Overview
CryoLife, Inc. ("CryoLife," the "Company," "we," or "us") is a leader in the
manufacturing, processing, and distribution of medical devices and implantable
human tissues used in cardiac and vascular surgical procedures for patients with
aortic disease. We have four major product families: aortic stents and stent
grafts, surgical sealants, On-X® mechanical heart valves and related surgical
products, and implantable human tissues. Aortic stents and stent grafts include
JOTEC® stent grafts and surgical products ("JOTEC" products), the Ascyrus
Medical Dissection Stent hybrid prosthesis ("AMDS"), and the NEXUSTM
endovascular stent graft system ("NEXUS"). Surgical sealants include BioGlue®
Surgical Adhesive ("BioGlue") products. In addition to these four major product
families, we sell or distribute PhotoFix® bovine surgical patches,
CardioGenesis® cardiac laser therapy products, and chorioamniotic allografts
(previously marketed as NeoPatch®), and PerClot® hemostatic powder (through the
Baxter Transaction, described above).
We reported quarterly revenues of $76.1 million for the three months ended June
30, 2021, a 42% increase from the three months ended June 30, 2020. The increase
in revenues for the three months ended June 30, 2021 was primarily due to
increases in revenues from all product lines and preservation services.
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See the "Results of Operations" section below for additional analysis of the
three and six months ended June 30, 2021.
Effects of COVID-19
In December 2019 an outbreak of a respiratory illness caused by a new
coronavirus named "2019-nCoV" ("COVID-19") was detected, and by March 11, 2020,
the World Health Organization ("WHO") declared the COVID-19 outbreak a
"pandemic."
Beginning in March 2020 we took steps to address the potential impact of
COVID-19 on our employees and operations, and to preserve cash, including
reducing expenditures and delaying investments. These steps included, but were
not limited to, implementing specific protocols to minimize workplace exposures
to COVID-19 by our employees; implementing remote work arrangements for most
employees we deemed able to do so; restricting business travel; issuing $100.0
million in aggregate principal amount convertible senior notes ("Convertible
Senior Notes"); using portions of those proceeds to repay our Revolving Credit
Facility and the remainder for general corporate purposes (see the "Liquidity
and Capital Resources" identified in Part I, Item 2 of this form 10-Q for
further detail of this transaction); implementing hiring restrictions; reducing
planned expenditures on some pending clinical trials; imposing senior management
cash salary reductions in exchange for cash payments in the second quarter of
2021; requiring our Board of Directors to accept CryoLife stock instead of cash
compensation for a six month period through October 2020; and suspending for
seven months 2020 management merit increases.
Our efforts to protect our supply chain and reduce the spread of COVID-19 among
our employees, including our work-from-home arrangements, were largely
successful in 2020 and the first half of 2021 as we continued to operate all
manufacturing sites at near full production. These efforts have not materially
affected our ability to maintain our business operations, including the
operation of financial reporting systems, internal control over financial
reporting, or disclosure controls and procedures; however, there is no guarantee
that these efforts and arrangements, if they are continued, will continue to be
successful in the future. Further, our reductions or delays in expenditures
slowed our progress on certain key R&D initiatives and could in the future
continue to adversely impact our business operations or further delay our
recovery from the pandemic.
Although we have largely scaled back most of our COVID-19 mitigation efforts, we
continue to monitor the impact of the COVID-19 pandemic on our business and
recognize that it could continue to negatively impact our business and results
of operations during the remainder of 2021 and beyond. The extent to which our
operations and financial performance will be impacted by the pandemic during the
remainder of 2021 will depend largely on future developments, including global
availability and acceptance of the vaccine and the emergence and prevalence of
more virulent COVID-19 variants. If COVID-19 or its variants become more
contagious, if efforts to further contain the effects of COVID-19 or its
variants, including vaccine adoption, are unsuccessful, if COVID-19 or its
variants impact our supply chain or employee productivity, or if we continue to
experience periods of uncertainty due to COVID-19 or its variants, it could
materially, adversely affect our revenues, financial condition, profitability,
and cash flows.
See the "Risk Factors" identified in Part II, Item 1A of this form 10-Q for
risks related to COVID-19.
New Accounting Pronouncements
See Note 1 of "Notes to Condensed Consolidated Financial Statements" identified
in Part I, Item I of this form 10-Q for further discussion of new accounting
standards that have been adopted.
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Results of Operations
(Tables in thousands)
Revenues
Revenues as a
Percent Percentage of
Total Revenues for
Revenues for the Change the
Three Months Ended From Prior Three Months Ended
June 30, Year June 30,
2021 2020 2021 2020
Products:
Aortic stents and stent grafts $ 21,064 $ 13,174 60% 28% 24%
Surgical sealants 17,864 12,437 44% 24% 23%
On-X 14,726 10,116 46% 19% 19%
Other 2,422 1,541 57% 3% 3%
Total products 56,076 37,268 50% 74% 69%
Preservation services 20,072 16,503 22% 26% 31%
Total $ 76,148 $ 53,771 42% 100% 100%
Revenues as a
Percent Percentage of
Total Revenues for
Revenues for the Change the
Six Months Ended From Prior Six Months Ended
June 30, Year June 30,
2021 2020 2021 2020
Products:
Aortic stents and stent grafts $ 41,269 $ 28,642 44% 28% 24%
Surgical sealants 35,692 29,174 22% 24% 24%
On-X 27,821 22,318 25% 19% 19%
Other 4,639 3,554 31% 3% 3%
Total products 109,421 83,688 31% 74% 70%
Preservation services 37,814 36,512 4% 26% 30%
Total $ 147,235 $ 120,200 22% 100% 100%
Revenues increased 42% and 22% for the three and six months ended June 30, 2021,
respectively, as compared to the three and six months ended June 30, 2020. The
increase in revenues for the three and six months ended June 30, 2021 was due to
increases in revenues from all products and preservation services. Excluding the
effects for foreign exchange, revenues increased 37% and 19% for the three and
six months ended June 30, 2021, respectively, as compared to the three and six
months ended June 30, 2020. Revenues for the three and six months ended June 30,
2021 and 2020 were negatively impacted in certain regions by delays or
cancellations of some surgical procedures as a result of reduced hospital
capacity and hospital restrictions due to the COVID-19 pandemic, as well as
patient reluctance to undergo procedures once the adverse impacts to capacity
and restrictions decreased. The revenue impact from COVID-19 was smaller and
varied regionally during the three and six months ended June 30, 2021 as
compared to the three and six months ended June 30, 2020 with the largest
negative impact during the three months ended June 30, 2020. A detailed
discussion of the changes in product revenues and preservation services revenues
for the three and six months ended June 30, 2021 is presented below.
Products
Revenues from products increased 50% and 31% for the three and six months ended
June 30, 2021, respectively, as compared to the three and six months ended June
30, 2020. The increase for the three and six months ended June 30, 2021 was due
to increases in revenues from all products. A discussion of the changes in
product revenues for aortic stents and stent grafts, surgical sealants, On-X,
and other product revenues is presented below.
Sales of certain products through our direct sales force and distributors across
Europe and various other countries are denominated in a variety of currencies
including Euros, British Pounds, Polish Zlotys, Swiss Francs, Brazilian Reals,
and
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Canadian Dollars, with a concentration denominated in Euros. Each currency is
subject to exchange rate fluctuations. For the three and six months ended June
30, 2021 as compared to the three and six months ended June 30, 2020, the
U.S. Dollar weakened in comparison to major currencies, resulting in revenue
increases when these foreign currency denominated transactions were translated
into U.S. Dollars. Future changes in these exchange rates could have a material,
adverse effect on our revenues denominated in these currencies. Additionally,
our sales to many distributors around the world are denominated in U.S. Dollars,
and although these sales are not directly impacted by currency exchange rates,
we believe that some of our distributors may delay or reduce purchases of
products in U.S. Dollars depending on the relative price of these goods in their
local currencies.
Aortic Stents and Stent Grafts
Aortic stents and stent grafts, including JOTEC, AMDS, and NEXUS products, are
used in endovascular and open vascular and cardiac surgery, as well as for the
treatment of complex aortic arch and thoracic aortic diseases.
On September 11, 2019 CryoLife and its wholly-owned subsidiary JOTEC entered
into exclusive distribution and loan agreements with Endospan Ltd. ("Endospan"),
an Israeli corporation, under which JOTEC obtained exclusive distribution rights
for Endospan's NEXUS and accessories in certain countries in Europe.
On September 2, 2020 CryoLife entered into an agreement to acquire all of the
equity interests of Ascyrus Medical LLC ("Ascyrus"). Ascyrus has developed the
AMDS, an aortic arch remodeling device used for the treatment of acute Type A
aortic dissections. The AMDS is currently distributed in Europe, the Middle
East, and Africa (collectively, "EMEA"), Canada, and the Asia Pacific region and
is included as a component of aortic stents and stent grafts revenues from the
date of the acquisition.
Aortic stents and stent grafts revenues increased 60% and 44% for the three and
six months ended June 30, 2021, respectively, as compared to the three and six
months ended June 30, 2020.
Aortic stents and stent grafts revenues, excluding original equipment
manufacturing ("OEM"), increased 60% for the three months ended June 30, 2021,
as compared to the three months ended June 30, 2020. This increase was primarily
due to a 7% increase in volume of units sold, which increased revenues by 54%
and the effect of foreign exchange rates, which increased revenues by 9%,
partially offset by a change in average sales prices, which decreased revenues
by 3%.
Aortic stents and stent grafts revenues, excluding OEM, increased 43% for the
six months ended June 30, 2021, as compared to the six months ended June 30,
2020. This increase was primarily due to a change in mix of units sold, which
increased revenues by 39%, and the effect of foreign exchange rates, which
increased revenues by 8%, partially offset by a change in average sales prices,
which decreased revenues by 4%.
On a constant currency basis, revenues for aortic stents and stent grafts,
excluding OEM, increased 47% and 32% in the three and six months ended June 30,
2021, as compared to the three and six months ended June 30, 2020. The increase
in revenues was partially due to improved conditions from the COVID-19 pandemic
for the three and six months ended June 30, 2021 as compared to the three and
six months ended June 30, 2020. Revenues for the three and six months ended June
30, 2021 increased primarily in EMEA. The revenue increase in EMEA is primarily
due to an increase in sales of JOTEC new product launches, as well as sales of
the AMDS as a result of the Ascyrus acquisition in the third quarter of 2020,
and an increase in NEXUS sales as these products continue to penetrate the EMEA
market. Aortic stents and stent grafts OEM sales accounted for less than 1% of
product revenues for the three and six months ended June 30, 2021 and 2020.
Surgical Sealants
Surgical sealants include BioGlue products used as an adjunct to standard
methods of achieving hemostasis (such as sutures and staples) in adult patients
in open surgical repair of large vessels (such as aorta, femoral, and carotid
arteries).
Revenues from the sales of surgical sealants increased 44% for the three months
ended June 30, 2021, as compared to the three months ended June 30, 2020. This
increase was primarily due to an increase in volume of milliliters sold, which
increased revenues by 43% and the effect of foreign exchange rates, which
increased revenues by 4%, partially offset by a decrease in average sales
prices, which decreased revenues by 3%.
Revenues from the sales of surgical sealants increased 22% for the six months
ended June 30, 2021, as compared to the six months ended June 30, 2020. This
increase was primarily due to an increase of milliliters sold, which increased
revenues
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by 22% and the effect of foreign exchange rates, which increased revenues by 2%,
partially offset by a decrease in average sales prices, which decreased revenues
by 2%.
On a constant currency basis, revenues from sales of surgical sealants increased
40% and 20% in the three and six months ended June 30, 2021, respectively, as
compared to the three and six months ended June 30, 2020 primarily from revenue
increases in North America and EMEA. The revenue increase in the North America
and EMEA markets was primarily due to an increase of surgical procedures due to
improved conditions related to the COVID-19 pandemic during the three and six
months ended June 30, 2021 as compared to the three and six months ended June
30, 2020.
We are currently seeking regulatory approval for BioGlue in China, where the
Chinese regulatory body has made additional requests related to the application.
If we have not satisfied the regulator's requests and obtained approval by May
2022, the pending application will expire and no longer be eligible for
allowance, requiring the Company to restart the approval process.
See Part II, Item 1A, "Risk Factors-Operational Risks- We may not be successful
in obtaining necessary clinical results or regulatory clearances/approvals for
new and existing products and services, and our approved products and services
may not achieve market acceptance."
Domestic revenues from surgical sealants accounted for 54% and 53% of total
surgical sealant revenues for the three and six months ended June 30, 2021,
respectively, and 54% and 51% of total surgical sealant revenues for the three
and six months ended June 30, 2020, respectively.
On-X
The On-X catalogue of products includes the On-X prosthetic aortic and mitral
heart valves and the On-X ascending aortic prosthesis ("AAP") for heart valve
replacement. On-X product revenues also include revenues from the distribution
of CarbonAid® CO2 diffusion catheters and from the sale of Chord-X® ePTFE
sutures for mitral chordal replacement. On-X also generates revenue from
pyrolytic carbon coating products produced for OEM customers.
On-X product revenues increased 46% and 25% for the three and six months ended
June 30, 2021, respectively, as compared to the three and six months ended June
30, 2020.
On-X product revenues, excluding OEM, increased 50% for the three months ended
June 30, 2021, as compared to the three months ended June 30, 2020. This
increase was primarily due to an increase in volume of units sold, which
increased revenues by 58%, and the effect of foreign exchange rates, which
increased revenues by 2%, partially offset by a decrease in average sales
prices, which decreased revenues by 10%.
On-X product revenues, excluding OEM, increased 27% for the six months ended
June 30, 2021, as compared to the six months ended June 30, 2020. This increase
was primarily due to an increase in volume of units sold, which increased
revenues by 30% and the effect of foreign exchange rates, which increased
revenues by 2%, partially offset by a decrease in average sales prices, which
decreased revenues by 5%.
On a constant currency basis, On-X revenues, excluding OEM, increased 48% and
25% in the three and six months ended June 30, 2021, respectively, as compared
to the three and six months ended June 30, 2020. The increase in revenues in the
three months ended June 30, 2021, as compared to the three months ended June 30,
2020 was primarily due to revenue increases in North America and EMEA. The
increase in revenues in the six months ended June 30, 2021, as compared to the
six months ended June 30, 2020 was primarily due to revenue increases in North
America, Asia Pacific, and EMEA. The revenue increases in these markets were
partially due to improved conditions from the COVID-19 pandemic for the three
and six months ended June 30, 2021, as compared to the three and six months
ended June 30, 2020. The increase in revenues in North America was also impacted
by increases in market share. The increase in revenues in EMEA was also impacted
by increase of shipments in direct markets. The increase in revenues in Asia
Pacific was also impacted by growth in distributor markets. On-X OEM sales
accounted for less than 1% of product revenues for both the three and six months
ended June 30, 2021 and 2020.
Other
Other revenues are comprised of PhotoFix, PerClot, and CardioGenesis Cardiac
Laser Therapy product revenues. Other revenues increased 57% and 31% for the
three and six months ended June 30, 2021, respectively, as compared to
June 30, 2020.
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The increase in revenues for the three months ended June 30, 2021 was primarily
due to a 59% and 91% increase in PhotoFix and PerClot revenues, respectively.
The increase in PhotoFix revenues was primarily due to increase in volume of
units sold, which increased revenues by 57% and the effect of foreign exchange
rates, which increased revenues by 2%. The increase in PerClot revenues was
primarily due to an increase in volume of units sold, which increased revenues
by 99% and the effect of foreign exchange rates, which increased revenues by
14%, partially offset by a change in average sales prices, which decreased
revenues by 22%.
The increase in revenues for the six months ended June 30, 2021 was primarily
due to a 36% and 37% increase in PhotoFix and PerClot revenues, respectively.
The increase in PhotoFix revenues was primarily due to an increase in volume of
units sold, which increased revenues by 33%, the effect of foreign exchange
rates, which increased revenues by 2% and the increase in average sales prices,
which increased revenues by 1%. The increase in PerClot revenues was primarily
due to an increase in volume of units sold, which increased revenues by 43% and
the effect of foreign exchange rates, which increased revenues by 9%, partially
offset by a decrease in average sales prices, which decreased revenues by 15%.
Preservation Services
Preservation services includes service revenues from processing cardiac and
vascular tissues. Our cardiac valves are primarily used in cardiac replacement
and reconstruction surgeries, including the Ross procedure, for patients with
endocarditis or congenital heart defects. Our cardiac tissues are primarily
distributed in domestic markets. The majority of our vascular preservation
services revenues are related to shipments of saphenous veins, which are mainly
used in peripheral vascular reconstruction surgeries to avoid limb amputations.
Competition with synthetic product alternatives and the availability of tissues
for processing are key factors affecting revenue volume that can fluctuate from
quarter to quarter. Our vascular tissues are primarily distributed in domestic
markets.
We continue to evaluate modifications to our tissue processing procedures in an
effort to improve tissue processing throughput, reduce costs, and maintain
quality across our tissue processing business. Preservation services revenues,
particularly revenues for certain high-demand cardiac tissues, can vary from
quarter to quarter and year to year due to a variety of factors including:
quantity and type of incoming tissues, yields of tissue through the preservation
process, timing of receipt of donor information, timing of the release of
tissues for implant, demand for certain tissue types due to the number and type
of procedures being performed, and pressures from competing products or
services.
In the fourth quarter of 2020, we became aware that a supplier shipped to us a
saline solution lot that we use in our tissue processing that contained some
contamination in a small number of bottles of the solution lot. The
contamination was identified by our in-process quality controls. The
contaminated solution was estimated to have impacted a small percentage of
tissue processed with this solution lot, causing us to write-off approximately
$826,000 of tissue in the fourth quarter of 2020. An additional $5.0 million in
tissue was quarantined in process pending further testing. Upon completion of
the testing, we began releasing acceptable tissue late in the second quarter of
2021.We believe that the written-off and quarantined tissue impacted the
availability of tissue for distribution which had a negative impact on revenue
in the first quarter of 2021 and to a lesser extent the second quarter of 2021.
Revenues from tissue processing increased 22% and 4% for the three and six
months ended June 30, 2021, respectively, as compared to the three and six
months ended June 30, 2020. Revenues were positively impacted by an increase in
medical procedures due to improved conditions related to the COVID-19 pandemic
for the three and six months ended June 30, 2021, as compared to the three and
six months ended June 30, 2020.
The increase in revenues for the three months ended June 30, 2021 was primarily
due to a 22% and 21% increase in vascular and cardiac tissue revenues,
respectively. The increase in vascular tissue revenues was primarily due to an
increase in vascular tissue shipments, which increased revenues 23%, partially
offset by a decrease in average service fees, which decreased revenues by 1%.
The increase in cardiac tissue revenues was primarily due to an increase in
cardiac tissue shipments, which increased revenues 24% and the effect of foreign
exchange rates, which increased revenues by 1%, partially offset by a decrease
in average service fees, which decreased revenues 4%.
The increase in revenues for the six months ended June 30, 2021 was primarily
due to a 7% increase in vascular tissue revenues primarily due to an increase in
vascular tissue shipments, which increased revenues 8%, partially offset by a
decrease in average service fees, which decreased revenues by 1%.
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Cost of Products and Preservation Services
Cost of Products
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Cost of products $ 16,178 $ 10,040 $ 31,089 $ 23,080
Cost of products increased 61% and 35% for the three and six months ended June
30, 2021, respectively, as compared to the three and six months ended June 30,
2020. Cost of products for the three and six months ended June 30, 2021 and 2020
included costs related to aortic stents and stent grafts, surgical sealants,
On-X, and other products.
The increase in cost of products for the three and six months ended June 30,
2021 was primarily due to an increase in shipments due to improved conditions
from the COVID-19 pandemic and write-downs of certain products, as compared to
the three and six months ended June 30, 2020.
Cost of Preservation Services
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Cost of preservation services $ 9,457 $ 7,841 $ 17,795 $ 17,059
Cost of preservation services increased 21% and 4% for the three and six months
ended June 30, 2021, respectively, as compared to the three and six months ended
June 30, 2020. Cost of preservation services includes costs for cardiac and
vascular tissue preservation services.
The increase in cost of preservation services for the three and six months ended
June 30, 2021 was primarily due to an increase in shipments due to improved
conditions from the COVID-19 pandemic as compared to the three and six months
ended June 30, 2020.
Gross Margin
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Gross margin $ 50,513 $ 35,890 $ 98,351 $ 80,061
Gross margin as a percentage of
total revenues 66% 67% 67% 67%
Gross margin increased 41% for the three months ended June 30, 2021 as compared
to the three months ended June 30, 2020. The increase for the three months ended
June 30, 2021 as compared to the three months ended June 30, 2020 was primarily
due to an increase in the volume of products sold. Gross margin as a percentage
of total revenues decreased for the three months ended June 30, 2021 as compared
to the three months ended June 30, 2020, primarily due to write-downs of certain
products, partially offset by the mix of products sold.
Gross margin increased 23% for the six months ended June 30, 2021 as compared to
the six months ended June 30, 2020. The increase for the six months ended June
30, 2021 as compared to the six months ended June 30, 2020 was primarily due to
favorable pricing of certain products and an increase in the volume of products
sold. Gross margin as a percentage of total revenues remained flat for the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Gross margins as a percentage of revenues were favorably impacted by pricing of
new JOTEC product launches, as well as the AMDS, and mix of products sold,
partially offset by write-downs of certain products.
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Operating Expenses
General, Administrative, and Marketing Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
General, administrative, and
marketing expenses $ 40,830 $ 32,288 $ 79,468 $ 71,290
General, administrative, and
marketing expenses 54% 60% 54% 59%
as a percentage of total revenues
General, administrative, and marketing expenses increased 26% and 11% for the
three and six months ended June 30, 2021, respectively, as compared to the three
and six months ended June 30, 2020. The increase in General, administrative, and
marketing expenses for the three and six months ended June 30, 2021 was
primarily due to an increase in personnel, commission, amortization, business
development, integration, and severance expenses. General, administrative, and
marketing expenses included $3.4 million and $4.8 million of business
development, integration, and severance expenses for the three and six months
ended June 30, 2021, respectively, as compared to $653,000 and $1.5 million for
the three and six months ended June 30, 2020, respectively. Business
development, integration, and severance expenses during the three and six months
ended June 30, 2021 were primarily comprised of charges related to the Ascyrus
acquisition.
Research and Development Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Research and development expenses $ 8,360 $ 5,522 $ 16,114 $ 11,878
Research and development expenses 11% 10% 11% 10%
as a percentage of total revenues
Research and development expenses increased 51% and 36% for the three and six
months ended June 30, 2021, respectively, as compared to the three and six
months ended June 30, 2020. Research and development spending in the three and
six months ended June 30, 2021 was primarily focused on clinical work to gain
regulatory approvals for On-X, JOTEC, and PerClot products. Research and
development spending in the three and six months ended June 30, 2020 was
primarily focused on clinical work to gain regulatory approval for On-X and
JOTEC products.
Interest Expense
Interest expense was $4.9 million and $8.9 million for the three and six months
ended June 30, 2021, respectively, as compared to $3.7 million and $7.0 million
for the three and six months ended June 30, 2020, respectively. Interest expense
for the three and six months ended June 30, 2021 and 2020 relates to interest on
debt and uncertain tax positions.
Other (Income) Expense, Net
Other income, net was $1.3 million and $740,000 for the three months ended June
30, 2021 and 2020, respectively. Other expense, net was $600,000 and $2.9
million for the six months ended June 30, 2021 and 2020, respectively. Other
(income) expense, net primarily includes the realized and unrealized effects of
foreign currency gains and losses.
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Earnings
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Loss before income taxes $ (2,183) $ (4,766) $ (6,684) $ (12,901)
Income tax benefit (5) (1,077) (1,368) (2,547)
Net loss $ (2,178) $ (3,689) $ (5,316) $ (10,354)
Diluted loss per common share $ (0.06) $ (0.10) $ (0.14) $ (0.27)
Diluted weighted-average common
shares outstanding
38,943 37,520 38,841 37,455
We experienced a loss before income taxes for the three and six months ended
June 30, 2021 and 2020. The loss before income taxes for the three and six
months ended June 30, 2021 was due to business development, integration and
severance expenses primarily related to the Ascyrus acquisition, investments in
the research and development pipeline, and delays and cancellations of some
surgical procedures as a result of reduced hospital capacity and hospital
restrictions due to the COVID-19 pandemic.
Our effective income tax rate was a benefit of under 1% and 20% for the three
and six months ended June 30, 2021, respectively, as compared to a benefit of
23% and 20% for the three and six months ended June 30, 2020, respectively. The
change in the tax rate for the three and six months ended June 30, 2021 is
primarily due to a change in pre-tax book loss and an increase in the excess tax
benefit related to stock compensation for the three and six months ended June
30, 2021, as well as an increase in the estimated current year valuation
allowance, as compared to the three and six months ended June 30, 2020.
The income tax rate for the three and six months ended June 30, 2021 was
favorably impacted by excess tax benefit deductions related to stock
compensation, the research and development tax credit, and the reduction of a
valuation allowance on prior year items. These factors were partially offset by
the unfavorable impacts of non-deductible operating expenses, executive
compensation expenses, an increase in the valuation allowance on current year
items, and the recording of a tax reserve on prior year items.
The income tax rate for the three and six months ended June 30, 2020 was
favorably impacted by excess tax benefit deductions related to stock
compensation, the research and development tax credit. These factors were
partially offset by the unfavorable impacts of non-deductible operating expenses
and executive compensation expenses.
In response to the COVID-19 pandemic, the U.S. government enacted the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act") on March 27,
2020. The CARES Act provided various forms of relief and assistance to U.S.
businesses. We recorded a reduction to income taxes payable and deferred tax
assets of approximately $1.3 million for the change to the 2019 Section 163(j)
interest expense deduction limitation for the three months ended March 31, 2020.
We experienced a net loss and diluted loss per common share for the three and
six months ended June 30, 2021 and 2020. Net loss and diluted loss per common
share for the three months ended June 30, 2021 was primarily due to a loss
before income taxes, as discussed above.
Seasonality
Historically, we believe the demand for aortic stents and stent grafts is
seasonal, with a decline in demand generally occurring in the third quarter due
to the summer holiday season in Europe. However, the nature of any seasonal
trends may have been obscured during the period due to integration activities
subsequent to the JOTEC acquisition including the implementation of our
distributor-to-direct strategy and our European sales force realignment as well
as the recent market introduction of AMDS and NEXUS products.
Historically, we believe the demand for BioGlue and On-X products is seasonal,
with a decline in demand generally occurring in the third quarter followed by
stronger demand in the fourth quarter. We believe that this trend may be due to
the summer holiday season in Europe and the U.S.
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We are uncertain whether the demand for AMDS and NEXUS products is seasonal, as
these products have not fully penetrated many markets and, therefore, the nature
of any seasonal trends may not yet be obvious.
We do not believe the demand for our other products is seasonal.
Demand for our cardiac preservation services has traditionally been seasonal,
with peak demand generally occurring in the third quarter. We believe this trend
for cardiac preservation services is primarily due to the high number of
surgeries scheduled during the summer months for school-aged patients. Based on
experience in recent years, we believe that this trend is lessening as we are
distributing a higher percentage of our tissues for use in adult populations.
Demand for our vascular preservation services has also traditionally been
seasonal, with lowest demand generally occurring in the fourth quarter. We
believe this trend for vascular preservation services is primarily due to fewer
vascular surgeries being scheduled during the winter holiday months.
As a result of the uncertainty and other impacts of the COVID-19 pandemic and
the resulting shifts of timing in some revenue, our historically observable
seasonality of revenues has been impacted or obscured in 2020 and 2021 and may
be obscured for the remainder of 2021 and potentially beyond.
Liquidity and Capital Resources
Net Working Capital
As of June 30, 2021 net working capital (current assets of $238.1 million less
current liabilities of $58.9 million) was $179.2 million, with a current ratio
(current assets divided by current liabilities) of 4 to 1, compared to net
working capital of $174.1 million and a current ratio of 4 to 1 at December 31,
2020.
Overall Liquidity and Capital Resources
Our primary cash requirements for the six months ended June 30, 2021 were for
general working capital needs, capital expenditures for facilities and
equipment, interest and principal payments under our Credit Agreement (defined
below), interest payments under our Convertible Senior Notes (defined below),
and repurchases of stock to cover tax withholdings. We funded our cash
requirements through our existing cash reserves and proceeds from stock option
exercises.
We believe our cash from operations and existing cash and cash equivalents will
enable us to meet our current operational liquidity needs for at least the next
twelve months. Our future cash requirements are expected to include interest and
principal payments under our Credit Agreement and Convertible Senior Notes
(described in "Significant Sources and Uses of Liquidity" section below),
expenditures for clinical trials, research and development expenditures, general
working capital needs, capital expenditures, and other corporate purposes and
may include cash to fund business development activities including obligations
in the Endospan and Ascyrus agreements. These items may have a significant
effect on our future cash flows during the next twelve months. Subject to the
terms of our Credit Agreement, we may seek additional borrowing capacity or
financing, pursuant to our current or any future shelf registration statement,
for general corporate purposes or to fund other future cash requirements. If we
undertake any further significant business development activity, we may need to
finance such activities by obtaining additional debt financing or using a
registration statement to sell equities. There can be no assurance that we will
be able to obtain any additional debt or equity financing at the time needed or
that such financing will be available on terms that are favorable or acceptable
to us.
Significant Sources and Uses of Liquidity
On December 1, 2017 we entered into a credit and guaranty agreement for a
$255.0 million senior secured credit facility, consisting of a $225.0 million
secured term loan facility (the "Term Loan Facility") and a $30.0 million
secured revolving credit facility ("the Revolving Credit Facility" and, together
with the Term Loan Facility, the "Credit Agreement"). We and each of our
existing domestic subsidiaries (subject to certain exceptions and exclusions)
guarantee the obligations under the Credit Agreement (the "Guarantors"). The
Credit Agreement is secured by a security interest in substantially all existing
and after-acquired real and personal property (subject to certain exceptions and
exclusions) of us and the Guarantors.
On June 2, 2021 we entered into an amendment to our Credit Agreement to extend
the maturity dates of both the Company's Term Loan and its Revolving Credit
Facility. As part of the amendment, the maturity dates of both the Company's
Term Loan and its Revolving Credit Facility are each extended by two and
one-half years, until June 1, 2027 and June 1, 2025, respectively, subject to
earlier springing maturities if our 4.25% Convertible Senior Notes, described
below,
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remain outstanding on April 1, 2025 and December 31, 2024, respectively. With
respect to the Term Loan, if the Convertible Senior Notes remain outstanding on
April 1, 2025, the Term's Loan's Maturity Date will be April 1, 2025, or, if the
Convertible Senior Notes' own maturity date has been extended, the earlier of
(i) 91 days prior to the Convertible Senior Notes' new maturity date and (ii)
June 1, 2027. In the case of the Revolving Credit Facility, if the Convertible
Senior Notes are still outstanding on December 31, 2024, the Revolving Credit
Facility's Maturity Date will be either December 31, 2024 or, if the Convertible
Senior Notes' own maturity date has been extended, the earlier of (i) 182 days
prior to the Convertible Senior Notes' new maturity date and (ii) June 1, 2025.
Under the amendment, the Term Loan Facility bears interest, at our option, at a
floating annual rate equal to either the base rate, plus a margin of 2.50%, or
LIBOR, plus a margin of 3.50%. Prior to the amendment, the optional floating
annual rate was equal to either the base rate plus a margin of 2.25%, or LIBOR,
plus a margin of 3.25%.
On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25%
Convertible Senior Notes with a maturity date of July 1, 2025 (the "Convertible
Senior Notes"). The net proceeds from this offering, after deducting initial
purchasers' discounts and costs directly related to this offering, were
approximately $96.5 million. On January 1, 2021 we adopted ASU 2020-06 and
adjusted the carrying balance of the Convertible Senior Notes to notional. The
Convertible Senior Notes balance was $100.0 million recorded in Long-term debt
on the Condensed Consolidated Balance Sheets as of June 30, 2021. 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, 2021 was approximately $144.6 million and 5.05%, respectively. The fair
value was based on market prices observable for similar instruments and is
considered Level 2 in the fair value hierarchy.
The interest expense recognized on the Convertible Senior Notes includes
approximately $1.2 million and $2.4 million for the aggregate of the contractual
coupon interest, and the amortization of the debt issuance costs as of the three
and six months ended June 30, 2021, respectively. Interest on the Convertible
Senior Notes began accruing upon issuance and is payable semi-annually.
Holders of the Convertible Senior Notes may convert their notes at their option
at any time prior to January 1, 2025 but only under the following circumstances:
(i) during any calendar quarter commencing after the calendar quarter ending on
September 30, 2020 (and only during such calendar quarter), if the last reported
sale price of our common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on, and
including, the last trading day of the immediately preceding calendar quarter is
greater than or equal to 130% of the conversion price on each applicable trading
day; (ii) during the five business day period after any five consecutive trading
day period in which the trading price per $1,000 principal amount of notes for
each trading day of the measurement period was less than 98% of the product of
the last reported sale price of our common stock and the conversion rate on each
such trading day; (iii) we give a notice of redemption with respect to any or
all of the notes, at any time prior to the close of business on the second
scheduled trading day immediately preceding the redemption date; or (iv) upon
the occurrence of specified corporate events. On or after January 1, 2025 until
the close of business on the second scheduled trading day immediately preceding
the maturity date, holders may convert their notes at any time, regardless of
the foregoing circumstances.
We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem
them on or after July 5, 2023, in whole or in part, at our option, if the last
reported sale price per share of our common stock has been at least 130% of the
conversion price then in effect for at least 20 trading days (whether or not
consecutive) during any 30 consecutive trading day period (including the last
trading day of such period) ending on, and including, the trading day
immediately preceding the date on which we provide notice of redemption. We may
redeem for cash all or part of the Convertible Senior Notes at a redemption
price equal to 100% of the principal amount of the redeemable Convertible Senior
Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
No principal payments are due on the Convertible Senior Notes prior to maturity.
Other than restrictions relating to certain fundamental changes and
consolidations, mergers or asset sales and customary anti-dilution adjustments,
the Convertible Senior Notes do not contain any financial covenants and do not
restrict us from conducting significant restructuring transactions or issuing or
repurchasing any of its other securities.
As of June 30, 2021 approximately 42% of our cash and cash equivalents were held
in foreign jurisdictions.
Net Cash Flows from Operating Activities
Net cash used in operating activities was $392,000 for the six months ended June
30, 2021, as compared to $760,000 for the six months ended June 30, 2020.
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We use the indirect method to prepare our cash flow statement and, accordingly,
the operating cash flows are based on our net loss, which is then adjusted to
remove non-cash items, items classified as investing and financing cash flows,
and changes in operating assets and liabilities from the prior year end. For the
six months ended June 30, 2021 these non-cash items included $12.0 million in
depreciation and amortization expenses, $4.6 million in non-cash compensation,
$4.3 million fair-value adjustment related to the Ascyrus acquisition, and $4.3
million of deferred income tax changes.
Our working capital needs, or changes in operating assets and liabilities, also
affected cash from operations. For the six months ended June 30, 2021 these
included the unfavorable effect of an $11.7 million increase in inventory
balances and deferred preservation costs, the unfavorable effect of a $5.5
million increase in receivables, and the unfavorable effect of a $2.1 million
increase in prepaid expenses and other assets, and the unfavorable effect of a
$1.2 million decrease in accounts payable, accrued expenses, and other
liabilities.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $7.0 million for the six months ended
June 30, 2021, as compared to $4.5 million for the six months ended June 30,
2020. During the six months ended June 30, 2021 cash flows used in investing
activities included $7.2 million related to capital expenditures.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $3.7 million for the six months ended
June 30, 2021, as compared to cash provided by financing activities of $96.2
million for the six months ended June 30, 2020. The current year cash used in
financing activities was primarily due to $2.2 million payment of debt issuance
costs, $1.8 million for repurchases of common stock to cover tax withholdings
and $1.4 million repayment of term loan debt, partially offset by $2.3 million
of proceeds from exercise of stock options and issuances of common stock.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Scheduled Contractual Obligations and Future Payments
Our long-term debt obligations and interest payments include $319.1 million of
scheduled principal payments and $73.1 million in anticipated interest payments
related to our Credit Agreement, Convertible Senior Notes, and JOTEC
governmental loans.
We have contingent payment obligations that include up to $120.0 million to be
paid to the former shareholders of Ascyrus, of which $10.0 million is expected
to be paid in CryoLife common stock, upon the achievement of certain milestones.
We anticipate making a $5.0 million third tranche payment under the Endospan
Loan upon receipt of certification that certain approvals and clinical trial
milestones have been achieved.
On September 28, 2010 we entered into a worldwide distribution agreement and a
license and manufacturing agreement (collectively, the "SMI Agreements") with
Starch Medical, Inc. ("SMI"), for PerClot®, a polysaccharide hemostatic agent
used in surgery.
On July 28, 2021 we entered into an asset purchase agreement and other ancillary
agreements related to the sale of our PerClot assets to a subsidiary of Baxter
International, Inc. ("Baxter") and an agreement to terminate all of our material
agreements with SMI related to PerClot (collectively the "Baxter Transaction").
As part of the Baxter Transaction, the SMI contingent liabilities were
extinguished.
Our operating and finance lease obligations result from the lease of land and
buildings that comprise our corporate headquarters and our various manufacturing
facilities, leases related to additional manufacturing, office, and warehouse
space, leases on Company vehicles, and leases on a variety of office equipment
and other equipment.
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Capital Expenditures
Capital expenditures were $7.2 million and $3.8 million for the six months ended
June 30, 2021 and 2020, respectively. Capital expenditures in the six months
ended June 30, 2021 were primarily related to leasehold improvements needed to
support our business, routine purchases of manufacturing and tissues processing
equipment, computer software, and equipment.
Risks and Uncertainties
See the "Risk Factors" identified in Part II, Item 1A of this Form 10-Q.
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