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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