”) 510(k) clearance and is indicated for use in intracardiac repair, including ventricular repair and atrial repair, great vessel repair and suture line buttressing, and pericardial closure. We believe that PhotoFix fits well into our product portfolio of medical devices for cardiac surgery. In January 2015 we received our initial shipments and launched our distribution of PhotoFix.
The agreement between CryoLife and GBI (the “GBI Agreement”) had an initial five-year term and was renewable for twoone-year periods at our option. Under the terms of the GBI Agreement, we purchased PhotoFix inventory for resale at an agreed upon transfer price and had the option, which became effective in March 2015, to acquire the PhotoFix product line from GBI.
Accounting for the Transaction
On April 13, 2016 we exercised our right to acquire the PhotoFix technology from GBI for approximately $2.3 million, of which $1.2 million was paid in cash at closing, approximately $600,000 was previously provided to GBI as an advance under the distribution agreement, and approximately $400,000 is payable to GBI within 18 months of signing or earlier, subject to certain conditions. Our allocation of the purchase price to the tangible and identifiable intangible assets acquired, based on their estimated fair values, resulted in the allocation of the majority of the purchase price to amortizable intangible assets. GBI will continue to manufacture PhotoFix until we are able to fully establish manufacturing operations which is expected to occur in 2018.
8
7. Inventories and Deferred Preservation Costs
September 30, 2017 | December 31, 2016 | |||||||
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Raw materials and supplies | $ | 11,153 | $ | 9,321 | ||||
Work-in-process | 4,028 | 3,321 | ||||||
Finished goods | 12,582 | 13,651 | ||||||
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Total inventories | $ | 27,763 | $ | 26,293 | ||||
|
|
Deferred preservation costs at September 30, 2017 and December 31, 2016 are comprised of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
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Cardiac tissues | $ | 17,195 | $ | 15,768 | ||||
Vascular tissues | 17,813 | 14,920 | ||||||
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Total deferred preservation costs | $ | 35,008 | $ | 30,688 | ||||
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|
We
June 30, 2022 | December 31, 2021 | ||||||||||
Raw materials and supplies | $ | 34,565 | $ | 35,780 | |||||||
Work-in-process | 11,856 | 9,712 | |||||||||
Finished goods | 27,897 | 31,479 | |||||||||
Total inventories, net | $ | 74,318 | $ | 76,971 |
8.
September 30, 2017 | December 31, 2016 | |||||||
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| |||||||
Goodwill | $ | 78,294 | $ 78,294 | |||||
Procurement contracts and agreements | 2,013 | 2,013 | ||||||
Trademarks | 841 | 841 |
June 30, 2022 | December 31, 2021 | ||||||||||
Goodwill | $ | 240,939 | $ | 250,000 | |||||||
In-process R&D | 2,025 | 2,208 | |||||||||
Procurement contracts and agreements | 2,013 | 2,013 | |||||||||
Trademarks | 226 | 66 |
Medical Devices Segment | |||||
Balance as of December 31, 2021 | $ | 250,000 | |||
Foreign currency translation | (9,061) | ||||
Balance as of June 30, 2022 | $ | 240,939 |
September 30, 2017 | Gross Carrying Value | Accumulated Amortization | Amortization Period | |||||||||
Acquired technology | $ | 38,478 | $ | 7,615 | 11 – 22 Years | |||||||
Patents | 3,593 | 2,766 | 17 Years | |||||||||
Distribution and manufacturing rights andknow-how | 4,059 | 1,748 | 11 – 15 Years | |||||||||
Customer lists and relationships | 29,140 | 3,190 | 13 – 22 Years | |||||||||
Other | 1,418 | 942 | 3 Years | |||||||||
December 31, 2016 | Gross Carrying Value | Accumulated Amortization | Amortization Period | |||||||||
Acquired technology | $ | 38,478 | $ | 5,956 | 11 – 22 Years | |||||||
Patents | 3,710 | 2,702 | 17 Years | |||||||||
Distribution and manufacturing rights andknow-how | 4,059 | 1,532 | 11 – 15 Years | |||||||||
Customer lists and relationships | 29,140 | 2,141 | 13 – 22 Years | |||||||||
Non-compete agreement | 381 | 381 | 10 Years | |||||||||
Other | 1,262 | 531 | 3 Years |
June 30, 2022 | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Useful Life (Years) | ||||||||||||||||||||||
Acquired technology | $ | 205,124 | $ | 50,258 | $ | 154,866 | 17.7 | |||||||||||||||||||
Other intangibles: | ||||||||||||||||||||||||||
Customer lists and relationships | 30,981 | 10,332 | 20,649 | 20.6 | ||||||||||||||||||||||
Distribution and manufacturing rights and know-how | 9,031 | 4,798 | 4,233 | 5.0 | ||||||||||||||||||||||
Patents | 4,136 | 3,160 | 976 | 17.0 | ||||||||||||||||||||||
Other | 4,403 | 2,055 | 2,348 | 4.5 | ||||||||||||||||||||||
Total other intangibles | $ | 48,551 | $ | 20,345 | $ | 28,206 | 10.7 |
December 31, 2021 | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Useful Life (Years) | ||||||||||||||||||||||
Acquired technology | $ | 213,626 | $ | 46,632 | $ | 166,994 | 17.7 | |||||||||||||||||||
Other intangibles: | ||||||||||||||||||||||||||
Customer lists and relationships | 31,148 | 9,618 | 21,530 | 20.5 | ||||||||||||||||||||||
Distribution and manufacturing rights and know-how | 9,847 | 4,308 | 5,539 | 5.0 | ||||||||||||||||||||||
Patents | 4,083 | 3,144 | 939 | 17.0 | ||||||||||||||||||||||
Other | 3,969 | 1,762 | 2,207 | 4.4 | ||||||||||||||||||||||
Total other intangibles | $ | 49,047 | $ | 18,832 | $ | 30,215 | 10.6 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
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2017 | 2016 | 2017 | 2016 | |||||||||||||
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Amortization expense | $ | 1,140 | $ | 1,155 | $ | 3,423 | $ | 3,273 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Amortization expense | $ | 3,905 | $ | 4,238 | $ | 7,989 | $ | 8,498 |
Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||
Amortization expense | $ | 1,140 | $ | 4,444 | $ | 4,102 | $ | 3,939 | $ | 3,918 | $ | 3,390 |
9.
Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Total | |||||||||||||||||||||||||||||||||||
Amortization expense | $ | 7,437 | 14,662 | 14,302 | 12,452 | 12,233 | 12,113 | $ | 73,199 |
Our income tax rate for the three and nine months ended September 30, 2017 was favorably affected by excess tax benefits, primarily related to the exercise ofnon-qualified stock options and the vesting of stock awards, as discussed in Note 1 above, which decreased income tax expense by approximately $1.1 million and $2.7 million, respectively.
research and development tax credit, and excess tax benefits on stock compensation.
10
Hemosphere in 2012, research and Cardiogenesis in 2011. We recorded significantdevelopment expenses, excess interest carryforward, stock compensation, and accrued compensation. Our deferred tax liabilities in 2016 related to theare primarily made up of intangible assets acquired in theOn-X acquisition.
As of September 30, 2017 weprevious years, finance leases, and unrealized gains and losses.
10. Debt
Amended Debt Agreement
In connection with$22.7 million and $26.4 million as of June 30, 2022 and December 31, 2021, respectively. Our valuation allowance against our deferred tax assets was $16.2 million and $13.3 million as of June 30, 2022 and December 31, 2021, respectively, primarily related to net operating loss carryforwards and disallowed excess interest carryforwards.
Operating leases: | June 30, 2022 | December 31, 2021 | |||||||||
Operating lease right-of-use assets | $ | 56,376 | $ | 58,097 | |||||||
Accumulated amortization | (13,717) | (12,383) | |||||||||
Operating lease right-of-use assets, net | $ | 42,659 | $ | 45,714 | |||||||
Current maturities of operating leases | $ | 3,207 | $ | 3,149 | |||||||
Non-current maturities of operating leases | 42,141 | 44,869 | |||||||||
Total operating lease liabilities | $ | 45,348 | $ | 48,018 | |||||||
Finance leases: | |||||||||||
Property and equipment, at cost | $ | 6,200 | $ | 6,759 | |||||||
Accumulated amortization | (2,180) | (2,105) | |||||||||
Property and equipment, net | $ | 4,020 | $ | 4,654 | |||||||
Current maturities of finance leases | $ | 489 | $ | 528 | |||||||
Non-current maturities of finance leases | 3,766 | 4,374 | |||||||||
Total finance lease liabilities | $ | 4,255 | $ | 4,902 | |||||||
Weighted average remaining lease term (in years): | |||||||||||
Operating leases | 12.3 | 12.5 | |||||||||
Finance leases | 8.4 | 8.8 | |||||||||
Weighted average discount rate: | |||||||||||
Operating leases | 5.9% | 5.8% | |||||||||
Finance leases | 2.0% | 2.0% |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Amortization of property and equipment | $ | 131 | $ | 155 | $ | 268 | $ | 310 | |||||||||||||||
Interest expense on finance leases | 22 | 28 | 47 | 57 | |||||||||||||||||||
Total finance lease expense | 153 | 183 | 315 | 367 | |||||||||||||||||||
Operating lease expense | 1,883 | 1,809 | 3,803 | 3,575 | |||||||||||||||||||
Sublease income | (91) | (92) | (183) | (216) | |||||||||||||||||||
Total lease expense | $ | 1,945 | $ | 1,900 | $ | 3,935 | $ | 3,726 |
Six Months Ended June 30, | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | 2022 | 2021 | |||||||||
Operating cash flows for operating leases | $ | 3,210 | $ | 2,957 | |||||||
Financing cash flows for finance leases | 244 | 306 | |||||||||
Operating cash flows for finance leases | 44 | 57 |
Finance Leases | Operating Leases | Sublease Income | |||||||||||||||
Remainder of 2022 | $ | 268 | $ | 2,506 | $ | 122 | |||||||||||
2023 | 575 | 5,606 | — | ||||||||||||||
2024 | 570 | 6,198 | — | ||||||||||||||
2025 | 549 | 5,124 | — | ||||||||||||||
2026 | 531 | 4,703 | — | ||||||||||||||
Thereafter | 2,127 | 41,447 | — | ||||||||||||||
Total minimum lease payments | $ | 4,620 | $ | 65,584 | $ | 122 | |||||||||||
Less amount representing interest | (365) | (20,236) | |||||||||||||||
Present value of net minimum lease payments | 4,255 | 45,348 | |||||||||||||||
Less current maturities | (489) | (3,207) | |||||||||||||||
Lease liabilities, less current maturities | $ | 3,766 | $ | 42,141 |
CryoLife and our existing domestic subsidiaries subject(subject to certain exceptions and exclusions, have guaranteedexclusions) guarantee the obligations of the Amended Debt Agreement. Borrowings under the Amended DebtCredit Agreement are(the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all of CryoLife’s,existing and certain of our subsidiaries’,after-acquired real and personal property.
The loans underproperty (subject to certain exceptions and exclusions) of us and the Amended DebtGuarantors.
non-cash debt extinguishment costs were recorded in Interest is due and payable, with respect to base rate loans, on a quarterly basis. Interest is due and payable, with respect to LIBOR loans,expense on the last dayCondensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Amended Debt Agreement prohibits us from exceeding a maximum consolidated leverage ratio during the term of the Amended Debt Agreement and requires us to maintain a minimum interest coverage ratio. In addition, the Amended DebtCredit Agreement contains certain customary affirmative and negative covenants, including covenants that limit our ability and the ability of our subsidiaries which are parties to the loan agreement to, among other things, grant liens;liens, incur debt;debt, dispose of assets;assets, make loans and investments;investments, make acquisitions;acquisitions, make certain restricted payments;payments (including cash dividends), merge or consolidate; andconsolidate, change our business andor accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. As of October 31, 2017 CryoLifeBeginning 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 our subsidiaries werethe maximum first lien net leverage ratio covenant, are applicable. We are in compliance with our debt covenants as of June 30, 2022.
Convertible Senior Notes to notional. The Amended Debt AgreementConvertible Senior Notes balance was $100.0 million recorded in Long-term debt on the Condensed Consolidated Balance Sheets as of June 30, 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 June 30, 2022 was approximately $107.0 million and 5.05%, respectively. T
11
securities.
As
September 30, 2017 | December 31, 2016 | |||||||
|
| |||||||
Term loan balance | $ | 69,678 | $ | 73,594 | ||||
Less unamortized loan origination costs | (1,609) | (2,020) | ||||||
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Net borrowings | 68,069 | 71,574 | ||||||
Less short-term loan balance | (3,234) | (4,562) | ||||||
|
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Long-term loan balance | $ | 64,835 | $ | 67,012 | ||||
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|
June 30, 2022 | December 31, 2021 | ||||||||||
Term loan balance | $ | 214,875 | $ | 216,000 | |||||||
Convertible senior notes | 100,000 | 100,000 | |||||||||
2.45% Sparkasse Zollernalb (KFW Loan 1) | 403 | 566 | |||||||||
1.40% Sparkasse Zollernalb (KFW Loan 2) | 844 | 1,061 | |||||||||
Total loan balance | 316,122 | 317,627 | |||||||||
Less unamortized loan origination costs | (7,591) | (8,504) | |||||||||
Net borrowings | 308,531 | 309,123 | |||||||||
Less short-term loan balance | (1,590) | (1,630) | |||||||||
Long-term loan balance | $ | 306,941 | $ | 307,493 |
11.
Our estimated unreported loss
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Domestic hospitals | $ | 39,508 | $ | 38,932 | $ | 76,501 | $ | 75,161 | |||||||||||||||
International hospitals | 27,235 | 27,638 | 55,649 | 53,765 | |||||||||||||||||||
International distributors | 12,152 | 9,504 | 23,216 | 18,146 | |||||||||||||||||||
CardioGenesis cardiac laser therapy | 1,445 | 74 | 2,187 | 163 | |||||||||||||||||||
Total sources of revenue | $ | 80,340 | $ | 76,148 | $ | 157,553 | $ | 147,235 |
Employment Agreements
The employment agreement of our Chairman, President,2022 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. We resumed enrollment into the trial in the fourth quarter of 2016 and, assuming enrollment proceeds as anticipated, we could receive Premarket Approval from the FDA in 2019.
As of September 30, 2017 we had $1.5 million in prepaid royalties, $2.7 million in net intangible assets, and $1.4 million in property and equipment, net on our Summary Consolidated Balance Sheets related to the PerClot product line. If we do2021 was not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets could be materially impaired in future periods.
12
12. Shareholders’ Equity
Change in Accounting for Employee Share-Based Payments
As discussed in Note 1 above, as a result of the adoption of ASU2016-09, we recorded a net $238,000 cumulative-effect adjustment decrease to retained earnings, which included a $379,000 increase to additionalpaid-in capital and a $141,000 increase in deferred tax assets.
Common Shares Issued
In January 2016 we issued 3,703,699 shares of CryoLife common stock, as part of the consideration for the acquisition ofOn-X. The stock had a value of $34.6 million as determined on the date of the closing. See Note 4 for further discussion of theOn-X acquisition.
13.material.
During the nine months ended September 30, 2016 the Committee authorized awards from approved stock incentive plans of RSUs to certain employees and RSAs and PSUs to certain Company officers, which, including PSUs at target levels, together totaled 478,000 shares of common stock and had an aggregate grant date market value of $5.3 million. The PSUs granted in 2016 represented the right to receive from 60% to 150% of the target number of shares of common stock. The performance component of PSU awards granted in 2016 was based on attaining specified levels of adjusted EBITDA, adjusted inventory levels, and trade accounts receivable days’ sales outstanding, each as defined in the PSU grant documents, for the 2016 calendar year. The PSUs granted in 2016 earned 142% of the target number of shares.
13
Expected life of options Expected stock price volatility Risk-free interest rate Expected life of options Expected stock price volatility Risk-free interest rate options and shares purchased under the ESPP: RSA, PSA, RSU, and PSU expense Stock option and ESPP option expense Total stock compensation expense Basic income per common share Net income Net income allocated to participating securities Net income allocated to common shareholders Basic weighted-average common shares outstanding Basic income per common share Diluted income per common share Net income Net income allocated to participating securities Net income allocated to common shareholders Basic weighted-average common shares outstanding Effect of dilutive stock options and awardsa Diluted weighted-average common shares outstanding Diluted income per common share options: Three Months Ended
September 30, 2017 Nine Months Ended
September 30, 2017 Stock Options ESPP Options Stock Options ESPP Options N/A 0.5 Years 4.8 Years 0.5 Years N/A 0.43 0.40 0.35 N/A 1.14% 1.87% 0.62% Three Months Ended
September 30, 2016 Nine Months Ended
September 30, 2016 Stock Options ESPP Options Stock Options ESPP Options 4.8 Years 0.5 Years 4.8 Years 0.5 Years 0.40 0.30 0.40 0.30 1.19% 0.49% 1.20% 0.49% Three Months Ended
June 30, 2022Six Months Ended
June 30, 2022Stock Options ESPP Stock
OptionsESPP Expected life N/A 0.5 Years 5.0 Years 0.5 Years Expected stock price volatility N/A 0.31 0.40 0.31 Risk-free interest rate N/A 0.22% 1.89% 0.22% deferredDeferred preservation and inventoryInventory costs (in thousands): Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ 1,448 $ 1,397 $ 4,326 $ 3,616 519 421 1,614 1,203 $ 1,967 $ 1,818 $ 5,940 $ 4,819 Three Months Ended
June 30,Six Months Ended
June 30,2022 2021 2022 2021 RSA, RSU, and PSU expense $ 2,470 $ 1,695 $ 5,238 $ 3,745 Stock option and ESPP expense 611 572 1,183 1,159 Total stock compensation expense $ 3,081 $ 2,267 $ 6,421 $ 4,904 PSAs, 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 $111,000$147,000 and $288,000$321,000 in the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, and $70,000$152,000 and $202,000$309,000 in the three and ninesix months ended SeptemberJune 30, 2016,2021, respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.As of September 30, 2017 we had total unrecognized compensation costs of $6.8 million related to RSUs, RSAs, and PSUs and $2.1 million related to unvested stock options. As of September 30, 2017 this expense is expected to be recognized over a weighted-average period of 2.1 years for RSUs, 1.7 years for stock options, 1.3 years for RSAs, and 1.0 years for PSUs.14. Incomeincomeloss per common share (in thousands, except per share data): Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ 1,325 $ 2,993 $ 6,711 $ 7,881 (22) (58) (126) (152) $ 1,303 $ 2,935 $ 6,585 $ 7,729 32,887 32,151 32,665 31,731 $ 0.04 $ 0.09 $ 0.20 $ 0.24 14Three Months Ended
June 30,Six Months Ended
June 30,Basic loss per common share 2022 2021 2022 2021 Net loss $ (4,259) $ (2,178) $ (7,648) $ (5,316) Net loss allocated to participating securities 21 14 39 36 Net loss allocated to common shareholders $ (4,238) $ (2,164) $ (7,609) $ (5,280) Basic weighted-average common shares outstanding 40,031 38,943 39,941 38,841 Basic loss per common share $ (0.11) $ (0.06) $ (0.19) $ (0.14) Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ 1,325 $ 2,993 $ 6,711 $ 7,881 (22) (56) (122) (148) $ 1,303 $ 2,937 $ 6,589 $ 7,733 32,887 32,151 32,665 31,731 1,170 1,014 1,186 837 34,057 33,165 33,851 32,568 $ 0.04 $ 0.09 $ 0.19 $ 0.24
a
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
Diluted loss per common share | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
Net loss | $ | (4,259) | $ | (2,178) | $ | (7,648) | $ | (5,316) | ||||||||||||||||||
Net loss allocated to participating securities | 21 | 14 | 39 | 36 | ||||||||||||||||||||||
Net loss allocated to common shareholders | $ | (4,238) | $ | (2,164) | $ | (7,609) | $ | (5,280) | ||||||||||||||||||
Diluted weighted-average common shares outstanding | 40,031 | 38,943 | 39,941 | 38,841 | ||||||||||||||||||||||
Diluted loss per common share | $ | (0.11) | $ | (0.06) | $ | (0.19) | $ | (0.14) |
15.outstanding as these would be antidilutive due to the net loss.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
|
|
| |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
|
|
|
| |||||||||||||
Revenues: | ||||||||||||||||
Medical devices | $ | 27,029 | $ | 28,004 | $ | 84,519 | $ | 85,067 | ||||||||
Preservation services | 16,970 | 17,248 | 52,357 | 50,284 | ||||||||||||
|
|
|
| |||||||||||||
Total revenues | 43,999 | 45,252 | 136,876 | 135,351 | ||||||||||||
Cost of products and preservation services: | ||||||||||||||||
Medical devices | 6,220 | 6,598 | 21,196 | 21,299 | ||||||||||||
Preservation services | 7,917 | 8,872 | 23,401 | 26,348 | ||||||||||||
|
|
|
| |||||||||||||
Total cost of products and preservation services | 14,137 | 15,470 | 44,597 | 47,647 | ||||||||||||
Gross margin: | ||||||||||||||||
Medical devices | 20,809 | 21,406 | 63,323 | 63,768 | ||||||||||||
Preservation services | 9,053 | 8,376 | 28,956 | 23,936 | ||||||||||||
|
|
|
| |||||||||||||
Total gross margin | $ | 29,862 | $ | 29,782 | $ | 92,279 | $ | 87,704 | ||||||||
|
|
|
|
15
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Medical devices | $ | 58,936 | $ | 56,076 | $ | 116,478 | $ | 109,421 | |||||||||||||||
Preservation services | 21,404 | 20,072 | 41,075 | 37,814 | |||||||||||||||||||
Total revenues | 80,340 | 76,148 | 157,553 | 147,235 | |||||||||||||||||||
Cost of products and preservation services: | |||||||||||||||||||||||
Medical devices | 18,230 | 16,178 | 35,638 | 31,089 | |||||||||||||||||||
Preservation services | 9,938 | 9,457 | 19,024 | 17,795 | |||||||||||||||||||
Total cost of products and preservation services | 28,168 | 25,635 | 54,662 | 48,884 | |||||||||||||||||||
Gross margin: | |||||||||||||||||||||||
Medical devices | 40,706 | 39,898 | 80,840 | 78,332 | |||||||||||||||||||
Preservation services | 11,466 | 10,615 | 22,051 | 20,019 | |||||||||||||||||||
Total gross margin | $ | 52,172 | $ | 50,513 | $ | 102,891 | $ | 98,351 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|
|
|
| |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
|
|
|
| |||||||||||||
Products: | ||||||||||||||||
BioGlue and BioFoam | $ | 15,730 | $ | 15,976 | $ | 48,094 | $ | 47,479 | ||||||||
On-X | 8,326 | 8,890 | 27,048 | 25,159 | ||||||||||||
CardioGenesis cardiac laser therapy | 1,489 | 1,653 | 5,130 | 5,497 | ||||||||||||
PerClot | 886 | 950 | 2,641 | 2,983 | ||||||||||||
PhotoFix | 598 | 535 | 1,606 | 1,406 | ||||||||||||
HeRO Graft | -- | -- | -- | 2,325 | ||||||||||||
ProCol | -- | -- | -- | 218 | ||||||||||||
|
|
|
| |||||||||||||
Total products | 27,029 | 28,004 | 84,519 | 85,067 | ||||||||||||
Preservation services: | ||||||||||||||||
Cardiac tissue | 7,932 | 8,279 | 23,911 | 22,255 | ||||||||||||
Vascular tissue | 9,038 | 8,969 | 28,446 | 28,029 | ||||||||||||
|
|
|
| |||||||||||||
Total preservation services | 16,970 | 17,248 | 52,357 | 50,284 | ||||||||||||
|
|
|
| |||||||||||||
Total revenues | $ | 43,999 | $ | 45,252 | $ | 136,876 | $ | 135,351 | ||||||||
|
|
|
|
16. JOTEC Acquisition
On October 10, 2017 we announced that we entered into a definitive agreement to acquire JOTEC AG (“JOTEC”). The transaction is expected to close later this year, subject to customary closing conditions. JOTEC is a German-based, privately-held developer
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Products: | |||||||||||||||||||||||
Aortic stent grafts | $ | 23,833 | $ | 21,064 | $ | 49,339 | $ | 41,269 | |||||||||||||||
Surgical sealants | 15,967 | 17,864 | 31,648 | 35,692 | |||||||||||||||||||
On-X | 16,255 | 14,726 | 30,626 | 27,821 | |||||||||||||||||||
Other | 2,881 | 2,422 | 4,865 | 4,639 | |||||||||||||||||||
Total products | 58,936 | 56,076 | 116,478 | 109,421 | |||||||||||||||||||
Preservation services | 21,404 | 20,072 | 41,075 | 37,814 | |||||||||||||||||||
Total revenues | $ | 80,340 | $ | 76,148 | $ | 157,553 | $ | 147,235 |
•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, workforce, clinical and regulatory timelines, and our research and development projects; •Our belief that our distributors may delay or reduce purchases of products in 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, for certain indications 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 organ and tissue procurement organizations and tissue banks, the FDA classification of our medical devices, our compliance with applicable laws and regulations, and the advantages of our intellectual property and its significance to our segments and our business as a whole, our relations with our employees, timelines regarding product launches and regulatory certifications, clearances, renewals, and approvals; •Our beliefs about potential competition and competitive products and services, potential adverse regulatory consequences, potential security vulnerabilities, and the associated potential adverse effects on our business; •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 US and the AMDS globally; •Our beliefs regarding the fair value of our acquisitions, divestitures, and other 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 Baxter Transaction; •Our beliefs about the anticipated benefits from our corporate reincorporation and rebranding and the risks posed by the same; •Our beliefs about the present value and potential impairment of 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; 22 •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 |
•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, aortic 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, aortic 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 |
These 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. However, whethercircumstances 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 risk factors set forth below underrisks described in Part II, Item 1A, as well as“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 in Part I, Item 1A, of“Risk Factors” in our Annual Report on Form10-K for the year ended December 31, 2016,2021 and elsewhere throughout that report, and other factors,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 Form10-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.
17
CryoLife,
.
Recent Events
Acquisition2022.
OnCOVID-19
CriticalCOVID-19.
A summary of our significant accounting policies is included inPronouncements
New Accounting Pronouncements
In February 2016 the Financial Accounting Standards Board (“FASB”) amended its Accounting Standards Codification and created a new Topic 842,Leases. The final guidance requires lessees to recognize aright-of-use asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840,Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. We are evaluating the impact the adoptionPart I, Item I of this standard will have on our financial position, resultsform 10-Q for further discussion of operations, and cash flows.
18
In May 2014 the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers. Since ASU2014-09 was issued, several additional ASUsnew accounting standards that have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the new standard is effective for reporting periods beginning after December 15, 2017. We plan to use the modified retrospective method of adoption. We have completed an initial evaluation of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material revenue streams. Based on this initial evaluation, we do not expect adoption will have a material impact on our financial position, results of operations, or cash flows. Related disclosures will be expanded in line with the requirements of the standard. We will continue our evaluation, including additional revenue streams associated with the proposed acquisition of JOTEC, until our adoption of the new standard.
19
adopted.
Revenues for the Three Months Ended September 30, | Revenues as a Percentage of Total Revenues for the Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
|
|
|
| |||||||||||||
Products: | ||||||||||||||||
BioGlue and BioFoam | $ | 15,730 | $ | 15,976 | 36 | % | 35 | % | ||||||||
On-X | 8,326 | 8,890 | 19 | % | 20 | % | ||||||||||
CardioGenesis cardiac laser therapy | 1,489 | 1,653 | 3 | % | 4 | % | ||||||||||
PerClot | 886 | 950 | 2 | % | 2 | % | ||||||||||
PhotoFix | 598 | 535 | 1 | % | 1 | % | ||||||||||
|
|
|
| |||||||||||||
Total products | 27,029 | 28,004 | 61 | % | 62 | % | ||||||||||
Preservation services: | ||||||||||||||||
Cardiac tissue | 7,932 | 8,279 | 18 | % | 18 | % | ||||||||||
Vascular tissue | 9,038 | 8,969 | 21 | % | 20 | % | ||||||||||
|
|
|
| |||||||||||||
Total preservation services | 16,970 | 17,248 | 39 | % | 38 | % | ||||||||||
|
|
|
| |||||||||||||
Total | $ | 43,999 | $ | 45,252 | 100 | % | 100 | % | ||||||||
|
|
|
|
Revenues for the Nine Months Ended September 30, | Revenues as a Percentage of Total Revenues for the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
|
|
|
| |||||||||||||
Products: | ||||||||||||||||
BioGlue and BioFoam | $ | 48,094 | $ | 47,479 | 35 | % | 35 | % | ||||||||
On-X | 27,048 | 25,159 | 20 | % | 19 | % | ||||||||||
CardioGenesis cardiac laser therapy | 5,130 | 5,497 | 4 | % | 4 | % | ||||||||||
PerClot | 2,641 | 2,983 | 2 | % | 2 | % | ||||||||||
PhotoFix | 1,606 | 1,406 | 1 | % | 1 | % | ||||||||||
HeRO Graft | -- | 2,325 | -- | % | 2 | % | ||||||||||
ProCol | -- | 218 | -- | % | -- | % | ||||||||||
|
|
|
| |||||||||||||
Total products | 84,519 | 85,067 | 62 | % | 63 | % | ||||||||||
Preservation services: | ||||||||||||||||
Cardiac tissue | 23,911 | 22,255 | 17 | % | 16 | % | ||||||||||
Vascular tissue | 28,446 | 28,029 | 21 | % | 21 | % | ||||||||||
|
|
|
| |||||||||||||
Total preservation services | 52,357 | 50,284 | 38 | % | 37 | % | ||||||||||
|
|
|
| |||||||||||||
Total | $ | 136,876 | $ | 135,351 | 100 | % | 100 | % | ||||||||
|
|
|
|
Revenues for the Three Months Ended June 30, | Percent Change From Prior Year | Revenues as a Percentage of Total Revenues for the Three Months Ended June 30, | |||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
Products: | |||||||||||||||||||||||||||||
Aortic stent grafts | $ | 23,833 | $ | 21,064 | 13% | 30% | 28% | ||||||||||||||||||||||
Surgical sealants | 15,967 | 17,864 | (11)% | 20% | 24% | ||||||||||||||||||||||||
On-X | 16,255 | 14,726 | 10% | 20% | 19% | ||||||||||||||||||||||||
Other | 2,881 | 2,422 | 19% | 3% | 3% | ||||||||||||||||||||||||
Total products | 58,936 | 56,076 | 5% | 73% | 74% | ||||||||||||||||||||||||
Preservation services | 21,404 | 20,072 | 7% | 27% | 26% | ||||||||||||||||||||||||
Total | $ | 80,340 | $ | 76,148 | 6% | 100% | 100% |
Revenues for the Six Months Ended June 30, | Percent Change From Prior Year | Revenues as a Percentage of Total Revenues for the Six Months Ended June 30, | |||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
Products: | |||||||||||||||||||||||||||||
Aortic stent grafts | $ | 49,339 | $ | 41,269 | 20% | 31% | 28% | ||||||||||||||||||||||
Surgical sealants | 31,648 | 35,692 | (11)% | 20% | 24% | ||||||||||||||||||||||||
On-X | 30,626 | 27,821 | 10% | 20% | 19% | ||||||||||||||||||||||||
Other | 4,865 | 4,639 | 5% | 3% | 3% | ||||||||||||||||||||||||
Total products | 116,478 | 109,421 | 6% | 74% | 74% | ||||||||||||||||||||||||
Preservation services | 41,075 | 37,814 | 9% | 26% | 26% | ||||||||||||||||||||||||
Total | $ | 157,553 | $ | 147,235 | 7% | 100% | 100% |
20
Our sales
BioGlue
original equipment manufacturing (“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 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 surgery for the treatment of complex aortic arch, thoracic, and abdominal aortic diseases. Our aortic stent grafts are primarily distributed in international markets.
Revenues from the sale of surgical sealants increased 1% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase was primarily due to a 3% increase in the volume of milliliters sold, which increased revenues by 1% and an increase in average sales prices, which increased revenues by 1%, partially offset by the unfavorable effect of foreign currency exchange, which decreased revenues by 1%.
The decrease in sales volume of surgical sealants for the three months ended September 30, 2017 was primarily due to a decrease in sales of BioGlue in Japan due to changes in distributor buying patterns. The increase in sales volume of surgical sealants for the nine months ended September 30, 2017 was primarily due to an increase in sales of BioGlue in Japan and Brazil, due to increased usage, partially offset by a decrease in sales in U.S. markets.
We are currently seeking regulatory approval for BioGlue in China, and if this effort is successful, management believes this will provide an additional international growth opportunity for BioGlue in future years.
Domestic revenues accounted for 52% and 54% of total BioGlue revenues for the three and nine months ended September 30, 2017, respectively, and 51% and 55% of total BioGlue revenues for the three and nine months ended September 30, 2016. BioFoam revenues accounted for less than 1% of surgical sealant revenues for the three and nine months ended September 30, 2017 and 2016. BioFoam is approved for sale in certain international markets.
On-X
On January 20, 2016 we acquiredOn-X, an Austin, Texas-based, privately held mechanical heart valve company. TheOn-X catalogue of products includes theOn-X prosthetic aortic and mitral heart valves and theOn-X AAP.On-X product revenues also include revenues from the distribution of CarbonAid CO2 diffusion catheters and from the sale ofChord-X ePTFE sutures for mitral chordal replacement.On-X products are distributed in both domestic and international markets.On-X also generates revenue from pyrolytic carbon coating products produced for other medical device manufacturers (“OEM”).
On-X product revenues decreased 6% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This decrease was primarily due to a 17% decrease in volume of units sold, which decreased revenues by 1% and a decrease in average sales prices, which decreased revenues by 5%. The volume decrease ofOn-X products was primarily due to a revenue reversal of $1.0 million related to the estimated buyback of inventory at the end of the contracts for certain distributors in countries in which we anticipate establishing a direct market as well as reducedOn-X AAP shipments due to the delay in obtaining recertification of theOn-X AAP CE Mark in Europe, partially offset by an increase in volume in the U.S.On-X product revenues, excluding the revenue reversal of $1.0 million related to the estimated buyback of inventory, increased 6% for
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the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The decrease in average selling prices was due to price reductions to certain customers in Europe as a result of pricing pressures from competitive products.
On-X product revenues increased 10% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase in sales volume ofOn-X products for the September 30, 2017 was primarily due to volume increases in the U.S. and our direct markets in Europe, partially offset by revenue reversals related to the estimated buyback of inventory at the end the contract for certain distributors in countries in which the company anticipates establishing a direct market, reducedOn-X AAP shipments due to the delay in obtainingre-certification of theOn-X AAP CE Mark in Europe, and decreases in sales to certain distributors in Asia.On-X product revenues, excluding the revenue reversal of $1.0 million related to the estimated buyback of inventory, increased 14% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.
On-X OEM revenues decreased 11% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.On-X OEM revenues decreased 32% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.On-X OEM revenues were $358,000 and $402,000 for the three months ended September 30, 2017 and 2016, respectively and $1.0 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively.On-X OEM revenues decreased for the three and nine months ended September 30, 2017 due to an anticipated decrease in OEM activities for a major OEM customer.
CardioGenesis Cardiac Laser Therapy
Revenues from our CardioGenesis cardiac laser therapy product line consist primarily of sales of handpieces and, in certain periods, the sale of laser consoles. Revenues from cardiac laser therapy decreased 10% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This decrease was primarily due to a 15% decrease in unit shipments of handpieces, partially offset by an increase in laser sales. Revenues from the sale of laser consoles were $140,000 and zero for the three months ended September 30, 2017 and 2016, respectively.
Revenues from cardiac laser therapy decreased 7% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This decrease was primarily due to a 12% decrease in unit shipments of handpieces, partially offset by an increase in laser sales. Revenues from the sale of laser consoles were $432,000 and zero for the nine months ended September 30, 2017 and 2016, respectively.
Cardiac laser therapy is generally used adjunctively with cardiac bypass surgery by a limited number of physicians who perform these procedures. We expect that cardiac laser therapy revenues will decrease for the full year of 2017 as compared to the full year of 2016, due to a projected decrease in handpiece sales. Revenues from laser console sales are difficult to predict and can vary significantly from quarter to quarter.
PerClot
Revenues from the sale of PerClot decreased 7% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This decrease was primarily due to a 9% decrease in the volume of grams sold, which decreased revenues by 7%, and a decrease in average sales prices, which decreased revenues by 1%, partially offset by the favorable effect of foreign currency exchange, which increased revenues by 1%.
Revenues from the sale of PerClot decreased 11% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This decrease was primarily due to a 10% decrease in the volume of grams sold, which decreased revenues by 8%, a decrease in average sales prices, which decreased revenues by 2%, and the unfavorable effect of foreign currency exchange, which decreased revenues by 1%.
The volume decrease for the three and nine months ended September 30, 2017 was primarily due to a decline in sales of PerClot in Europe due to competitive pressures. The decrease in average selling prices for the three and nine months ended September 30, 2017 was primarily due to price reductions to certain customers in Europe as a result of pricing pressures from competitive products.
We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. We resumed enrollment into the PerClot U.S. clinical trial in the fourth quarter of 2016, and assuming enrollment proceeds as anticipated, we could receive Premarket Approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”) in 2019.
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PhotoFix
PhotoFix revenues increased 12% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.2021. This increase was primarily due to an increase in units sold, which increased revenues by 12%.
PhotoFix revenues increased 14% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase was primarily due to a 14% increase in units sold, which increased revenues by 13%22%, and an increase in average sales prices, which increased revenues by 1%3%, partially offset by the effect of foreign exchange rates, which decreased revenues by 9%.
The increase in volume
PhotoFix is distributed in the U.S. for use in intracardiac repair, including ventricular repair and atrial repair, great vessel repair and suture line buttressing, and pericardial closure.
HeRO Graft and ProCol
On February 3, 2016 we sold our HeRO Graft product line to Merit Medical Systems, Inc. (“Merit”), and we agreed to continue to manufacture the HeRO Graft for Merit for up to six months under a transition supply agreement. Revenues include sales to hospitals through February 3, 2016 and to Merit from that date through the second quarter of 2016. The sales transfer to Merit was completed in the second quarter of 2016, at which time we ceased sales of the HeRO Graft.
On March 18, 2016 we sold our ProCol product line to LeMaitre Vascular, Inc., at which time we ceased sales of these products.
Preservation Services
Revenues from preservation services decreased 2% and increased 4% for the three and nine months ended September 30, 2017, respectively,2022, as compared to the three and ninesix months ended SeptemberJune 30, 2016, respectively. A detailed discussion of the changes in cardiac and vascular preservation services revenues is presented below.
Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, timing of the release of tissues 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. See further discussion below of specific items affecting cardiac and vascular preservation services revenues for the three and nine months ended September 30, 2017.
Cardiac Preservation Services
Revenues from cardiac preservation services, consisting of revenues from the distribution of heart valves and cardiac patch tissues, decreased 4% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.2021. This decrease was primarily due to a 4% decrease in unit shipments of cardiac tissues, which decreased revenues by 6%, partially offset by an increase in average service fees, which increased revenues by 2%.
Revenues from cardiac preservation services increased 7% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase was primarily due to a 5% increase in unit shipments of cardiac tissues, which increased revenues by 5% and an increase in average service fees, which increased revenues by 2%.
The decrease in cardiac volume for the three months ended September 30, 2017 was primarily due to the impact of recent hurricanes in Florida and Texas which delayed surgical procedures and the timing of tissue releases to an implantable status. The increase in cardiac volume for the nine months ended September 30, 2017 was primarily due to an increase in the volume of cardiac valve tissue shipments for the nine months ended September 30, 2017. Theunits sold, which increased revenues by 20%, and an increase in average service feessales prices, which increased revenues by 10%, partially offset by the effect of foreign exchange rates, which decreased revenues by 9%.
Starch Medical, Inc. (“SMI”) related to PerClot (collectively the “Baxter Transaction”).
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Vascular Preservation Services
Revenues from vascular preservation services increased 1% for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. This increase was primarily due to a 4% increase in vascular tissue shipments, which increased revenues by 3%, and a decrease in average service fees, which decreased revenues by 2%.
Revenues from vascular preservation services increased 1% for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. This increase was primarily due to a 3% increase in vascular tissue shipments, which increased revenues by 3%, partially offset by a decrease in average service fees, which decreased revenues by 2%.
The increase in vascular volume for the three and nine months ended September 30, 2017 was primarily due to increases in saphenous veins and femoral artery shipments. The decrease in average service fees for the three and nine months ended September 30, 2017 was primarily due to fee differences due to physical characteristics of vascular tissues and the negotiation of pricing contracts with certain customers.
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. TheseCompetition 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.
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2017 | 2016 | 2017 | 2016 | |||||||||||||
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Cost of products | $ | 6,220 | $ | 6,598 | $ | 21,196 | $ | 21,299 |
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2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Cost of products | $ | 18,230 | $ | 16,178 | $ | 35,638 | $ | 31,089 |
2021. Cost of products for the three and ninesix months ended SeptemberJune 30, 2017 includes $32,0002022 and $2.1 million in inventory basisstep-up expense, primarily2021 included costs related to costs foraortic stent grafts, surgical sealants, On-X, productsre-purchased from previous international and domestic distributors in excess of the unit cost to manufacture the inventory. Cost of products for the three and nine months ended September 30, 2016 includes $750,000 and $2.2 million, respectively, in acquisition inventory basisstep-up expense, related to theOn-X inventory fair value adjustment recorded in purchase accounting.
other products.
Cost of Preservation Services
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Cost of preservation services | $ | 7,917 | $ | 8,872 | $ | 23,401 | $ | 26,348 |
Cost of preservation services decreased 11% for both the three and nine months ended September 30, 2017,lesser extent, surgical sealants, as compared to the three and ninesix months ended SeptemberJune 30, 2016. 2021.
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2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Cost of preservation services | $ | 9,938 | $ | 9,457 | $ | 19,024 | $ | 17,795 |
Cost of preservation services decreased in the three and nine months ended September 30, 2017 primarily due to a decrease in the per unit cost of processing tissues, partially offset by a slight
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Gross Margin
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Gross margin | $ | 29,862 | $ | 29,782 | $ | 92,279 | $ | 87,704 | ||||||||
Gross margin as a percentage of total revenues | 68% | 66% | 67% | 65% |
Gross margin was flat for the three months ended SeptemberJune 30, 20172022 was primarily due to an increase in the processing cost of cardiac and increased 5% for the nine months ended September 30, 2017,vascular tissues, as compared to the three and nine months ended SeptemberJune 30, 2016, respectively. 2021.
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2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Gross margin | $ | 52,172 | $ | 50,513 | $ | 102,891 | $ | 98,351 | |||||||||||||||
Gross margin as a percentage of total revenues | 65% | 66% | 65% | 67% |
surgical sealants. Gross margin as a percentage of total revenues decreased for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, primarily due to an increase in product costs of certain products sold resulting from inflationary pressures of materials and labor, partially offset by a favorable mix of certain products sold during the three months ended June 30, 2022.
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General, administrative, and marketing expenses | $ | 38,983 | $ | 40,830 | $ | 77,938 | $ | 79,468 | |||||||||||||||
General, administrative, and marketing expenses as a percentage of total revenues | 49% | 54% | 49% | 54% |
Operating Expenses
General, Administrative, and Marketing Expenses
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General, administrative, and marketing expenses | $ | 24,756 | $ | 20,592 | $ | 71,016 | $ | 69,302 | ||||||||
General, administrative, and marketing expenses as a percentage of total revenues | 56% | 46% | 52% | 51% |
General, administrative, and marketing expenses increased 20% and 2% for the three and nine months ended September 30, 2017, respectively, as compared to the three and nine months ended September 30, 2016, respectively.
General, administrative, and marketing expenses for the three and ninesix months ended SeptemberJune 30, 2017 included $3.0 million and $4.4 million, respectively, in business development costs, primarily related to the proposed acquisition of JOTEC. General, administrative, and marketing expenses for the three and nine months ended September 30, 2016 included $413,000 and $7.0 million, respectively, in transaction and integration costs primarily related to the acquisition ofOn-X in January 2016, which include, among other costs, expenses related to the termination of international and domestic distribution agreements.
The increase in general, administrative, and marketing expenses for the three months ended September 30, 2017 was primarily due to the increase in business development expenses, as well as higher expenses to support the Company’s increasing revenue base, international expansion, and increasing employee headcount. The increase in general, administrative, and marketing expenses for the nine months ended September 30, 2017 was primarily due to higher expenses to support the Company’s increasing revenue base, international expansion, and increasing employee headcount.
Research and Development Expenses
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Research and development expenses | $ | 4,277 | $ | 3,714 | $ | 13,098 | $ | 9,602 | ||||||||
Research and development expenses as a percentage of total revenues | 10% | 8% | 10% | 7% |
Research and development expenses increased 15% and 36% for the three and nine months ended September 30, 2017, respectively,2022, as compared to the three and ninesix months ended SeptemberJune 30, 2016, respectively. Research and development
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spending in these periods was primarily focused on clinical work with respect to our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S, and to a lesser extent, NeoPatchTM,On-X products, and BioGlue projects.
Gain from Sale of Business Components
Gain from sale of business components for the three months ended September 30, 2016 consisted of the net of an $8.8 million gain on the HeRO Sale and an $845,000 loss on the ProCol Sale. We sold our HeRO Graft and ProCol product lines during the first quarter of 2016.
Interest Expense
Interest expense was $851,000 and $2.5 million for the three and nine months ended September 30, 2017, respectively, and $742,000 and $2.3 million for the three and nine months ended September 30, 2016, respectively. Interest expense in 2017 and 2016 included interest on debt and uncertain tax positions.
Earnings
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Income before income taxes | $ | 21 | $ | 4,731 | $ | 5,908 | $ | 14,653 | ||||||||
Income tax (benefit) expense | (1,304 | ) | 1,738 | (803 | ) | 6,772 | ||||||||||
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Net income | $ | 1,325 | $ | 2,993 | $ | 6,711 | $ | 7,881 | ||||||||
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Diluted income per common share | $ | 0.04 | $ | 0.09 | $ | 0.19 | $ | 0.24 | ||||||||
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Diluted weighted-average common shares outstanding | 34,057 | 33,165 | 33,851 | 32,568 | ||||||||||||
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Income before income taxes decreased for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, respectively. The decrease in income before income taxes for the three months ended September 30, 2017 was due to an increase in operating expenses largely as a result of increased business development costs, primarily related to the proposed acquisition of JOTEC. The decrease in income before income taxes for the nine months ended September 30, 20172021, was primarily due to the gain from sale ofa decrease in business components in 2016, which did not recur in 2017, and an increase in research and development expenses, partially offset by an increase in gross margins.
personnel related and marketing costs.
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2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Research and development expenses | $ | 8,648 | $ | 8,360 | $ | 18,776 | $ | 16,114 | |||||||||||||||
Research and development expenses as a percentage of total revenues | 11% | 11% | 12% | 11% |
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2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Loss before income taxes | $ | (3,300) | $ | (2,183) | $ | (5,729) | $ | (6,684) | |||||||||||||||
Income tax expense (benefit) | 959 | (5) | 1,919 | (1,368) | |||||||||||||||||||
Net loss | $ | (4,259) | $ | (2,178) | $ | (7,648) | $ | (5,316) | |||||||||||||||
Diluted loss per common share | $ | (0.11) | $ | (0.06) | $ | (0.19) | $ | (0.14) | |||||||||||||||
Diluted weighted-average common shares outstanding | 40,031 | 38,943 | 39,941 | 38,841 |
Net incomestock compensation.
We
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We are uncertain whether the demand forOn-X products, PerClot, or PhotoFix will be seasonal, as these products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may be obscured.
US.
seasonal.
Our demand
2021.
proceeds from stock option exercises.
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 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.
In connection with the closing of theOn-X acquisition on January 20, 2016, CryoLife and certain of our subsidiaries
As of September 30, 20172022 approximately 6%37% of our cash and cash equivalents were held in foreign jurisdictions.
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Cash flows used in: | |||||||||||
Operating activities | $ | (8,912) | $ | (392) | |||||||
Investing activities | (4,994) | (7,044) | |||||||||
Financing activities | (1,032) | (3,737) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 310 | 242 | |||||||||
Decrease in cash and cash equivalents | $ | (14,628) | $ | (10,931) |
2022 and 2021, respectively.
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in operating assets and liabilities from the prior year end. For the ninesix months ended SeptemberJune 30, 20172022 thesenon-cash items included $6.7$11.5 million in depreciation and amortization expenses, and $5.7$6.1 million innon-cash compensation. The prior yearnon-cash items included aone-time $7.9 compensation, $5.0 million gain from salein fair value adjustments of business components.
financial instruments, $3.8 million of lease expenses, and $1.6 million of deferred income tax changes.
assets.
expenditures.
Off-Balance Sheet Arrangements
We have nooff-balance sheet arrangements.
Scheduled contractual obligations and the related future payments as of September 30, 2017 were as follows (in thousands):
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Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | ||||||||||||||||||||||
Long-term debt obligations | $ | 68,741 | $ | -- | $ | 3,750 | $ | 3,750 | $ | 5,157 | $ | 56,084 | $ | -- | ||||||||||||||
Operating leases | 23,002 | 909 | 5,093 | 5,024 | 4,381 | 3,807 | 3,788 | |||||||||||||||||||||
Interest payments | 8,336 | 686 | 2,649 | 2,499 | 2,321 | 181 | -- | |||||||||||||||||||||
Research obligations | 6,037 | 1,522 | 3,817 | 328 | 235 | 135 | -- | |||||||||||||||||||||
Purchase commitments | 3,582 | 1,709 | 1,696 | 177 | -- | -- | -- | |||||||||||||||||||||
Contingent payments | 1,000 | �� | -- | -- | 1,000 | -- | -- | -- | ||||||||||||||||||||
Other long-term liabilities | 475 | 465 | 10 | -- | -- | -- | -- | |||||||||||||||||||||
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Total contractual obligations | $ | 111,173 | $ | 5,291 | $ | 17,015 | $ | 12,778 | $ | 12,094 | $ | 60,207 | $ | 3,788 | ||||||||||||||
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Credit Agreement, Convertible Senior Notes, and other governmental loans.
Our research obligations represent commitments for ongoing studiesequipment and payments to support research and development activities.
Our purchase commitments include obligations from agreements with suppliers, one of which is the minimum purchase requirements for PerClot under a worldwide distribution agreement (the “Distribution Agreement”) with Starch Medical, Inc. (“SMI”). Pursuant to the terms of the Distribution Agreement, we may terminate that agreement, including the minimum purchase
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requirements set forth in the agreement for various reasons, one of which is if we obtain FDA approval for PerClot. These minimum purchases are included in the table above through 2018, based on the assumption that we will not terminate the Distribution Agreement before our target date for receiving FDA approval for PerClot in 2019. However, if we do not obtain FDA approval for PerClot, and if we choose not to terminate the Distribution Agreement, CryoLife may have minimum purchase obligations of up to $1.75 million per year through the end of the contract term in 2025.
The contingent payments obligation includes payments that we may make if certain U.S. regulatory approvals and certain commercial milestones are achieved related to our transaction with SMI for PerClot.
The schedule of contractual obligations above excludes (i) obligations for estimated liability claims unless they are due as a result of a settlement agreement or other contractual obligation, as no assessments have been made for specific litigation, and (ii) any estimated liability for uncertain tax positions and interest and penalties, currently estimated to be $3.4 million, as no specific assessments have been made by any taxing authorities.
equipment.
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We are significantly dependent on our revenues from BioGlue and are subject to
BioGlue® Surgical Adhesive (“BioGlue”) isand uncertainties, known and unknown, including, among others, the risks discussed below. These risks should be carefully considered together with the other information provided in this 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 significant sourcematerial, adverse impact on our business, reputation, revenues, financial condition, profitability, and cash flows. Additional risks and uncertainties not presently known or knowable to us, or that we currently believe to be immaterial, may also adversely affect our business.
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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.
Any of these laws common stock. products. qualify a new supplier before a disruption in handpiece availability occurs. specialized workforce. common stock. discontinue distribution of these tissues. control. loss of revenue. Common Stock stock price.representing 39% and 38% of revenues in the three months ended September 30, 2017 and 2016, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows,as such, we face risks if we are unable to:●Source sufficient quantities of some tissue types from human donors or address potential excess supply of other tissue types. We rely primarily upon the efforts of third-party procurement organizations, tissue banks (most of which arenot-for-profit), and others 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;●Process donated tissue cost effectively or at all due to factors such as employee turnover, ineffective or inefficient operations, or an insufficiently skilled workforce;●Compete effectively in tissue preservation services, as our competitors may have advantages over us in terms of cost structure, pricing, back-office automation, marketing, and sourcing tissue; or●Mitigate sufficiently the risk that processed tissue cannot be sterilized and hence carries an inherent risk of infection or disease transmission; there is no assurance that our quality controls will be adequate to mitigate such risk.U.S.US and foreign governments and regulatory agenciesgovernmental authorities have adopted restrictive laws and regulations and rules that apply to ourrestrict tissue preservation services. These include but are not limited to:●The National Organ Transplant Act of 1984 or “NOTA,” which prohibits the acquisition or transfer of human organs for valuable consideration for use in human transplantation, but allows for the payment of reasonable expenses associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of human organs;●U.S. Department of Labor, Occupational Safety and Health Administration, and U.S. Environmental Protection Agency requirements for prevention of occupational exposure to infectious agents and hazardous chemicals and protection of the environment; and●European Union directives, called the “EUCTD,” which require that countries in the European Economic Area take responsibility for regulating tissues and cells through a Competent Authority.regulations, and rules or othersregulations could change, including becoming more restrictive or our interpretation of them could be challenged by U.S., state,governmental authorities.foreign governmentsbusiness would likely be material to our financial results. We face the following risks related to BioGlue:agencies,risks.”these governmentsbusiness would likely be material to our financial results. We face risks based on our ability to:regulatory agencies could adopt more restrictive laws or regulationsbrand recognition;regarding tissue preservation services thatrevenues 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 not realize all of the anticipated benefits of theOn-X acquisition.On January 20, 2016 we acquiredOn-X at a price of $128.2 million, subject to certain adjustments, which is the largest acquisition we have ever made. Pursuant to the acquisition, we borrowed $75.0 million through a senior secured credit facility, subject to certain restrictions on our business, and we issued shares of common stock worth, at the time, approximately $34.6 million.Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of theOn-X acquisition continues to depend on a number of factors including:●The success of our integration of the direct sales forces ofOn-X and CryoLife into a single sales force to sell, with limited exception, the entire suite of products of the combined businesses;31●Our ability to successfully manage independent sales representatives and distributor relationships, particularly internationally;●The success of moving to a direct sales model with theOn-X products in certain international markets;●Our ability to resolve unanticipated or undisclosedpre-existingOn-X liabilities including any regulatory or quality issues;●Our ability to execute on existingOn-X clinical trials in a compliant, timely, and cost effective manner;●Our ability to retain existing customers and obtain new customers forOn-X products; and●Unforeseen negative economic or market conditions impacting theOn-X business.Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. As a result of these or other factors, we may not realizeaffect the full benefits of the acquisition, including achieving anticipated sales, capitalizing on the FDA’s approved reduced international normalized ratio (“INR”) indication and other growth opportunities, capturing market share from major competitors, all of whom are substantially larger and better resourced than CryoLife, or realizing expected synergies and costs savings. These benefits may not be achieved within the anticipated time-frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the acquisition, and negatively impact the pricevalue of our common stock. In addition, if we fail to realizeanticipated benefitscompletion of acquisitions using the acquisition, wepurchase method of accounting. Our financial results could experience an interruption or loss of momentum in our existing business activities, which could adversely affect our revenues, financial condition, profitability, and cash flows.We are significantly dependent on our revenues fromOn-X and are subject to a variety of risks affecting them.On-X is a significant source of our revenues, representing 19% and 20% of revenues in the three months ended September 30, 2017 and 2016, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:●Our ability to achieve anticipatedOn-X revenues;●Our ability to capitalize on the FDA’s approved reduced INR indication;●Our ability to overcome high levels of inventory in certain markets;●Our ability to compete effectively with our major competitors, as they may have advantages over us in terms of cost structure, pricing, sales force footprint, and brand recognition;●Our ability to manage the risks associated with less favorable contract terms forOn-X products on consignment at hospitals with more bargaining power;●Changes in technology that may impact the market for mechanical heart valves, such as transcatheter aortic valve replacement, or “TAVR” devices; and●Enhanced regulatory enforcement activities that could cause interruption in our ability to sellOn-X products in certain markets.Our revenues for theOn-X ascending aortic prosthesis (“AAP”) in Europe may continue to be adversely affected by regulatory enforcement activities regarding theOn-X AAP’s CE Mark.On November 22, 2016, we received a letter fromLNE/G-Med(“G-Med”), which acts as our Notified Body for theOn-X product line, indicating that it was temporarily suspending the CE Mark for theOn-X AAP in the European Economic Area (“EEA”), due to an allegedly untimely and allegedly deficient plan by us to address certain technical documentation issues found byG-Med during a review and renewal of the design examination certificate for theOn-X AAP. On July 26, 2017, we received a letter fromG-Med indicating that it was continuing the suspension of the CE Mark for the AAP product for a period of up to 18 months pending further assessment. We have since withdrawn our application withG-Med for certification of the AAP product and are currently pursuing another pathway to CE Mark for the AAP product with a goal of returning the product to the European market in the first quarter of 2018. Failure to obtain CE Mark for theOn-X AAP in the EEA could have a material adverse effect on EEA revenues in 2018 and beyond.32We may not realize all of the anticipated benefits of the JOTEC acquisition.On October 10, 2017 we entered a definitive agreement to acquire JOTEC at a price of $225 million, subject to certain adjustments, which would be the largest acquisition we have ever made. We anticipate financing the transaction and related expenses, as well as refinancing our existing approximately $69 million loan, with a new $255 million senior secured credit facility, consisting of a $225 million institutional term loan B and a $30 million undrawn revolving credit facility, $56.25 million in CryoLife common stock as determined on the date of signing of the agreement, and available cash on hand.Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of the JOTEC acquisition depend on a number of factors including:●Our ability to consummate the acquisition;●The continued growth of the global market for stent grafts used in endovascular and open repair of aortic disease;●Our ability to leverage our global infrastructure, including in the markets in which JOTEC is already direct; minimize difficulties and costs associated with transitioning away from distributors in key markets; and accelerate our ability to go direct in Europe in developed markets with the CryoLife and JOTEC product portfolios;●Our ability to foster cross-selling opportunities between the CryoLife and JOTEC product portfolios;●Our ability to bring JOTEC products to the U.S. market;●Our ability to harness the JOTEC new product pipeline and R&D capabilities to drive long-term growth, including our ability to obtain CE Mark for pipeline products;●Our ability to drive gross margin expansion;●Our ability to successfully integrate the JOTEC business with ours, including integrating the combined European sales force;●Our ability to compete effectively;●Our ability to carry significantly more debt and repayment obligations after the acquisition closes; and●Our ability to manage the unforeseen risks and uncertainties related to JOTEC’s business.Manyfinancial adjustments required by purchase accounting such as:these factors are outsidesome acquired intangible assets;our controlrecording purchased tangible assets;any oneintangible assets;them could result in increased costs, decreased revenues, and diversionsales may increase temporarily if acquired inventory is recorded at fair market value;management’s time and energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. These benefits may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impactearn-outs, our earnings per share, decreasemay be affected by changes in estimates of future contingent consideration; or delay the expected accretive effectthe acquisition, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of the acquisition, we could experience an interruption or loss of momentum in our existing business activities, which could adversely affect our revenues, financial condition, profitability, and cash flows.Our investment in PerClot is subject to significant risks, and our ability to fully realize our investment is dependent on our ability to obtain FDA approval and to successfully commercialize PerClot in the U.S. either directly or indirectly.In 2010 and 2011, we entered into various agreements with Starch Medical, Inc. (“SMI”) pursuant to which, among other things, we (a) may distribute PerClotin certain international markets and are licensed to manufacture PerClot in the U.S.; (b) acquired some technology to assist in the production of a potentially key component in the manufacture of PerClot; and (c) obtained the exclusive right to pursue, obtain, and maintain FDA Premarket Approval (“PMA”) for PerClot. The initial consideration under those SMI agreements was approximately $8.0 million paid in cash and stock. We made additional payments of $1.75 million through 2016 and may pay contingent amounts of up to an additional $1.0 million if certain U.S. regulatory and other commercial milestones are achieved. We may also pay SMI, subject to certain offsets, royalties on our future sales of PerClot that we manufacture.In March 2014, we received approval of our investigational device exemption (“IDE”) for PerClot from the FDA, pursuant to which we began, in the first half of 2015, our pivotal clinical trial for surgical indications in the U.S. We began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol, the last of which was approved by the FDA in July 2016.We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. We resumed enrollment into the PerClot U.S. clinical trialthis risk, in the fourth quarter of 2016,2021, we fully impaired the value of the Endospan Option and assuming enrollment proceeds as anticipated, we could receive PMA fromfully wrote-down the FDAvalue of the Endospan Loan, primarily driven by a decrease in 2019. On October 3, 2017 SMI provided notice to terminate our exclusive license to pursue, obtain,forecasted operating results. This impairment, and maintain PMA approval (but not our exclusive licenses to manufacture and sell PerClot or to SMI’s technology), andother potential risks like those mentioned above, may adversely affect the parties have begun contractually required, good faith negotiations to resolve this issue. Even though the FDA33has approved the revised protocol, we may not be able to continue, or may elect to discontinue, the pivotal clinical trial. Finally, we are subject to the termsmarket value of our resolution with Medafor, which resulted from an April 28, 2014 declaratory judgment lawsuit regarding our manufacture, use, offer for sale, and sale of PerClot in the U.S. and Medafor’s U.S. Patent No. 6,060,461. Under the terms of the resolution with Medafor, we are precluded from marketing, selling, or distributing PerClot in the U.S. until February 8, 2019, even if we obtain FDA PMA for PerClot before that date.We cannot sell PerClot for surgical indications in the U.S. in future years unless, and until, we obtain FDA approval and only after the Medafor injunction has expired on February 8, 2019. Failure to obtain FDA approval could materially, adversely affect our financial condition, anticipated future revenues, and profitability. There is no guarantee that we will obtain FDA approval when anticipated, or at all. The estimated timing of regulatory approval for PerClot is based on factors beyond our control, including but not limited to, the pace of enrollment in the pivotal clinical trial and the approval process may be delayed because of unforeseen scheduling difficulties and unfavorable results at various stages in the pivotal clinical trial or the process. Management may also decide to delay or terminate our pursuit of U.S. regulatory approval for PerClot at any time due to changing conditions at CryoLife, in the marketplace, or in the economy in general.Finally, even if we receive FDA PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. as competitors may have substantial market share or significant market protections due to contracts, among other things. We may also be unsuccessful in selling in countries other than the U.S. due, in part, to a proliferation in other countries of multiple generic competitors, SMI’s breach of its contractual obligations, or the lack of adequate intellectual property protection or enforcement. Any of these occurrences could materially, adversely affect our future revenues, financial condition, profitability, and cash flows.Reclassification by the FDA of CryoValve® SGPV may make it commercially infeasible to continue processing the CryoValve SGPV.In October 2014 the FDA convened an advisory committee meeting to consider the FDA’s recommendation tore-classify more than minimally manipulated (“MMM”) allograft heart valves from an unclassified medical device to a Class III medical device. The class of MMM allograft heart valves includes our CryoValve SG pulmonary heart valve (“CryoValve SGPV”). At the meeting, a majority of the advisory committee panel recommended to the FDA that MMM allograft heart valves bere-classified as a Class III product. We expect that the FDA will issue a proposal for reclassification of MMM allograft heart valves, which will be subject to a public comment period before finalization. After publication of the reclassification rule, we expect to have thirty months to submit for an FDA PMA, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers. To date, the FDA has not issued a proposed reclassification for MMM allograft heart valves.We have continued to process and ship our CryoValve SGPV tissues. However, if the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, we anticipate requesting a meeting with the FDA to determine the specific requirements to file for and obtain a PMA, and we will determine an appropriate course of action in light of those requirements. 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, this could materially, adversely affect our revenues, financial condition, profitability, and/or cash flows in future periods. In addition, we could decide that the requirements for obtaining a PMA make continued processing of the CryoValve SGPV infeasible, necessitating that we discontinue distribution of these tissues.Our investment in PhotoFix is subject to a variety of risks.In April 2016 we exercised our option and acquired the PhotoFix product line from Genesee Biomedical, Inc. (“GBI”). We began distribution of PhotoFix in the first quarter of 2015 and have continued to sell PhotoFix after the acquisition.Simultaneously with our acquisition of the PhotoFix product line, we entered into a Transition Supply Agreement with GBI, pursuant to which GBI will continue to manufacture product for us until we have completed the transfer of manufacturing operations to us. During this transition period, we are reliant on GBI to produce quality products in the quantities we and our customers require. If GBI experiences quality, supply, or production challenges, its products could be subject to recall or other quality action; its business operations and/or its facilities that make the products could be shut down temporarily or permanently, whether by government order, natural disaster, or otherwise; and there may not be sufficient product to enable us to meet demand. Even though we have acquired PhotoFix, we may be unable to continue the manufacturing, marketing, or distribution of the product consistent with our current projections or within the time frame anticipated. Further, we may be unable to secure anticipated approvals from the FDA or international regulatory bodies to remove certain labelling restrictions or to be able to commercialize PhotoFix in key international markets, such as Europe. Any of these occurrences or actions could materially, adversely affect our revenues, financial condition, profitability, and cash flows.34materials and supplies.our tissue processing are subject to stringent quality standards andregulatory requirements and many of these materials and supplies are subject to significant regulatory oversight and action.oversight. If materials or supplies used in our processes fail to meet these standards and requirements or are subject to recallregulatory enforcement action, they may have to be scrapped, or other quality action, an outcome could be the rejection or recall of our products or tissues and/could be rejected during or the immediateafter processing, recalled, or rejected by customers. In these cases, we may have to immediately scrap raw or in process materials or expense of the costs of the manufacturing or preservation.andor supplies or changes to them do not receive regulatory approval or are recalled, orif the related suppliers and/or their facilities are shut down temporarily or permanently, whether by government order, natural disaster,for any reason, or if the related suppliers are otherwise thereunable or unwilling to supply us, we may not behave sufficient materials or supplies available for purchase to allow us to manufacture our products or process tissues. AnyIn addition, we rely on contract manufacturers to manufacture some of our products or to provide additional manufacturing capacity for some products. If these occurrencescontract manufacturers fail to meet our quality standards or actions could materially, adversely affectother 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 therevenues, financial condition, profitability,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 cash flows.sole sourcesingle and sole-source suppliers and single facilities.Certainfacilities.that are key components ofused in our product manufacturing orand tissue processing, as well as some of our tissue processingproducts, are sourced from single vendors.single- or sole-source suppliers. As a result, our ability to negotiate favorable terms with those vendorssuppliers may be limited, and if those vendorssuppliers experience operational, financial, quality, or regulatory difficulties, or if those vendorssuppliers 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 vendorssuppliers resume operations, until alternative suppliers could be identified and qualified, or permanently if the suppliers do not resume operations and no alternative vendorssuppliers 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.substantially all of our own manufacturing operations at twothree facilities: Austin, Texas for ourOn-X product line, products, Hechingen, Germany for internally manufactured aortic stent grafts, and Kennesaw, Georgia for all our other products.BioGlue, PerClot, PhotoFix, and tissue preservation services. The AMDS product is solely manufactured by a supplier in Charlotte, North 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, due to natural disasterfor any reason including a pandemic or other reason,climate change related event, our business could be substantially disrupted.Our products and tissues are highly regulated and subject to significant quality and regulatory risks.The manufacture and sale of medical devices and processing, preservation, and distribution of human tissues are highly complex and subject to significant quality and regulatory risks. Any of the following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:●Our products and tissues may be recalled or placed on hold by us, the FDA, or other regulatory bodies;●Our products and tissues allegedly have caused, and may in the future cause, injury to patients, which has exposed, and could in the future expose, us to product and tissue processing liability claims, and such claims could lead to additional regulatory scrutiny and inspections;●Our manufacturing and tissue processing operations are subject to regulatory scrutiny and inspections, including by the FDA and foreign regulatory agencies, and these agencies could require us to change or modify our manufacturing operations, processes, and procedures;●Regulatory agencies could reclassify, reevaluate, or suspend our clearances and approvals to sell our products and distribute tissues;●European Notified Bodies have recently engaged in more rigorous regulatory enforcement activities and may continue to do so, and the European Union has adopted a new Medical Device Regulation (MDR 2017/745), which could result in product reclassifications that adversely impact our clearances and approvals; and●Adverse publicity associated with our products or processed tissues or our industry could lead to a decreased use of our products or tissues, additional regulatory scrutiny, and/or product or tissue processing liability lawsuits.As an example of these risks, in January 2013 we received a warning letter from the FDA related to the manufacture of our products and our processing, preservation, and distribution of human tissue, as well as a subsequent 2014 Form 483, after are-inspection by the FDA related to the warning letter that included observations concerning design and process validations, environmental monitoring, product controls and handling, corrective and preventive actions, and employee training. Despite an FDAre-inspection in the first quarter of 2015, after which the FDA closed out the warning letter issued in 2013, we remain subject to further inspections and oversight by the FDA and, if the FDA is not satisfied with our quality and regulatory compliance, it could institute a wide variety of enforcement actions, ranging from issuing additional Form 483s or warning letters, to more severe sanctions such as fines; injunctions; civil penalties; recalls of our products and/or tissues; operating restrictions; suspension of production;non-approval or withdrawal of approvals or clearances for new products or existing products; and criminal prosecution. Any further Form 483s, warning letters, recalls, holds, or other adverse action from the FDA may decrease demand for our products or tissues or cause us to write down our inventories or deferred preservation costs and could materially, adversely affect our revenues, financial condition, profitability, and cash flows.35We operate in highly competitive market segments, face competition from large, well-established medical device companies with significant resources, and may not be able to compete effectively.The market for our products and services is intensely competitive and significantly affected by new product introductions and activities of other industry participants. We face intense competition from other companies engaged in the following lines of business:●The sale of mechanical, synthetic, and animal-based tissue valves for implantation;●The sale of synthetic and animal-based patches for implantation;●The sale of surgical adhesives, surgical sealants, and hemostatic agents; and●The processing and preservation of human tissue.A significant percentage of market revenues from these products was generated by Baxter International Inc., Ethicon (a Johnson & Johnson Company), Medtronic, Inc., Abbott Laboratories, LivaNova PLC, Edwards Life Sciences Corp., C.R. Bard, Inc., Integra Life Sciences Holdings, or LifeNet. Several of our competitors enjoy competitive advantages over us, including:●Greater financial and other resources for product research and development, sales and marketing, acquisitions, and patent litigation;●Enhanced experience in, and resources for, launching, marketing, distributing, and selling products;●Greater name recognition as well as more recognizable trademarks for products similar to the products that we sell;●More established record of obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;●More established relationships with healthcare providers and payors;●Lower cost of goods sold or preservation costs;●Advanced systems for back office automation, product development, and manufacturing, which may provide certain cost advantages; and●Larger direct sales forces and more established distribution networks.Our competitors may develop services, products, or processes with significant advantages over the products, services and processes that we offer or are seeking to develop, and our products and tissues may not be able to compete successfully. If we are unable to successfully market and sell innovative andin-demand products and services, our competitors may gain competitive advantages that may be difficult to overcome. In addition, consolidation among our competitors may make it more difficult for us to compete effectively. If we fail to compete effectively, this could materially, adversely affect our revenues, financial condition, profitability, and cash flows.We are subject to a variety of risks as we seek to expand our business globally.The expansion of our international operations is subject to a number of risks, which may vary significantly from the risks we face in our U.S. operations, including:●Difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships and developing direct sales operations in key foreign countries;●Expanded compliance obligations, including obligations associated with the Foreign Corrupt Practices Act, the U.K. Bribery Law, local anti-corruption laws, and Office of Foreign Asset Control administered sanction programs;●Broader exposure to corruption;●Overlapping and potentially conflicting international legal and regulatory requirements, as well as unexpected changes in international legal and regulatory requirements or reimbursement policies and programs;●Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those receivables;●Diminished protection for intellectual property and the presence of a growing number of generic or smaller competitors in some countries;●Changes in currency exchange rates, particularly fluctuations in the British Pound and Euro as compared to the U.S. Dollar, including any fluctuations in exchange rates due to the exit of the U.K. from the European Union;●Differing local product preferences and product requirements;●Adverse economic or political changes or political instability;●Potential trade restrictions, exchange controls, and import and export licensing requirements including tariffs; and●Potential adverse tax consequences of overlapping tax structures.36Our failure to address adequately these risks could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.The outcome of the 2016 U.S. Presidential and Congressional elections might result in material changes to governmental regulation of various aspects of our business and operations or cause disruptions to our business.The outcome of the 2016 U.S. Presidential and Congressional election might result in material changes to governmental regulation of various aspects of our business and operations. We devote significant operational and managerial resources to comply with existing laws and regulations. Different interpretations and enforcement policies of existing laws and regulations, the possible repeal of existing laws and regulations, as well as the enactment of new laws and regulations, could require additional operational and managerial resources and could subject our current practices to allegations of impropriety or illegality or could require us to make significant changes to our products and operations.We may be subject to fines, penalties, injunctions and other sanctions if we are deemed to be promoting the use of our products for unapproved, oroff-label, uses.Our business and future growth depend on the continued use of our products for specific approved uses. Generally, unless the products are approved or cleared by the FDA for the alternative uses, the FDA contends that we may not make claims about the safety or effectiveness of our products, or promote them, for such uses. Such limitations present a risk that the FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales, marketing, and/or support activities, though designed to comply with all FDA requirements, constitute the promotion of our products for an unapproved use in violation of the Federal Food, Drug, and Cosmetic Act. We also face the risk that the FDA or other governmental authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs, and other activities. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to change substantially our sales, promotion, grant, and educational activities. There is also a possibility that we could be enjoined from selling some or all of our products for any unapproved use. In addition, as a result of an enforcement action against us or our executive officers, we could be excluded from participation in government healthcare programs such as Medicare and Medicaid.Our existing insurance coverage may be insufficient, and we may be unable to obtain insurance in the future.Our products and tissues allegedly have caused, and may in the future cause, injury to patients using our products or tissues, and we have been, and may be, exposed to product and tissue processing liability claims. We maintain claims-made insurance policies to mitigate our financial exposure to product and tissue processing liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. In addition, our product and tissue processing liability insurance policies do not include coverage for any punitive damages. have insurance for product and tissue processing liabilities, securities, property, and general liabilities, it is possible that:●We could be exposed to product and tissue processing liability claims and security claims greater than the amount that we have insured;●We may be unable to obtain future insurance policies in an amount sufficient to cover our anticipated claims at a reasonable cost or at all; or●Because we are not insured against all potential losses, uninsured losses due to natural disasters or other catastrophes could adversely impact our business.Any product liability claim, with or without merit, could result in an increase in our product insurance rates or our inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the future due to market, industry, or other factors. Any product liability claim, even a meritless or unsuccessful one, would be time-consuming and expensive to defend and could result in the diversion of our management’s attention from our business and result in adverse publicity, withdrawal of clinical trial participants, injury to our reputation, and loss of revenue.If we are unsuccessful in arranging acceptable settlements of future product or tissue processing liability claims or future securities class action or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these obligations. If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future exposure from product or tissue processing liability or securities claims. Additionally, if one or more claims with respect to which we may become, in the future, a defendant should result in a substantial verdict rendered in favor of the plaintiff(s), such verdict(s) could exceed our available insurance coverage and liquid assets. If we are unable to meet required future cash payments to resolve any outstanding or any future claims, this will materially, adversely affect our financial condition, profitability, and cash flows.37Further, although we have an estimated reserve for our unreported product and tissue processing liability claims for which we do expect that we will obtain recovery under our insurance policies, these costs could exceed our current estimates. Finally, our facilities could be materially damaged by tornadoes, flooding, other natural disasters, or catastrophic circumstances, for which we are not fully covered by business interruption and disaster insurance, and, even with such coverage, we could suffer substantial losses in our inventory and operational capacity, along with a potential adverse impact on our customers and opportunity costs for which our insurance would not compensate us.Any of these events could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of operations will suffer.We may experience decreasing prices for our goods and services due to pricing pressure experienced by our customers from managed care organizations and other third-party payors, increased market power of our customers as the medical device industry consolidates, and increased competition among medical engineering and manufacturing services providers. If the prices for our goods and services decrease and we are unable to reduce our expenses, our results of operations will be adversely affected.Certain of our products and technologies are subject to significant intellectual property risks and uncertainty.We own patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. In addition, we have certain proprietary technologies and methods that we believe provide us with important competitive advantages. We cannot be certain that our pending patent applications will issue as patents or that no one will challenge the validity or enforceability of any patent that we own or license.We have obtained licenses from third parties for certain patents and patent application rights, including rights related to our PerClot technologies. These licenses allow us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement, or strategy for many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property rightswork diligently to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies.Furthermore, competitors may independently develop similar technologies or duplicate our technologies or design around the patented aspectsadequate inventories of such technologies. In addition, our technologies or products or services could infringe patents or other rights owned by others, or others could infringe our patents. If we become involved in a patent dispute, the costs of the dispute could be expensive,raw materials, components, supplies, subassemblies, and if we were to lose or decide to settle the dispute, the amounts or effects of the settlement or award by a tribunal could be costly. For example, in 2015 we resolved a patent infringement case with Medafor related to technology we licensed from SMI. The settlement of that patent infringement case resulted in the continuation of an injunction prohibiting us from marketing, selling, or distributing PerClot in the U.S. until February 8, 2019. We incurred substantial attorneys’ fees and costs in pursuing and defending that case, and only a portion of those fees and costs are subject to recovery through indemnification. Should we be forced to sue a potential infringer, if we are unsuccessful in prohibiting infringements of our patents, should the validity of our patents be successfully challenged by others, or if we are sued by another party for alleged infringement (whether we ultimately prevail or not), our revenues, financial condition, profitability, and cash flows could be materially, adversely affected.We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.Some of our employees were previously employed at other medical device or tissue companies. We may also hire additional employees who are currently employed at other medical device or tissue companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or independent contractors have used or disclosed any party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.Our key growth vectors may not generate anticipated benefits.Our strategic plan is focused on four growth vectors, primarily in the cardiac and vascular surgery segment, which are expected to drive our business in the near term. These growth vectors and their key elements are described below:38●New Products – Drive growth through new products including theOn-X heart valve and, as anticipated, the JOTEC family of products;●New Indications – Broaden the reach of certain of our products, including theOn-X heart valve and BioGlue, with new or expanded approvals and indications in the U.S. or in international markets;●Global Expansion – Expand our current products and services into new markets, including emerging markets, and accelerate growth by developing new direct sales territories overseas; and●Business Development – Selectively pursue potential acquisition, licensing, or distribution rights of companies or technologies that complement CryoLife’s existing products, services, and infrastructure, and expand our footprint in the cardiac and vascular surgery space, such as the 2016 acquisition ofOn-X and the anticipated acquisition of JOTEC, as well as divestitures of certain of ournon-core product lines, such as the HeRO Graft in 2016, and strategic licensing of certain products developed internally. To the extent we identify newnon-core products or additional applications for our core products, we may attempt to license these products to corporate partners for further development or seek funding from outside sources to continue commercial development.Although management continues to implement these strategies, we cannot be certain that they will ultimately drive business expansion and enhance shareholder value.We continue to evaluate expansion through acquisitions of, or licenses with, investments in, and distribution arrangements with, other companies or technologies, which may carry significant risks.One of our growth strategies is to selectively pursue potential acquisition, licensing, or distribution rights of companies or technologies that complement CryoLife’s existing products, services, and infrastructure. In connection with one or more of the acquisition transactions, we may:●Issue additional equity securities that would dilute our stockholders’ ownership interest in us;●Use cash that we may need in the future to operate our business;●Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;●Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit astep-up in the tax basis for the assets acquired;●Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;●Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;●Be unable to secure or retain the services of key employees related to the acquisition;●Be unable to succeed in the marketplace with the acquisition; or●Assume material unknown liabilities associated with the acquired business.As an example of these risks, we recently entered a definitive agreement to acquire JOTEC, which we anticipate financing by incurring further debt, using cash on hand, and issuing additional equity securities. This anticipated acquisition poses many of the same risks as set forth above.Any of the above risks, should they occur, could materially, adversely affect our revenues, financial condition, profitability, and cash flows, including the inability to recover our investment or cause a write-down orwrite-off of such investment, associated goodwill, or assets.Our charges to earnings resulting from acquisition, restructuring, and integration costs may materially adversely affect the market value of our common stock.We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required in purchase accounting including the following:●We will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with acquisitions during such estimated useful lives;●We will incur additional depreciation expense as a result of recording purchased tangible assets;●To the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets;●Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at its fair market value;39●Earnings may be affected by changes in estimates of future contingent consideration to be paid when anearn-out is part of the consideration; or●Earnings may be affected by transaction and implementation costs, which are expensed immediately.Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.Our current and future levels of indebtedness could:●Limit our ability to borrow money for our working capital, capital expenditures, development projects, strategic initiatives, or other purposes;●Require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;●Limit our flexibility in planning for, or reacting to, changes in our operations or business;●Make us more vulnerable to downturns in our business, the economy, or the industry in which we operate;●Restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities; and●Expose us to the risk of increased interest rates as most of our borrowings are at a variable rate of interest.The agreements governing our indebtedness contain restrictions that limit our flexibility in operating our business.The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us, including restrictions or prohibitions on our ability to, among other things:●Incur or guarantee additional debt;●Pay dividends on or make distributions in respect of our share capital or make other restricted payments;●Repurchase or redeem capital stock or subordinated indebtedness;●Transfer or sell certain assets;●Create liens on certain assets;●Consolidate or merge with, or sell or otherwise dispose of all, or substantially all, of our assets to other companies;●Enter into certain transactions with our affiliates;●Pledge the capital stock of any of our subsidiaries;●Enter into agreements which restrict our ability to pay dividends or incur liens;●Make material changes in our equity capital structure;●Engage in any line of business substantially different than that in which we are currently engaged; and●Make certain investments, including strategic acquisitions.As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.We have pledged substantially all of our assets as collateral under our existing debt agreement. If we default on the terms of such debt agreements and the holders of our indebtedness accelerate the repayment of such indebtedness,finished goods, there can be no assurance that we will have sufficient assetsbe able to repayavoid all disruptions to our indebtedness.Underglobal supply chain, or disruptions to our existing credit agreement, we are required to satisfy and maintain specified financial ratios including a maximum consolidated leverage ratio and a minimum interest coverage ratio. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to comply with the covenants contained in our existing debt agreement could result in an eventsterilization or distribution networks. Any of default under such agreements, which, if not cured or waived,these disruptions could have a material, adverse effect on our business, financial condition, andrevenues, reputation, or profitability. In the event of any default under our existing debt agreement, the holders of our indebtedness thereunder:●Will not be required to lend any additional amounts to us;●Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or●Could require us to apply all of our available cash to repay such indebtedness.If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against the collateral granted to them to secure that indebtedness. If the indebtedness under our existing debt agreements were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.40key personnel. including qualified personnel with medical device and tissue processing experience, and senior management with experience in the medical device or tissue processing space, manysome of whom would be difficult to replace. Our business and future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant part on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel for our operations.personnel. Our mainprimary facilities are in Kennesaw, GeorgiaGeorgia; Austin, Texas; and Austin, Texas,Hechingen, Germany, where the local supply of qualified personnel in the medical device and tissue processing industriesand other personnel is limited. Competitionlimited, competition for such personnel is intense,significant, and we cannot ensure that we will be successful in attracting andor retaining such personnel. Ifthem. 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 employeesemployees. This risk was exacerbated during 2021, and is expected to continue, as needed,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 unprecedented 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.haveresult 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 transaction, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of a material, adversetransaction, we could experience an interruption or loss of momentum in our existing business activities.financial condition, profitability,earnings per share, decrease or delay the expected accretive effect of the Corporate Rebrand, and cash flows.Continued fluctuation of foreign currencies relative tonegatively impact the U.S. Dollar could materially, adversely affect our business.The majorityprice of our foreign product and tissue processing revenues are denominated in British Pounds and Euros and, as such, are sensitive to changes in exchange rates. In addition, a portion of our dollar-denominated product sales are made to customers in other countries who must convert local currencies into U.S. Dollars in order to purchase these products. We also have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of British Pounds and Euros or other local currencies in relation to the U.S. Dollar could materially reduce our future revenues as compared to the comparable prior periods. Should this occur, it could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.andas well as traditional recordkeeping to operate our business. In the ordinary course of business, we collect, store, and transmit large amounts of confidential information (including, but not limited to, information about our business, financial information, personal information,data, intellectual property, and, in some instances, patient data). We have also outsourced elements of our operations to third parties, including elements of our information technology infrastructure and, as a result, we manage a number of independent vendor relationships with third parties who may or could have access to our confidential information. Our information technology and information security systems and records are potentially vulnerable to security breaches, service interruptions, data loss, or to security breachesmalicious attacks resulting from inadvertent or intentional actions by our employees, vendors, or vendors.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.are also potentially vulnerable to malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. While we have invested significantly in the protection of data andemployee information technology,security training, there can be no assurance that our efforts will prevent all security breaches, service interruptions, or security breaches. For example, although we have taken security precautions and are assessing additional precautions to provide greater data security, certain data may be vulnerable to loss in a catastrophic event.losses. We have only limited cyber-insurance coverage that willmay not cover a number of theall possible events, described above and this insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance. We thus have no insurance for most of the claims that could be raised and, for those where we have coverage, those claims could exceed the limits of our coverage.limitations. Any interruptionsecurity breaches, service interruptions, or breach in our systemsdata losses could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could resultor 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.policy changes, including U.S. healthcare reform legislation signedProducts Regulatory Agency has announced that CE Marking will continue to be recognized in 2010,the UK and certificates issued by EU-recognized Notified Bodies will continue to be valid in the UK market until June 30, 2023. Going forward, all devices marketed in the UK will require UK Conformity Assessed Marks certified by a UK Approved Body (the re-designation of the UK Notified Body).us.In responseour ability to perceived increasessupply demand in healthcare costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators, and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all of these proposals couldaffected jurisdictions, have a material, adverse effectimpact on our financial condition and profitability.The Patient Protection and Affordable Care Act (“ACA”) and the Health Care and Education Affordability Reconciliation Act of 2010 imposed significant new taxes on medical device makers in the form of a 2.3 percent excise tax on all U.S. medical device sales that commenced in January 2013. While this tax has been suspended for 2016 and 2017, there is no guarantee that the excise tax will not be reinstated and the underlying legislation might not be repealed or replaced despite the outcome of the 2016 U.S.41Presidential and Congressional election. On January 20, 2017, President Trump issued an executive order titled “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal.” Congressional efforts to repeal and replace the ACA have been ongoing since the election, but it is unclear whether Congress will be successful in itsrepeal-and-replace efforts. The impact of the executive order and the future of the ACA remain unclear. There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully understood. These proposals may affect aspects of our business. We cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on us. However, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business, and profitability.Our sales are affectedmay 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.challenging domestic and international economic and geopolitical conditions and their constraining effect on hospital budgets, and demandthe FDA of CryoValve SG pulmonary heart valve (“CryoValve SGPV”) may make it commercially infeasible to continue processing the CryoValve SGPV.our products and tissue preservation services could decrease in the future,reclassification of more than minimally manipulated (“MMM”) allograft heart valves to Class III medical devices, which could materially, adversely affectinclude our business.The demandCryoValve 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 an FDA PMA application, after which the FDA will determine if, and for our products and tissue preservation services can fluctuate from time to time. In challenging economic environments, hospitals attempt to control costs by reducing spending on consumable and capital items, which can result in reduced demand for some of our products and services. If demand for our products or tissue preservation services decreases significantly in the future, our revenues, profitability, and cash flows would likely decrease, possibly materially. In addition, the manufacturing throughput of our products and the processing throughput of our preservation services would necessarily decrease, which would likely adversely impact our margins and, therefore, our profitability, possibly materially. Further, if demand for our products and/or tissue preservation services materially decreases in the future,how long, we may continue to provide these tissues to customers during review of the PMA application. To date, the FDA has not be able to shipissued such a proposed final rule.products and/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 tissues before they expire, which would causeif 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 write down our inventories and/or deferred preservation costs.Our sales may also be affected by challenging economic and geopolitical conditions in countries around the world, in addition to the U.S., particularly in countries where we have significant BioGlue orOn-X heart valve sales or where BioGlue or theOn-X heart valve is still in a growth phase. These factors could materially, adversely affect our revenues, financial condition, and profitability.necessary clinical results andor regulatory clearances/approvals for new and existing products and services, in development, and our newapproved products and services may not achieve market acceptance.will depend,depends in part upon our ability to complete development of,develop, and successfully introduce, new products and services, or expand upon existing indications, which requiresclearances, and approvals, requiring that we invest significant time and resources to obtain requirednew regulatory clearances/approvals, including significant investment of timeinto pre- and resources intopost-market clinical trials.studies. Although we have conducted clinical studies onbelieve certain products and services in our portfolio or under development which indicate that such products and services may be effective in a particular application, we cannot be certain thatuntil we will be able to successfully execute on theserelevant clinical trials, or thatand the results we obtain from pre- and post-market clinical studies willmay be sufficientinsufficient for us to obtain or maintain any required regulatory approvals or clearances.As noted above, weengaged in a PMA clinical trialseeking regulatory approval for PerClot, as well as clinical trialsBioGlue in China, where the Chinese regulatory body has made additional requests, and expressed several concerns, related to the application. We have obtained an extension of time until February 2024 in which to secure approval for BioGlue and in China. If we cannot obtain approval by then or the U.S. for theOn-X valve. costs to do so are prohibitive, we ultimately may be unable to see BioGlue in China.theseour trials, studies, and approvals is subject to the risks outlined herein. the relevant regulatory agencies will clear or approve these products and services or indications, or any new products and services or new indications, on a timely basis, if ever, or that the new products and services or new indications will adequately meet the requirements of the applicable market or achieve market acceptance. We may encounter delays or rejections during any stage of the regulatory approval process ifPre- and post-market clinical or other data fails to demonstrate satisfactorily compliance with, or if the service or product fails to meet, the regulatory agency’s requirements for safety, efficacy, and quality, or the regulatory agency otherwise has concerns about our quality or regulatory compliance. Regulatory requirements for safety, efficacy, and quality may become more stringent due to changes in applicable laws, regulatory agency policies, or the adoption of new regulations. Clinical trialsstudies may also be delayed or halted due to the following, among other factors:●Unanticipated side effects;●Lack of funding;●Inability to locate or recruit clinical investigators;●Inability to locate, recruit, and qualify sufficient numbers of patients;●Redesign of clinical trial programs;●Inability to manufacture or acquire sufficient quantities of the products, tissues, or any other components required for clinical trials;●Changes in development focus; or●Disclosure of trial results by competitors.42Our ability to complete the development of any ofmany factors beyond our products and services is subject to all of the risks associated with the commercialization of new products and services based on innovative technologies. Such risks include unanticipated technical or other problems, manufacturing, or processing difficulties, and the possibility that we have allocated insufficient funds to complete such development. Consequently, we may not be able to successfully introduce and market our products or services, or we may not be able to do so on a timely basis. These products and services may not meet price or performance objectives and may not prove to be as effective as competing products and services.financial, technical, competitive, or other reasonsany 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 revenues, financial condition, profitability, and cash flows.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.costs, among other things. The introduction of new products or services may require significant physician training andor years of clinical evidence derived fromfollow-up studies on human patients in order to gain acceptance in the medical community.Alltheseour products and components, could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.The success of certainus.preservation services depends upon relationships with healthcare professionals.Iflobbying 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 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.failare deemed to maintain our working relationships with healthcare professionals, manybe promoting the use of our products for unapproved, or off-label, uses.preservation services may not be developed and marketed to appropriately meetfuture growth depend on the needs and expectations of the professionals whocontinued use and support our products and preservation services. The research, development, marketing, and sales of many of our new and improved products and preservation services are dependent upon our maintaining working relationships with healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and preservation services. Healthcare professionals assist us as researchers, marketing and training consultants, product consultants, and speakers. If we are unable to maintain our relationships with these professionals and do not continue to receive their advice and input, the development and commercialization of our products 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 preservation servicesscope 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 educationalsuffer, which couldbe excluded from participation in government healthcare programs such as Medicare and Medicaid.revenues,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.profitability,rely, in part, on customers in the healthcare industry that receive substantial revenues from governmental and cash flows.If healthcare providers are not adequately reimbursedother third-party payer programs. A reduction or less than expected increase in government funding for procedures conducted withthese 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 if reimbursement policies changereduce medical procedure volumes, could adversely affect our business and profitability.not be successful in marketing and selling our products or preservation services.Most of our customers, and the healthcare providers to whom our customers supply medical devices, rely on third-party payors, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which medical devices that incorporate components we manufacture or assemble are used. Healthcare providers, facilities, and government agencies are unlikely to purchase our products or implant our tissues if they are not adequately reimbursed for these procedures. Unless a sufficient amount of peer-reviewed clinical data about our products and preservation services has been published, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement. The continuing efforts of governmental authorities, insurance companies, and other payors of healthcare costs to contain or reduce these costs could lead to patients being unable to obtain approvalinsurance in the future, to cover any resulting liability.payment from these third-party payors. Furthermore, evenpunitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, if reimbursementwe are unsuccessful in arranging cost-effective acceptable resolutions of claims, it is provided, itpossible that our insurance program may not be adequate to fully compensate the clinicianscover any or hospitals. Some third-party payors may impose restrictionsall 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 the procedures for which they will provide reimbursement. If healthcare providers cannot obtain sufficient reimbursement from third-party payors for our productsreasonable terms, if at all.preservation servicesproduct liability/tissue processing claim, even a meritless or the screenings conducted with our products, we may not achieve significant market acceptance. Acceptanceunsuccessful one, could be costly to defend, and result in diversion of our products in international markets will depend upon the availabilitymanagement’s attention from our business, adverse publicity, withdrawal of adequate reimbursementclinical trial participants, injury to our reputation, or funding within prevailing healthcare payment systems. Reimbursement, funding, and healthcare payment systems vary significantly by country. We may not obtain approvals for reimbursement in a timely manner or at all.federalUS and stateinternational bribery, anti-kickback, self-referral, false claims, privacy, and transparency, laws, and similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and profitability.federalUS and international bribery, anti-kickback, self-referral, false claims, privacy, and transparency, laws, and similar laws, often referred to collectively as healthcare“healthcare compliance laws.” Healthcare compliance laws are broad, can besometimes ambiguous, and are complex, and even minor inadvertent violations can give risesubject to claims thatchange and changing interpretations. The ongoing war in Ukraine and the relevant law has been violated.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 sanctionsmonetary fines, civil and criminal penalties, exclusion from federal and stategovernment healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs, and TRICARE (the healthcare system administered by or on behalfdespite our compliance efforts, we face the risk of the U.S. Department of Defense for uniformed services beneficiaries, including active duty and their dependents and retirees and their dependents), and forfeiture of amounts collected in violation of such prohibitions. Any government investigationan enforcement activity or a finding of a violation of these laws could result in a material, adverse effect on our business, financial condition, and profitability.43Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid, or other government-sponsored healthcare programs. laws. agreements, speaker agreements, research agreements, and product development agreements with healthcare professionals and healthcare organizations, including some who may order our products or make decisions to use them. We have also adopted the AdvaMed Code of Conduct, 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 laws. While these transactions wereour relationships with healthcare professionals and organizations are structured to comply with the intention of complying with all applicable laws, including state anti-referralsuch laws and other applicable anti-kickbackwe conduct training sessions on these laws and Codes, it is possible that regulatory or enforcement agencies or courtsauthorities may in the future view these transactionsour relationships as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties. We have also adopted the AdvaMed Code of Conduct into our Code of Business Conduct, which governs our relationships with healthcare professionals, including our payment of travel and lodging expenses, research and educational grant procedures, and sponsorship of third-party conferences.penalties or debarment. In addition, we have conducted training sessions on these principles. However, there can be no assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard the rules we have established. Because our strategy relies on the involvement of healthcare professionals who consult with us on the design of our products, perform clinical research on our behalf, or educate the market about the efficacy and uses of our products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with healthcare professionals, who refer or order our products, to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of the healthcare professionals we engage to provide services on our behalf. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for noncompliance.The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. Government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The U.S. Department of Justice (“DOJ”) on behalf of the government has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers, including theoff-label promotion of products or the payment of prohibited kickbacks to doctors, violated the FCA, resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts, and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.The Physician Payments Sunshine Act and similar state laws require us to annually report in detail certain payments and “transfer of value” from us to healthcare professionals, such as reimbursement for travel and meal expenses or compensation for services provided such as training, consulting, and research and development. This information is then posted on the website of the Center of Medicare and Medicaid Services (“CMS”). Certain states also prohibit some forms of these payments, require adoption of marketing codes of conduct, and regulate our relationships with physicians and other referral sources.The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the scarcity of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material, adverse effect on our business, financial condition, and profitability. Any state or federal regulatory orevent, any enforcement review of or action against us as a result of such review, regardless of the outcome, wouldcould 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.Consolidationhealthcare industryEuropean Union, could adversely affect our business.ana material, adverse effect on our revenuesbusiness, financial condition, and resultsprofitability. In the event of operations.Many healthcare industry companies, including health care systems, are consolidatingany such default, the holders of our indebtedness:create new companieslend any additional amounts to us; andgreater market power. As the healthcare industry consolidates, competitionaccrued and unpaid interest and fees, to provide goodsbe due and servicespayable and terminate all commitments to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. extend further credit, if applicable.forcedunable to reducerepay those amounts, the holders of our prices becausesecured indebtedness could proceed against their secured collateral to seek repayment out of consolidationproceeds 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 the healthcare industry,full.revenues would decrease and our financial condition, profitability, and/or cash flows would suffer.frequentlyfrom time to time propose to involve themselves in the governance, strategic direction, and operations of thea company. We may in the future44become subject to such shareholder activity and demands. Such demandsinvolvement may disrupt our business and divert the attention of our management, and employees, and any perceived uncertainties as to our future direction resulting from such a situationinvolvement could result in the loss of potential business opportunities, be exploited by our competitors, cause concern tofor our current or potential customers, andcause significant fluctuations in stock price, or make it more difficult to attract and retain qualified personnel and business partners, allpartners.adversely affectbe impacted by increased shareholder emphasis on environmental, social, and governance matters.business. In addition, actionsESG 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 activist shareholdersfocus 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 cause significant fluctuations indisrupt our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflectbusiness and divert the underlying fundamentals and prospectsattention of our business.Our acquired federal tax net operating lossmanagement, and general business credit carryforwards will be limited or may expire, which could result in greater future income tax expense and adversely impact future cash flows.Our federal tax net operating loss and general business credit carryforwards include acquired net operating loss carryforwards. Such acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation, as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control, and that prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in control. We also acquired net operating loss carryforwards in the acquisition ofOn-X Life Technologies that are limited under Section 382. However, we believe that such net operating loss carryforwards fromOn-X will be fully realizable prior to expiration. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that it expects will not be realizable due to these changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which management believes it is more likely than not that these deferred tax assets will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. Limitations on our federal tax net operating loss and general business credit carryforwards could result in greater future income tax expense and adversely impact future cash flows.Our operating results may fluctuate significantly on a quarterly or annual basis as a result of a variety of factors, many of which are outside our control.Fluctuations in our quarterly and annual financial results have resulted and will continue to result from numerous factors, including:●Changes in demand for the products we sell;●Increased product and price competition, due to the announcement or introduction of new products by our competitors, market conditions, the regulatory landscape, or other factors;●Changes in the mix of products we sell;●Availability of materials and supplies, including donated tissue used in preservation services;●Our pricing strategy with respect to different product lines;●Strategic actions by us, such as acquisitions of businesses, products, or technologies;●Effects of domestic and foreign economic conditions and exchange rates on our industry and/or customers;●The divestiture or discontinuation of a product line or other revenue generating activity;●The relocation and integration of manufacturing operations and other strategic restructuring;●Regulatory actions that may necessitate recalls of our products or warning letters that negatively affect the markets for our products;●Failure of government and private health plans to adequately and timely reimburse the users of our products;●Costs incurred by us in connection with the termination of contractual and other relationships, including distributorships;●Our ability to collect outstanding accounts receivable in selected countries outside of the U.S.;●The expiration or utilization of deferred tax assets such as net operating loss carryforwards;●Market reception of our new or improved product offerings; and●The loss of any significant customer, especially in regard to any product that has a limited customer base.We have based our current and future expense levels largely on our investment plans and estimates of future events, although certain of our expense levels are, to a large extent, fixed. We may be unable to adjust spendingmake the investments in a timely mannerESG that our competitors with greater financial resources are able to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relativemake. Failure to our planned expenditures would have an immediate adverse effect on our business, results of operations, and financial condition. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or marketing decisions that could have a material and adverse effect on our business, results of operations, and financial condition. Due to the foregoing factors,45some of which are not within our control, the price of our common stock may fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analystsinvestors 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 investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons ofotherwise impact our financial results are not always meaningful and should not be relied upon as an indication of our future performance.Risks Related to Ownership of our Common Stockif the market pricethrough appreciation of our common stock has increased when they sell shares of our common stock that they own. Future dividends, if any, will be authorized by our Board of Directors and declared by us based upon a variety of factors deemed relevant by our directors, including, among other things, our financial condition, liquidity, earnings projections, and business prospects. In addition, restrictions in our credit facility limit our ability to pay future dividends. We can provide no assurance of our ability to pay cash dividends in the future.FloridaDelaware law and anti-takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely and prevent attempts by shareholders to remove current management.We are subject to the Florida affiliated transactions statute, which generally requires approval by the disinterested directors or supermajority approval by shareholders for “affiliated transactions” between“interested stockholder.” Additionallyinterested 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 restrictingthat restrict persons who may call shareholder meetings, allow the issuance of blank-check preferred stock without the vote of shareholders, and allowingallow 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.
Period | Total Number of Common Shares and Common Stock Units Purchased | Average Price Paid per Common Share | Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Common Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||
07/01/17 - 07/31/17 | 654 | $ | 18.90 | -- | $ | -- | ||||||||||
08/01/17 - 08/31/17 | 762 | 18.79 | -- | -- | ||||||||||||
09/01/17 - 09/30/17 | 954 | 21.75 | -- | -- | ||||||||||||
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| |||||||||||||
Total | 2,370 | 20.01 | -- |
Period | Total Number of Common Shares and Common Stock Units Purchased | Average Price Paid per Common Share | Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Common Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
04/01/22 - 04/30/22 | — | $ | — | — | $ | — | ||||||||||||||||||||
05/01/22 - 05/31/22 | 451 | 20.35 | — | — | ||||||||||||||||||||||
06/01/22 - 06/30/22 | — | — | — | — | ||||||||||||||||||||||
Total | 451 | $ | 20.35 | — | $ | — |
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ARTIVION, INC. | |||||||||||||||
(Registrant) | |||||||||||||||
/s/ J. PATRICK MACKIN | /s/ D. ASHLEY LEE | ||||||||||||||
J. PATRICK MACKIN | D. ASHLEY LEE | ||||||||||||||
Chairman, President, and Chief Executive Officer (Principal Executive Officer) | Executive Vice President, and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||||||||
| |||||||||||||||
August 5, 2022 | |||||||||||||||
DATE | ||||||||
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