Item 1A. Risk Factors.

Risks Relating to Our Business

Our business involves a variety of risks and uncertainties, known and unknown, including, among others, the risks discussed below. These risks should be carefully considered together with the other information provided in this Annual Report and in our other filings with the SEC. Our failure to adequately anticipate or address these risks and uncertainties may have a material, adverse impact on our business, reputation, revenues, financial condition, profitability, and cash flows. Additional risks and uncertainty not presently known or knowable to us, or that we currently believe to be immaterial, may also adversely affect our business.

Business and Economic Risks

COVID-19, and similar outbreaks, could have a material, adverse impact on us.

In 2020, businesses, communities, and governments worldwide have taken and continue to take a wide range of actions to mitigate the spread and impact of COVID-19, leading to an unprecedented impact on the global economy. Hospitals and other healthcare providers have adopted differing approaches to address the surge and resurgence of COVID-19 cases, including their impact on healthcare workers, such as postponing elective and non-emergent procedures, restricting access to their facilities, cancelling elective procedures, or re-allocating scarce resources to some critically ill patients. Although some areas have seen a decline in COVID-19 cases, the potential for additional impact from new waves of COVID-19 and longer than anticipated timelines for widespread therapeutic and vaccine availability remain. These conditions have impacted and could continue to impact our business activities, including the following activities:

Our product sales. We have experienced an impact on revenues in the twelve months ending December 31, 2020, due principally to the COVID-19 pandemic. The extent to which our financial performance will be impacted by the pandemic in 2021 and beyond will depend largely on future developments, including the availability of the vaccine.

Our business operations. In 2020, we took several steps to address the impact of COVID-19 on our employees, cash consumption, and operations, including reducing expenditures and delaying investments. The reductions and delays we adopted could adversely impact our business operations or delay our recovery from the effects of the pandemic. The COVID-19 virus is contagious and our efforts to reduce the spread of COVID-19 among our employees, including our key personnel, and to protect our supply chain may not succeed.

Our management of our indebtedness. Partly as a precautionary measure to increase cash and maintain maximum financial flexibility during the COVID-19 pandemic, we issued $100.0 million aggregate principal amount of 4.25% convertible senior notes with a maturity date of July 1, 2025 (“Convertible Senior Notes”), using portions of those proceeds to repay our Revolving Credit Facility and retaining the remainder for general

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corporate purposes which may limit our operational flexibility and adversely affect our ability to raise additional capital.

Our research and development projects. We have reduced spending on research and development projects, including clinical research projects. These reductions could adversely impact future revenue, and additional reductions in spending might be required, further impacting future revenue. In addition, our ability to conduct our ongoing research and development projects in markets that are affected by COVID-19 has been, and could continue to be, adversely impacted. Enrollment and timelines for our clinical trials have been and might continue to be impacted as healthcare providers reprioritize resources and limit access to healthcare facilities or as patients decline to participate or are hesitant to voluntarily visit healthcare facilities. In addition, COVID-19-related impacts on government and regulatory agencies have slowed and might continue to slow timelines for regulatory actions, including approvals.

If COVID-19 continues to spread, if efforts to contain COVID-19 continue or are unsuccessful, if we experience new infections of COVID-19 in areas previously successful in containing its spread, or if COVID-19 spreads among our employees or impacts our supply chain, it could materially, adversely affect our revenues, financial condition, profitability, and cash flows. These adverse developments or a prolonged period of uncertainty could adversely affect our financial performance.

We are subject to a variety of risks due to our global expansion.

Our international operations subject us to a number of risks, which may vary significantly from the risks we face in our U.S. operations, including:

Difficulties and costs associated with staffing, establishing and maintaining internal controls, managing foreign operations and distributor relationships, and selling directly to customers;

Broader exposure to corruption and expanded compliance obligations, including under the Foreign Corrupt Practices Act, the U.K. Bribery Law, local anti-corruption laws, Office of Foreign Asset Control administered sanction programs, and the European Union’s General Data Protection Regulation;

Overlapping and potentially conflicting, or unexpected changes in, international legal and regulatory requirements or reimbursement policies and programs;

Longer and more expensive collection cycles in certain countries, particularly those in which our primary customers are government-funded hospitals;

Changes in currency exchange rates, particularly fluctuations in the Euro as compared to the U.S. Dollar;

Potential adverse tax consequences of overlapping tax structures; and

Potential adverse financial and regulatory consequences resulting from the exit of the U.K. from the European Union, or “Brexit.”

Our key growth areas may not generate anticipated benefits.

Our strategic plan is focused on four areas – new products, new indications, global expansion and business development – to drive growth and/or increase the size of our total addressable markets, primarily in the cardiac and vascular surgery segment, but we cannot be certain that these strategies will ultimately drive business expansion and enhance shareholder value.

We operate in highly competitive market segments, face competition from large, well-established medical device companies and tissue service providers with greater resources and may not be able to compete effectively.

The market for our products and services is competitive and affected by new product introductions and activities of other industry participants. We face intense competition in virtually all of our product lines. A significant percentage of market revenues from competitive products are generated by Baxter International, Inc.; Ethicon (a Johnson & Johnson Company); Medtronic, Inc.; Abbott Laboratories; Edwards Lifesciences Corp.; Bard, a subsidiary of Becton, Dickinson and Company; Integra Life Sciences Holdings; LifeNet; Anteris Technologies, Inc.; Aziyo Biologics; Cook Medical; Gore & Associates; Terumo Aortic Corp.; LeMaitre Vascular, Inc.; Maquet, Inc.; Pfizer, Inc.; and BioCer Entwicklungs-GmbH. Several of our competitors enjoy competitive advantages over us, including:

Greater financial and other resources for research and development, commercialization, acquisitions, and litigation;

Greater name recognition as well as more recognizable trademarks for products similar to products that we sell;

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More established record of obtaining and maintaining regulatory product clearances or approvals;

More established relationships with healthcare providers and payors;

Lower cost of goods sold or preservation costs; and

Larger direct sales forces and more established distribution networks.

We are significantly dependent on our revenues from tissue preservation services and are subject to a variety of risks affecting them.

Tissue preservation services are a significant source of our revenues, accounting for 29% of revenues in the years ended December 31, 2020, 2019, and 2018 and as such, we face risks if we are unable to:

Source sufficient quantities of some human tissue or address potential excess supply of others. We rely primarily upon the efforts of third-parties to educate the public and foster a willingness to donate tissue. Factors beyond our control such as supply, regulatory changes, negative publicity concerning methods of tissue recovery or disease transmission from donated tissue, or public opinion of the donor process as well as our own reputation in the industry can negatively impact the supply of tissue;

Compete effectively, as we may be unable to capitalize on our clinical advantages or our competitors may have advantages over us in terms of cost structure, pricing, back office automation, marketing, and sourcing; or

Mitigate sufficiently the risk that tissue can become contaminated during processing; that processed tissue cannot be end-sterilized and hence carries an inherent risk of infection or disease transmission or that our quality controls can eliminate that risk.

In addition, U.S. and foreign governmental authorities have adopted laws and regulations that restrict tissue preservation services. Any of these laws or regulations could change, including becoming more restrictive or our interpretation of them could be challenged by governmental authorities.

We are significantly dependent on our revenues from BioGlue and are subject to a variety of related risks.

BioGlue Surgical Adhesive (“BioGlue”) is a significant source of our revenues, accounting for 25% of revenues in the years ended December 31, 2020, 2019, and 2018 and as such, any risk adversely affecting our BioGlue products or business would likely be material to our financial results. We face the following risks related to BioGlue:

Competing effectively with our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;

We may be unable to obtain approval to commercialize BioGlue in certain non U.S. countries as fast as our competitors do of their products or at all. We also may not be able to capitalize on new BioGlue approvals, including for new indications, in non U.S. countries;

BioGlue contains a bovine blood protein. Animal-based products are subject to increased scrutiny from the public and regulators, who may seek to impose additional regulations or product bans in certain countries on such products; BioGlue is a mature product and other companies may use the inventions disclosed in expired BioGlue patents to develop and make competing products; and

BioGlue faces potential adverse regulatory consequences resulting from the exit of the U.K. from the European Union, or “Brexit.” See Part I, Item 1A, “Risk Factors—Industry Risks—Our products and tissues are highly regulated and subject to significant quality and regulatory risks.”

We are significantly dependent on our revenues from aortic stents and stent grafts and are subject to a variety of related risks.

Aortic stents and stent grafts is a significant source of our revenues, accounting for 24% of revenues in the years ended December 31, 2020, 2019, and 2018 and as such, any risk adversely affecting aortic stents and stent grafts would likely be material to our financial results. We face the following aortic stents and stent grafts related risks based on our ability to:

Compete effectively with our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;

Develop innovative and in-demand aortic repair products;

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Respond adequately to enhanced regulatory requirements and enforcement activities;

Meet demand for aortic stents and stent grafts as we seek to expand our business globally; and

Maintain a productive working relationship with our Works Council in Germany.

We are significantly dependent on our revenues from On-X and are subject to a variety of related risks.

On-X is a significant source of our revenues, accounting for 19%, 18%, and 17% of revenues in the years ended December 31, 2020, 2019, and 2018, respectively and as such, any risk adversely affecting our On-X products or business would likely be material to our financial results. We face risks based on our ability to:

Compete effectively with some of our major competitors, as they may have advantages over us in terms of cost structure, supply chain, pricing, sales force footprint, and brand recognition;

Take market share in the mechanical heart valve market based on the FDA’s approved lower International Normalized Ratio (“INR”) indication or complete the associated FDA mandated post-approval studies;

Address clinical trial data or changes in technology that may reduce the demand for mechanical heart valves, such as transcatheter aortic valve replacement, or “TAVR” devices;

Manage risks associated with less favorable contract terms for On-X products on consignment at hospitals;

Respond adequately to enhanced OUS regulatory requirements or enforcement activities; and

Receive timely renewal certifications in certain markets.

Continued fluctuation of foreign currencies relative to the U.S. Dollar could materially, adversely affect our business.

The majority of our foreign product revenues are denominated in Euros and, as such, are sensitive to changes in exchange rates. In addition, a portion of our dollar-denominated and euro-denominated product sales are made to customers in other countries who must convert local currencies into U.S. Dollars or Euros in order to purchase these products. We also have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of Euros or other local currencies in relation to the U.S. Dollar could materially reduce our future revenues as compared to the comparable prior periods. Should this occur, it could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

Our charges resulting from acquisitions, restructurings, and integrations may materially, adversely affect the market value of our common stock.

We account for the completion of acquisitions using the purchase method of accounting. Our financial results could be adversely affected by a number of financial adjustments required by purchase accounting such as:

We may incur added amortization expense over the estimated useful lives of some acquired intangible assets;

We may incur additional depreciation expense as a result of recording purchased tangible assets;

We may be required to incur material charges relating to any impairment of goodwill and intangible assets;

Cost of sales may increase temporarily if acquired inventory is recorded at fair market value;

If acquisition consideration consists of earn-outs, our earnings may be affected by changes in estimates of future contingent consideration; or

Earnings may be affected by transaction and integration costs, which are expensed immediately.

Our existing insurance coverage may be insufficient, and we may be unable to obtain insurance in the future.

We maintain claims-made insurance policies to mitigate our financial exposure to securities, as well as product and tissue processing liability, claims that are reported to the insurance carrier while the policy is in effect. These policies do not include coverage for punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, if we are unsuccessful in arranging cost-effective acceptable resolutions of claims, it is possible that our insurance program may not be adequate to cover any or all possible claims or losses, including losses arising out of natural disasters or catastrophic circumstances. Any significant claim could result in an increase in our insurance rates or jeopardize our ability to secure coverage on reasonable terms, if at all.

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Any securities or product liability/tissue processing claim, even a meritless or unsuccessful one, could be costly to defend, and result in diversion of our management’s attention from our business, adverse publicity, withdrawal of clinical trial participants, injury to our reputation, or loss of revenue.

Operational Risks

We are heavily dependent on our suppliers and contract manufacturers to provide quality products.

The materials and supplies used in our product manufacturing and tissue processing are subject to regulatory requirements and oversight. If materials or supplies used in our processes fail to meet these requirements or are subject to regulatory enforcement action, they may have to be scrapped, or our products or tissues could be rejected during or after processing, recalled, or rejected by customers. In these cases, we may have to immediately scrap raw or in process materials or expense the costs of manufacturing or preservation.

As an example of this risk, in the fourth quarter of 2020 we became aware that a supplier shipped to us a lot of saline solution that we use in our tissue processing that contained some contamination. The contamination was identified by our routine quality controls. The contaminated solution is currently estimated to have impacted a small percentage of the tissue processed with this lot of solution, causing us to write-off those contaminated tissues. We are conducting further review to determine if the remaining tissue processed with this lot of solution can be released for distribution.

In addition, if these materials or supplies or changes to them do not receive regulatory approval or are recalled, if the related suppliers and/or their facilities are shut down temporarily or permanently, for any reason, or if the related suppliers are otherwise unable or unwilling to supply us, we may not have sufficient materials or supplies to manufacture our products or process tissues. In addition, we rely on contract manufacturers to manufacture some of our products or to provide additional manufacturing capacity for some products. If these contract manufacturers fail to meet our quality standards or other requirements or if they are unable or unwilling to supply the products, we may not be able to meet demand for these products. Our ability to fully recover all possible losses from these suppliers and contract manufacturers may have practical limitations imposed by factors like industry standard contractual terms or the financial resources of the adverse party.

We are dependent on single and sole-source suppliers and single facilities.

Some of the materials, supplies, and services in our product manufacturing or tissue processing, as well as some of our products, are sourced from single- or sole-source suppliers. As a result, our ability to negotiate favorable terms with those suppliers may be limited, and if those suppliers experience operational, financial, quality, or regulatory difficulties, or if those suppliers and/or their facilities refuse to supply us or cease operations temporarily or permanently, we could be forced to cease product manufacturing or tissue processing until the suppliers resume operations, until alternative suppliers could be identified and qualified, or permanently if the suppliers do not resume operations and no alternative suppliers could be identified and qualified. We could also be forced to purchase alternative materials, supplies, or services with unfavorable terms due to diminished bargaining power.

As an example of these risks, in 2019 we lost our supply of handpieces for cardiac laser therapy resulting from a manufacturing location change at our supplier that ultimately required a PMA supplement and FDA approval before handpiece manufacturing and distribution could resume. We anticipate resumption of limited supply during the first half of 2021.

We also conduct all of our own manufacturing operations at three facilities: Austin, Texas for On-X products, Hechingen, Germany for JOTEC products, and Kennesaw, Georgia for all other products. The NEXUS product is solely manufactured by Endospan in Herzelia, Israel, and the AMDS product is solely manufactured by a supplier in Charlotte, North Carolina. If one of these facilities ceases operations temporarily or permanently, for any reason, our business could be substantially disrupted.

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We are dependent on our key personnel.

Our business and future operating results depend in significant part upon the continued contributions of our key personnel, including qualified personnel with medical device and tissue processing experience, and senior management with experience in the medical device or tissue processing space, some of whom would be difficult to replace. Our business and future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant part on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel. Our facilities are in Kennesaw, Georgia; Austin, Texas; and Hechingen, Germany, where the supply of qualified medical device and tissue processing personnel is limited. Competition for such personnel is significant, and we cannot ensure that we will be successful in attracting or retaining them. We face risks if we lose any key employees to other employers or due to severe illness, death or retirement, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled employees.

We continue to evaluate expansion through acquisitions of, or licenses with, investments in, and distribution arrangements with, other companies or technologies, which may carry significant risks.

One of our growth strategies is to pursue select acquisitions, licensing, or distribution rights with companies or technologies that complement our existing products, services, and infrastructure. In connection with one or more of these transactions, we may:

Issue additional equity securities that would dilute our stockholders’ ownership interest;

Use cash we may need in the future to operate our business;

Incur debt, including on terms that could be unfavorable to us or debt we might be unable to repay;

Structure the transaction resulting in unfavorable tax consequences, such as a stock purchase that does not permit a step-up in basis for the assets acquired;

Be unable to realize the anticipated benefits of the transaction; or

Assume material unknown liabilities associated with the acquired business.

We may not realize all the anticipated benefits of our business development activities.

As part of our efforts to drive growth by pursuing select acquisition, license, and distribution opportunities that are aligned to our objectives and complement our existing products, services, and infrastructure, we have completed several transactions in recent years and may pursue similar additional transactions in the future. Examples of these activities include the following:

On December 1, 2017 we acquired JOTEC AG, a Swiss entity that we converted to JOTEC GmbH and subsequently merged with our Swiss acquisition entity, Jolly Buyer Acquisition GmbH and its subsidiaries;

On September 11, 2019 we entered into various agreements with Endospan, Ltd. (“Endospan”), an Israeli medical device manufacturer (the “Endospan Transaction”). The Endospan Transaction included an exclusive distribution agreement for the NEXUS stent graft system (“NEXUS”) in Europe; an agreement (“Endospan Loan”) for a secured loan from CryoLife to Endospan; and a security purchase option agreement for CryoLife to purchase all the then outstanding Endospan securities from Endospan’s existing securityholders upon FDA approval of NEXUS; and

On September 2, 2020 we acquired 100% of the outstanding shares of Ascyrus Medical LLC (“Ascyrus”), the developer of the Ascyrus Medical Dissection Stent (“AMDS”).

Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of these transactions depends on a number of factors including our ability to:

Leverage our global infrastructure to sell and cross-market the acquired products;

Drive adoption of NEXUS and AMDS in the European and other markets, including our ability to manage the substantial requirements for NEXUS procedures for product training, implant support, and proctoring;

Bring acquired products to the U.S. market, including AMDS, and the JOTEC products;

Harness the JOTEC product pipeline and research and development capabilities;

Obtain regulatory approvals in relevant markets, including our ability to obtain Conformité Européene Mark product certification (“CE Mark”) for pipeline products and obtain or maintain certification for pipeline and current products at all;

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Execute on development and clinical trial timelines for acquired products;

Carry, service, and manage significant debt and repayment obligations; and

Manage the unforeseen risks and uncertainties related to these transactions, including any related to intellectual property rights.

Additionally, our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the Endospan Transaction depends on a number of additional factors including Endospan’s ability to (a) comply with the Endospan Loan and other debt obligations, and avoid an event of default; (b) successfully commercialize NEXUS in markets outside of Europe; (c) meet demand for NEXUS; (d) meet quality and regulatory requirements; (e) manage any intellectual property risks and uncertainties associated with NEXUS; and (f) obtain FDA approval of NEXUS.

Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and energy. The benefits of these transactions may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the acquisition, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of an acquisition, we could experience an interruption or loss of momentum in our existing business activities.

Our investment in PerClot is subject to significant risks, including our ability to fully realize our investment by obtaining FDA approval and to successfully commercialize PerClot in the U.S. either directly or indirectly.

In 2010 and 2011, we entered into various agreements with SMI pursuant to which, among other things, we (i) may distribute PerClotin certain international markets.; (ii) acquired technology to assist in the production of a key component in PerClot; and (iii) obtained the exclusive right to pursue, obtain, and maintain FDA Pre-Market Approval (“PMA”) for PerClot. We are currently conducting our pivotal trial to gain PMA for PerClot for surgical indications, and we completed enrollment in January 2019. We anticipate being in a position to submit to the FDA during the third quarter of 2021. There is no guarantee, however, that we will obtain FDA approval when anticipated or at all including based on factors such as, unforeseen scheduling difficulties and unfavorable results at stages in the PMA process. We may also decide to delay or terminate our pursuit of PMA at any time due to changing conditions at CryoLife, in the marketplace, or in the economy in general. Even if we receive PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. By the time we secure approvals, competitors may have substantial market share or significant market protections. We may also be unsuccessful in selling outside the U.S. due, in part, to a proliferation of generic competitors, any breach by SMI of its contractual obligations, or the lack of adequate intellectual property protection or enforcement.

Significant disruptions of information technology systems or breaches of information security systems could adversely affect our business.

We rely upon a combination of sophisticated information technology systems as well as traditional recordkeeping to operate our business. In the ordinary course of business, we collect, store, and transmit confidential information (including, but not limited to, information about our business, personal information, intellectual property, and, in some instances, patient data). Our information technology and information security systems and records are potentially vulnerable to security breaches, service interruptions, or data loss from inadvertent or intentional actions by our employees, vendors or other third parties. In addition, due to the COVID-19 pandemic, we have implemented remote work arrangements for some employees, and those employees may use outside technology and systems that are vulnerable to security breaches, service interruptions, data loss or malicious attacks, including by third parties.

As an example of these risks, on November 1, 2019, we were notified that we had become a victim of a business e-mail compromise. During the fourth quarter of 2019, a company email account was compromised by a third-party impersonator and a payment intended for one of our U.S. vendors in the amount of $2.6 million was fraudulently re-directed into an individual bank account controlled by this third-party impersonator. Our cyber-insurance covered all but $25,000 of the unrecovered losses from this compromise.

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While we have invested, and continue to invest, in our information technology and information security systems, there can be no assurance that our efforts will prevent security breaches, service interruptions, or data losses. We have limited cyber-insurance coverage that may not cover all possible events, and this insurance is subject to deductibles and coverage limitations. Any security breaches, service interruptions, or data losses could adversely affect our business operations or result in the loss of critical or sensitive confidential information or intellectual property, or in financial, legal, business, and reputational harm to us or allow third parties to gain material, inside information that they may use to trade in our securities.

Industry Risks

Our products and tissues are highly regulated and subject to significant quality and regulatory risks.

The commercialization of medical devices and processing and distribution of human tissues are highly complex and subject to significant global quality and regulatory risks and as such, we face the following risks:

Our products and tissues allegedly have caused, and may in the future cause, patient injury, which has exposed, and could in the future expose, us to liability claims that could lead to additional regulatory scrutiny;

Our manufacturing and tissue processing operations are subject to regulatory scrutiny, inspections and enforcement actions, and regulatory agencies could require us to change or modify our operations or take other action, such as issuing product recalls or holds;

Regulatory agencies could reclassify, reevaluate, or suspend our clearances or approvals, or fail, or decline, to issue or reissue our clearances or approvals that are necessary to sell our products and distribute tissues;

Regulatory and quality requirements are subject to change, which could adversely affect our ability to sell our products or distribute tissues; and

Adverse publicity associated with our products, processed tissues or our industry could lead to a decreased use of our products or tissues, increased regulatory scrutiny, or product or tissue processing liability claims.

Further, on May 25, 2017, the European Union adopted a new Medical Device Regulation (MDR 2017/745) (“MDR”), which is currently scheduled to be fully implemented by May 26, 2021. Upon implementation, among other changes, MDR will place stricter requirements on manufacturers and European Notified Bodies regarding, among other things, product classifications and pre- and post-market clinical studies for product clearances and approvals which could result in product reclassifications or the imposition of other regulatory requirements that could delay, impede, or prevent our ability to commercialize existing, improved, or new products in the EEA.

At the same time, European Notified Bodies have begun engaging in more rigorous regulatory enforcement and may continue to do so. For example, in anticipation of MDR, Notified Bodies have declined to review many routine submissions unless they are in accordance with MDR, and Notified Bodies may continue to do so despite the postponement of MDR implementation. Our inability to timely adapt to these new requirements of our Notified Bodies could adversely impact our clearances or approvals.

Finally, we anticipate additional regulatory impact as a result of the United Kingdom’s exit from the European Union (“Brexit”). The U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”) has announced that CE Marking will continue to be recognized in the U.K. and certificates issued by EU-recognized Notified bodies will continue to be valid in the U.K. market until June 30, 2023. Going forward, all devices marketed in the U.K. will require U.K. Conformity Assessed (“UKCA”) Marks certified by a U.K. Approved Body (the re-designation of the U.K. Notified Body). In 2019 we were informed of the cancellation of notified body services by our former Notified Body for BioGlue and PhotoFix, Lloyd’s Register Quality Assurance Limited. The German competent authority, Regierungspraesidium-Tubingen, granted us an extended grace period until December 31, 2021, to complete the transfer of our registration to a new notified body, provided that we meet certain conditions, including the demonstration of adequate progress in the CE Mark certification process with our new Notified Body. If we are delayed or unsuccessful in transferring to a new Notified Body for BioGlue and PhotoFix in the EEA, or if we are otherwise unable to timely meet applicable regulatory requirements, we may be unable to place BioGlue or PhotoFix on the market in the EEA until we resolve the situation.

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Reclassification by the FDA of CryoValve SG pulmonary heart valve (“CryoValve SGPV”) may make it commercially infeasible to continue processing the CryoValve SGPV.

In December 2019, we learned that the FDA is preparing to issue a proposed rule for reclassification of more than minimally manipulated (“MMM”) allograft heart valves, which could include our CryoValve SGPV, from unclassified medical devices to a Class III medical device. Following a comment period and subsequent publication of any final rule, should the CryoValve SGPV be determined to be MMM, we expect to have approximately thirty months to submit a PMA application, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers during review of the PMA application. To date, the FDA has not issued such a proposed final rule.

If the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, and if there are delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant, we could decide that the requirements for continued processing of the CryoValve SGPV are too onerous, leading us to discontinue distribution of these tissues.

We may not be successful in obtaining necessary clinical results or regulatory clearances/approvals for products and services in development, and our new products and services may not achieve market acceptance.

Our growth and profitability depends in part upon our ability to develop, and successfully introduce, new products and services, or expand upon existing indications, requiring that we invest significant time and resources to obtain required regulatory clearances/approvals, including investment into pre and post-market clinical studies. Although we believe certain products and services under development may be effective in a particular application, we cannot be certain until we successfully execute on a clinical trial, and the results we obtain from pre and post-market clinical studies may be insufficient for us to obtain or maintain any required regulatory approvals or clearances.

We are currently engaged in several pre and post-market clinical studies, including PROACT Xa which will determine if patients with an On-X mechanical aortic valve can be maintained safely and effectively on apixaban (Eliquis®) rather than on warfarin, and a U.S. IDE for PerClot. We also have begun to initiate U.S. clinical trials for certain JOTEC products, initiate U.S. and international clinical trials for the AMDS, and we support Endospan’s U.S. clinical trial efforts for NEXUS. Each of these trials or studies is subject to the risks outlined herein.

We cannot give assurance that regulatory agencies will clear or approve these products and services or indications, or any new products and services or new indications, on a timely basis, if ever, or that the products and services or new indications will adequately meet the requirements of the market or achieve market acceptance. Pre and post-market clinical studies may also be delayed or halted due to many factors beyond our control.

If we are unable to successfully complete the development of a product, service, or application, or if we determine for any reason not to complete development or obtain regulatory approval or clearance of any product, service, or application, particularly in instances when we have expended significant capital, this could materially, adversely affect our financial performance. Research and development efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful products or services. Even the successful commercialization of a new product or service in the medical industry can be characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs, among other things. The introduction of new products or services may require significant physician training or years of clinical evidence in order to gain acceptance in the medical community.

Regulatory enforcement activities regarding Ethylene Oxide, which is used to sterilize some of our products and components, could have a material, adverse impact on us.

Some of our products, including our On-X products, are sterilized using ethylene oxide (“EtO”). Although we have a small-scale EtO facility in Austin, Texas, we rely primarily on large-scale EtO facilities to sterilize our products. In addition, some of our suppliers use, or rely upon third parties to use, EtO to sterilize some of our product components. Concerns about the release of EtO into the environment at unsafe levels have led to various regulatory enforcement activities against EtO facilities, including closures and temporary closures, as well as proposals increasing regulations related to EtO. The number of EtO facilities in the U.S. is limited, and any permanent or temporary closures or disruption to their operations could delay, impede, or prevent our ability to commercialize our products. In addition, any regulatory enforcement activities against us for our use of EtO could result in financial, legal, business, and reputational harm to us.

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We may be subject to fines, penalties, and other sanctions if we are deemed to be promoting the use of our products for unapproved, or off-label, uses.

Our business and future growth depend on the continued use of our products for approved uses. Generally, regulators contend that, unless our products are approved or cleared by a regulatory body for alternative uses, we may not make claims about the safety or effectiveness of our products, or promote them, for such uses. Such limitations present a risk that law enforcement could allege that the nature and scope of our sales, marketing, or support activities, though designed to comply with all regulatory requirements, constitute unlawful promotion of our products for an unapproved use. We also face the risk that such authorities might pursue enforcement based on past activities that we discontinued or changed. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to substantially change our sales, promotion, grant, and educational activities. In addition, we or our officers could be excluded from participation in government healthcare programs such as Medicare and Medicaid.

Healthcare policy changes may have a material, adverse effect on us.

In response to perceived increases in healthcare costs in recent years, there have been, and continue to be, proposals by the governmental authorities, third-party payors, and elected office holders and candidates to control these costs and, more generally, to reform the healthcare systems. Additional uncertainty is anticipated particularly in light of the recent presidential election in the United States and the impact the results of the presidential and congressional elections may have on U.S. law relating to the healthcare industry. Many U.S. healthcare laws, such as the Affordable Care Act, are complex, subject to change, and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our customers or the specific services and relationships we have with our customers is not always clear. Our failure to anticipate accurately any changes to, or the repeal or invalidation of all or part of the Affordable Care Act and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity and negatively affect our business, results of operations and financial condition. Further, the growth of our business, results of operations and financial condition rely, in part, on customers in the healthcare industry that receive substantial revenues from governmental and other third-party payer programs. A reduction or less than expected increase in government funding for these programs or a change in reimbursement or allocation methodologies could negatively affect our customers’ businesses and, in turn, negatively impact our business, results of operations and financial condition. Any changes that lower reimbursement for our products or reduce medical procedure volumes, however, could adversely affect our business and profitability.

Legal, Quality, and Regulatory Risks

We are subject to various U.S. and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and profitability.

Our relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various U.S. and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, often referred to collectively as “healthcare compliance laws.” Healthcare compliance laws are broad, sometimes ambiguous, complex, and subject to change and changing interpretations. Possible sanctions for violation of these healthcare compliance laws include fines, civil and criminal penalties, exclusion from government healthcare programs, and despite our compliance efforts, we face the risk of an enforcement activity or a finding of a violation of these laws.

We have entered into consulting and product development agreements with healthcare professionals or healthcare organizations, including some who may order our products or make decisions to use them. We have also adopted the AdvaMed Code of Conduct and the MedTech Europe Code of Ethical Business Practice, which govern our relationships with healthcare professionals to bolster our compliance with healthcare compliance law. While our relationships with healthcare professional and organizations are structured to comply with such laws and we conduct training sessions on these laws and Codes, it is possible that enforcement authorities may view our relationships as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties or debarment. In any event, any enforcement review of or action against us such review, regardless of outcome, could be costly and time consuming. Additionally, we cannot predict the impact of any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a going-forward basis only.

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The implementation of new data privacy laws, including the General Data Protection Regulation in the European Union in May 2018, could adversely affect our business.

An increasing number of federal, state, and foreign data privacy laws and regulations, which can be enforced by private parties or governmental entities, have been or are being promulgated and are constantly evolving. These laws and regulations may include new requirements for companies that receive or process an individual’s personal data (including employees), which increases our operating costs and requires significant management time and energy. Many of these laws and regulations, including the European Union’s General Data Protection Regulation (“GDPR”) also include significant penalties for noncompliance. Although our personal data practices, policies, and procedures are intended to comply with GDPR and other data privacy laws and regulations, there can be no assurance that regulatory or enforcement authorities will view our arrangements as being in compliance with applicable laws, or that one or more of our employees or agents will not disregard the rules we have established. Any privacy related government enforcement activities may be costly, result in negative publicity, or subject us to significant penalties.

Our business could be negatively impacted as a result of shareholder activism.

In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists from time to time propose to involve themselves in the governance, strategic direction, and operations of a company. Such involvement may disrupt our business and divert the attention of our management, and any perceived uncertainties as to our future direction resulting from such involvement could result in the loss of business opportunities, be exploited by our competitors, cause concern for our current or potential customers, cause significant fluctuations in stock price, or make it more difficult to attract and retain qualified personnel and business partners. We have had investors who we believe to be activist investors with respect to some of their positions recently invest in our stock.

Some of our products and technologies are subject to significant intellectual property risks and uncertainty.

We own trade secrets, patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. We cannot be certain that we will be able to maintain our trade secrets, that our pending patent applications will issue as patents, or that no one will challenge the validity or enforceability of any patent that we own or license. Competitors may independently develop our proprietary technologies or design non-infringing alternatives to patented inventions. We do not control the maintenance, prosecution, enforcement, or strategy for in-licensed intellectual property and as such are dependent in part on the owners of these rights to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies. Additionally, our technologies, products, or services could infringe intellectual property rights owned by others, or others could infringe our intellectual property rights. If we become involved in an intellectual property dispute, the costs could be expensive, and if we were to lose or decide to settle, the amounts or effects of the settlement or award by a tribunal could be costly.

Risks Relating to Our Indebtedness

The agreements governing our indebtedness contain restrictions that limit our flexibility in operating our business.

The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us and certain of our subsidiaries, including (subject in each case to certain exceptions) restrictions or prohibitions on our and certain of our subsidiaries’ ability to, among other things:

Incur or guarantee additional debt or create liens on certain assets;

Deviate from a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period;

Pay dividends on or make distributions of our share capital, including repurchasing or redeeming capital stock, or make other restricted payments, including restricted junior payments;

Enter into agreements that restrict our subsidiaries’ ability to pay dividends to us, repay debt owed to us or our subsidiaries, or make loans or advances to us or our other subsidiaries;

Comply with certain financial ratios set forth in the agreement;

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Enter into certain transactions with our affiliates including any transaction or merger or consolidation, liquidation, winding-up, or dissolution; convey, sell, lease, exchange, transfer or otherwise dispose of all or any part of our business, assets or property; or sell, assign, or otherwise dispose of any capital stock of any subsidiary;

Enter into certain rate swap transactions, basis swaps, credit derivative transactions, and other similar transactions, whether relating to interest rates, commodities, investments, securities, currencies, or any other relevant measure, or transactions of any kind subject to any form of master purchase agreement governed by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement;

Amend, supplement, waive, or otherwise modify our or our subsidiaries organizational documents in a manner that would be materially adverse to the interests of the lenders, or change or amend the terms of documentation regarding junior financing in a manner that would be materially adverse to the interests of the lenders;

Make changes to our and our subsidiaries’ fiscal year without notice to the administrative agent under the agreement;

Enter into agreements which restrict our ability to incur liens;

Engage in any line of business substantially different from that in which we are currently engaged; and

Make certain investments, including strategic acquisitions or joint ventures.

Our indebtedness could adversely affect our ability to raise additional capital to fund operations and limit our ability to react to changes in the economy or our industry.

Our current and future levels of indebtedness could adversely affect our ability to raise additional capital, limit our operational flexibility, and hinder our ability to react to changes in the economy or our industry. It may also limit our ability to borrow money, require us to dedicate substantial portions of our cash flow to repayment, and expose us to increased interest rate fluctuation risk as most of our borrowings are at a variable rate of interest.

We have pledged substantially all of our U.S. assets as collateral under our existing Credit Agreement. If we default on the terms of such credit agreements and the holders of our indebtedness accelerate the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness.

A failure to comply with the covenants in our existing Credit Agreement could result in an event of default, which, if not cured or waived, could have a material, adverse effect on our business, financial condition, and profitability. In the event of any such default, the holders of our indebtedness:

Will not be required to lend any additional amounts to us;

Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or

Could require us to apply all of our available cash to repay such indebtedness.

If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against their secured collateral. If our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.

Risks Related to Ownership of our Common Stock

We do not anticipate paying any dividends on our common stock for the foreseeable future.

In December 2015 our Board of Directors discontinued dividend payments on our common stock for the foreseeable future. If we do not pay cash dividends, our shareholders may receive a return on their investment in our common stock only through appreciation of shares of our common stock that they own. In addition, restrictions in our credit facility limit our ability to pay future dividends.

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Provisions of Florida law and anti-takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely and prevent attempts by shareholders to remove current management.

We are subject to the Florida affiliated transactions statute, which generally requires approval by the disinterested directors or supermajority approval by shareholders for “affiliated transactions” between a corporation and an “interested stockholder.” Additionally, our organizational documents contain provisions that restrict persons who may call shareholder meetings, allow the issuance of blank-check preferred stock without the vote of shareholders, and allow the Board of Directors to fill vacancies and fix the number of directors. These provisions of Florida law and our articles of incorporation and bylaws could prevent attempts by shareholders to remove current management, prohibit or delay mergers or other changes of control transactions, and discourage attempts by other companies to acquire us, even if such a transaction would be beneficial to our shareholders.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters and laboratory facilities consist of approximately 190,400 square feet of leased manufacturing, administrative, laboratory, and warehouse space located on a 21.5-acre setting, with an additional 14,400 square feet of off-site warehouse space both located in Kennesaw, Georgia. The manufacturing and tissue processing space includes approximately 20,000 square feet of class 10,000 clean rooms and 8,000 square feet of class 100,000 clean rooms. This extensive clean room environment provides a controlled aseptic environment for manufacturing and tissue preservation. Two back-up emergency generators assure continuity of our manufacturing operations and liquid nitrogen freezers maintain preserved tissue at or below –135C. We manufacture products from our Medical Devices segment, including BioGlue and PhotoFix, and process and preserve tissues from our Preservation Services segment at our headquarters facility. Our corporate headquarters also includes a CardioGenesis cardiac laser therapymaintenance and evaluation laboratory space.

Our corporate complex includes the Ronald C. Elkins Learning Center, a 3,600 square foot auditorium that holds 225 participants, and a 1,500 square foot training lab, both equipped with closed-circuit and satellite television broadcast capability allowing live broadcasts from and to anywhere in the world. The Ronald C. Elkins Learning Center provides visiting surgeons with a hands-on training environment for surgical and implantation techniques for our technology platforms.

Our primary European subsidiary, JOTEC, located in Hechingen, Germany, maintains facilities that consist of approximately 80,000 square feet of leased manufacturing, administrative, laboratory, and warehouse space. We are in the process of constructing a 76,000 square feet facility that we anticipate leasing in 2021 for future growth.

Our On-X facility consists of approximately 75,000 square feet of combined manufacturing, warehouse, and office space leased in Austin, Texas.

We also lease a facility, which consists of 15,600 square feet of combined manufacturing and office space in Atlanta, Georgia, and a facility, which consists of approximately 25,000 square feet of additional office space in Kennesaw, Georgia, both of which we sublet to a third party. Our Atlanta facility was sublet beginning in 2018.

We lease small amounts of ancillary additional office and warehouse space in various countries in which we operate direct sales subsidiaries, including in Brazil, Italy, Poland, Spain, Switzerland, and the United Kingdom.

Item 3. Legal Proceedings.

From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may been incurred, and to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.

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Based on current knowledge, management does not believe that there are any pending matters that potentially could have a material, adverse effect on our business, financial condition, results of operations, or cash flows. However, we are engaged in various legal actions in the normal course of business. There can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, and an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market Price of Common Stock

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CRY.” The following table sets forth, for the periods indicated, the intra-day high and low sale prices per share of common stock on the NYSE.

As of February 12, 2021 we had 232 shareholders of record.

Dividends

No dividends were paid in 2020, 2019, or 2018.

On December 1, 2017 we entered into a Credit and Guaranty Agreement (the “Credit Agreement”), among CryoLife, as borrower, CryoLife International, Inc., On-X Life Technologies Holdings, Inc. (“On-X Holdings”), On-X Life Technologies, Inc., AuraZyme Pharmaceuticals, Inc., as guarantor subsidiaries, the financial institutions party thereto from time to time as lenders, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent. The Credit Agreement prohibits the payment of certain restricted payments, including cash dividends. See also Part II, Item 8, Note 10 of the “Notes to Consolidated Financial Statements” for further discussion of the Credit Agreement.

Issuer Purchases of Equity Securities

The following table provides information about purchases we made during the quarter ended December 31, 2020 of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934.

Issuer Purchases of Equity Securities

Common Stock

Total Number

of Common Shares Dollar Value

Purchased as of Common Shares

Total Number of Average Price Part of Publicly That May Yet Be

Common Shares Paid per Announced Purchased Under the

Period Purchased Common Share Plans or Programs Plans or Programs

The common shares purchased during the quarter ended December 31, 2020 were tendered to us in payment of taxes on stock compensation and were not part of a publicly announced plan or program.

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Under our Credit Agreement, we are prohibited from repurchasing our common stock, except for the repurchase of stock from our employees or directors when tendered in payment of taxes or the exercise price of stock options, upon the satisfaction of certain requirements.

Item 6. Selected Financial Data.

On November 19, 2020, the SEC adopted certain amendments to Regulation S-K, which are intended to modernize, simplify, and enhance certain financial disclosure requirements. Among other topics of focus, the amendments eliminated the requirements of Item 301, Selected Financial Data, which required certain public companies to provide the last five years of selected financial data in tabular form. Companies can elect to comply with certain or all amendments on or after February 10, 2021, with compliance becoming mandatory on August 9, 2021. We have elected to comply with the provision of the amendment allowing certain registrants to stop providing selected financial data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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: BioGlue Surgical Adhesive (“BioGlue”) products, aortic stents and stent grafts, On-X mechanical heart valves and related surgical products, and implantable cardiac and vascular human tissues. Aortic stents and stent grafts include JOTEC stent grafts and surgical products, Ascyrus Medical Dissection Stent (“AMDS”) hybrid prosthesis, and NEXUS endovascular stent graft system (“NEXUS”). In addition to these four major product families, we sell or distribute PhotoFix bovine surgical patch, PerClot hemostatic powder, CardioGenesis cardiac laser therapy, and NeoPatch chorioamniotic allograft.

For the year ended December 31, 2020 we reported annual revenues of $253.2 million, decreasing 8% over the prior year, largely due to decreases in revenues from BioGlue, CardioGenesis cardiac laser therapy, cardiac preservation service revenues, Aortic stents and stent grafts, On-X and PerClot product revenues, partially offset by an increase in PhotoFix product revenues. For the year ended December 31, 2020 we generated $12.4 million in cash flows from operations and reported a net loss of $16.7 million. See the “Results of Operations” section below for additional analysis of the fourth quarter and full year 2020 results. See Part I, Item 1, “Business,” for further discussion of our business and activities during 2020.

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 “global pandemic.”

Starting 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 have included but were not limited to, implementing specific protocols to minimize workplace exposures to COVID-19 by our employees, implementing remote work arrangements for employees we deem 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 II, Item 7 of this form 10-K 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 deferring management merit increases.

Our efforts to reduce the spread of COVID-19 among our employees, including our key personnel and to protect our supply chain were largely successful in 2020 as we continued to operate all manufacturing sites at near full production and our work-from-home arrangements 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 will continue to be successful in the future. Further, our

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reductions and delays 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 effects of the pandemic.

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 in 2021. The extent to which our operations and financial performance will be impacted by the pandemic in 2021 will depend largely on future developments, including the vaccine rollout. If COVID-19 becomes more contagious, continues to spread, if efforts to contain COVID-19 are unsuccessful, if we experience new infections of COVID-19 in areas previously successful in containing its spread, or if COVID-19 spreads among our employees or impacts our supply chain, or if we experience a prolonged period of uncertainty it could materially adversely affect our revenues, financial condition, profitability and cash flows.

See the “Risk Factors” identified in Part I, Item 1A of this form 10-K for risks related to COVID-19.

Transaction with Ascyrus

On September 2, 2020 we entered into a Securities Purchase Agreement (the “Ascyrus Agreement”) to acquire 100% of the outstanding equity interests of Ascyrus Medical LLC, (“Ascyrus”). Ascyrus has developed the AMDS, the world’s first aortic arch remodeling device for use in the treatment of acute Type A aortic dissections.

Under the terms of the Ascyrus Agreement, we may pay an aggregate of up to $200.0 million in consideration, consisting of: (i) a cash payment of approximately $60.0 million and the issuance of $20.0 million in shares of CryoLife common stock, in each case, delivered at the closing of the acquisition, (ii) if the U.S. Food and Drug Administration (the “FDA”) approves an Investigational Device Exemption (“IDE”) application for the AMDS, a cash payment of $10.0 million and the issuance of $10.0 million in shares of CryoLife common stock, (iii) if the FDA approves a Premarket Approval (“PMA”) application submitted for the AMDS, a cash payment of $25.0 million, (iv) if regulatory approval of the AMDS is obtained in Japan on or before June 30, 2027, a cash payment of $10.0 million, (v) if regulatory approval of the AMDS is obtained in China on or before June 30, 2027, a cash payment of $10.0 million and (vi) a potential additional consideration cash payment capped at up to $55.0 million (or up to $65.0 million to $75.0 million if the Japanese or Chinese approvals are not secured on or before June 30, 2027 and those approval milestone payments are added to the potential additional consideration cash payment cap) calculated as two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a Premarket Approval application submitted for the AMDS.

Critical Accounting Policies

A summary of our significant accounting policies is included in Part II, Item 8, Note 1 of the “Notes to Consolidated Financial Statements.” We believe that the consistent application of these policies enables us to provide users of the financial statements with useful and reliable information about our operating results and financial condition. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and assumptions. The following are accounting policies that we believe are most important to the portrayal of our financial condition and results of operations and may involve a higher degree of judgment and complexity.

Fair Value Measurements

We record certain financial instruments at fair value on a recurring basis, including cash equivalents, and certain restricted securities. We may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-instrument basis. Fair value financial instruments are recorded in accordance with the fair value measurement framework.

We also measure certain assets and liabilities at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as certain financial assets, long-lived assets, and non-amortizing intangible assets for impairment, allocating value to assets in an acquired asset group and applying accounting for business combinations and the initial recognition of liabilities such as contingent consideration. We use the fair value measurement framework to value these assets and liabilities and report these fair values in the periods in which they are recorded or written down.

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The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and

Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to our unobservable estimates and assumptions. Our assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist in determining fair value, as appropriate.

Although we believe that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

Deferred Preservation Costs

Deferred preservation costs include costs of cardiac and vascular tissues available for shipment, tissues currently in active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot be bought or sold; therefore, the tissues we preserve are not held as inventory. The costs we incur to procure and process cardiac and vascular tissues are instead accumulated and deferred. Deferred preservation costs are stated at the lower of cost or market value on a first-in, first-out basis and are deferred until revenue is recognized. Upon shipment of tissue to an implanting facility, revenue is recognized, and the related deferred preservation costs are expensed as cost of preservation services. Cost of preservation services also includes, as applicable, lower of cost or market write-downs and impairments for tissues not deemed to be recoverable, and includes, as incurred, idle facility expense, excessive spoilage, extra freight, and re-handling costs.

The calculation of deferred preservation costs involves judgment and complexity and uses the same principles as inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement organizations (“OPOs”) and tissue banks that consign the tissue to us for processing, preservation, and distribution. Deferred preservation costs consist primarily of the procurement fees charged by the OPOs and tissue banks, direct labor and materials (including salary and fringe benefits, laboratory supplies and expenses, and freight-in charges), and indirect costs (including allocations of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual tissue processing levels, to the extent that they are within the range of the facility’s normal capacity.

These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of donors or number of tissues processed. We apply a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. We estimate quarantine and in process yields based on our experience and reevaluate these estimates periodically. Actual yields could differ significantly from our estimates, which could result in a change in tissues available for shipment and could increase or decrease the balance of deferred preservation costs. These changes could result in additional cost of preservation services expense or could increase per tissue preservation costs, which would impact gross margins on tissue preservation services in future periods.

We regularly evaluate our deferred preservation costs to determine if the costs are appropriately recorded at the lower of cost or market value. We also evaluate our deferred preservation costs for costs not deemed to be recoverable, including tissues not expected to ship prior to the expiration date of their packaging. Lower of cost or market value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue services, based on recent average service fees at the time of the evaluation. Impairment write-downs are recorded based on the book value of tissues deemed to be impaired. Actual results may differ from these estimates. Write-downs of deferred preservation costs are expensed as cost of preservation services, and these write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels if our estimates change.

We recorded write-downs to our deferred preservation costs totaling $1.7 million, $787,000, and $437,000 for the years ended December 31, 2020, 2019, and 2018, respectively, due primarily to tissues not expected to ship prior to the expiration

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date of the packaging. In addition, write-offs during the year ended December 31, 2020 included $826,000 of non-conforming tissues resulting from the contaminated saline solution. See “Results of Operations,” for further discussion of contaminated saline solution.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. We assess the recoverability of our deferred tax assets and provide a valuation allowance against our deferred tax assets when, as a result of this analysis, we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized.

Assessing the recoverability of deferred tax assets involves judgment and complexity, including the consideration of prudent and feasible tax planning. Estimates and judgments used in the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance include, but are not limited to, the following:

The ability to carry back deferred tax attributes to a prior tax year;

Timing of the anticipated reversal of book/tax temporary differences;

Projected future operating results;

Anticipated future state tax apportionment;

Timing and amounts of anticipated future taxable income;

Evaluation of statutory limits regarding usage of certain tax assets; and

Evaluation of the statutory periods over which certain tax assets can be utilized.

Significant changes in the factors above, or other factors, could affect our ability to use our deferred tax assets. Such changes could have a material, adverse impact on our profitability, financial position, and cash flows. We will continue to assess the recoverability of our deferred tax assets, as necessary, when we experience changes that could materially affect our prior determination of the recoverability of our deferred tax assets.

We believe that the realizability of our acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control as defined in Section 382 and that, prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered such a change in control. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes, for which we believe it is more likely than not, that some will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. In addition, during the year, the realizability of a portion of our net operating loss carryforwards and other deferred tax assets was limited. We recorded a valuation allowance against these deferred tax assets.

Valuation of Acquired Assets or Businesses

As part of our corporate strategy, we are seeking to identify and capitalize upon acquisition opportunities of complementary product lines and companies. We evaluate and account for acquired patents, licenses, distribution rights, and other tangible or intangible assets as the purchase of an asset or asset group, or as a business combination, as appropriate. The determination of whether the purchase of a group of assets should be accounted for as an asset group or as a business combination requires judgment based on the weight of available evidence.

For the purchase of an asset group, we allocate the cost of the asset group, including transaction costs, to the individual assets purchased based on their relative estimated fair values. In-process research and development acquired as part of an asset group is expensed upon acquisition. We account for business combinations using the acquisition method. Under this method, the allocation of the purchase price is based on the fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the tangible net assets and identifiable intangible assets is recorded as goodwill. Transaction costs related to a business combination are expensed as incurred. In-process research and development acquired as part of a business combination is accounted for as an indefinite-lived intangible asset until the related research and development project gains regulatory approval or is discontinued.

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We typically engage external advisors to assist in determining the fair value of acquired asset groups or business combinations, using valuation methodologies such as: the excess earnings, the discounted cash flow, or the relief from royalty methods. The determination of fair value in accordance with the fair value measurement framework requires significant judgments and estimates, including, but not limited to: timing of product life cycles, estimates of future revenues, estimates of profitability for new or acquired products, cost estimates for new or changed manufacturing processes, estimates of the cost or timing of obtaining regulatory approvals, estimates of the success of competitive products, and discount rates. We, in consultation with our advisor(s), make these estimates based on our prior experiences and industry knowledge. We believe that our estimates are reasonable, but actual results could differ significantly from our estimates. A significant change in our estimates used to value acquired asset groups or business combinations could result in future write-downs of tangible or intangible assets acquired by us and could, therefore, materially impact our financial position and profitability. If the value of the liabilities assumed by us, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in purchase accounting, we may need to record additional expenses or write-downs in future periods, which could materially impact our financial position and profitability.

New Accounting Pronouncements

See Part II, Item 8, Note 1 of “Notes to Consolidated Financial Statements” for further discussion of new accounting standards that have been adopted or are being evaluated for future adoption.

Results of Operations

(In thousands)

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenues

Revenues as a Percentage of

Revenues for the Total Revenues for the

Three Months Ended Three Months Ended

December 31, December 31,

Products:

CardioGenesis cardiac laser therapy 106 1,050 -90% 0% 2%

Preservation services:

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Revenues as a Percentage of

Revenues for the Total Revenues for the

Twelve Months Ended Twelve Months Ended

December 31, December 31,

Products:

CardioGenesis cardiac laser therapy 464 6,016 -92% 0% 2%

Preservation services:

Revenues decreased 3% and 8% for the three and twelve months ended December 31, 2020, respectively, as compared to the three and twelve months ended December 31, 2019. The decrease in revenues for the three months ended December 31, 2020 was primarily due to decrease in revenues from vascular and cardiac preservation services, CardioGenesis cardiac laser therapy revenues, BioGlue and PerClot product revenues, partially offset by increases in aortic stents and stent grafts, On-X, and PhotoFix product revenues. The decrease in revenues for the twelve months ended December 31, 2020 was primarily due to decreases in revenues from all products, except PhotoFix. Excluding the effects for foreign exchange, revenues decreased 4% and 8% for the three and twelve months ended December 31, 2020, respectively, as compared to the three and twelve months ended December 31, 2019. Revenues for the three and twelve months ended December 31, 2020 were negatively impacted 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. Revenue decreases during 2020 as compared to 2019 were larger during the second quarter with smaller sequential decreases during the third and fourth quarters as procedure volumes increased throughout second half of 2020.

A detailed discussion of the changes in product revenues and preservation services revenues for the three and twelve months ended December 31, 2020 is presented below.

Products

Revenues from products increased 1% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. Revenues from products decreased 9% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. The increase in revenues for the three months ended December 31, 2020 was primarily due to increases in aortic stents and stent grafts, On-X and PhotoFix product revenues, partially offset by decreases in revenues from CardioGenesis cardiac laser therapy, BioGlue and PerClot products. The decrease for the twelve months ended December 31, 2020 was due to decreases in revenues from all products except for PhotoFix. A detailed discussion of the changes in product revenues for BioGlue, aortic stents and stent grafts, On-X, PhotoFix, PerClot, and CardioGenesis cardiac laser therapy is presented below.

Sales of certain products through our direct sales force and distributors across Europe and various other countries are denominated in a variety of currencies including Euros, British Pounds, Polish Zlotys, Swiss Francs, Brazilian Reals, and Canadian Dollars, with a concentration denominated in Euros. Each currency is subject to exchange rate fluctuations. For the three and twelve months ended December 31, 2020 as compared to the three and twelve months ended December 31, 2019, 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,

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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.

BioGlue

The BioGlue product line is 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 sale of BioGlue decreased 4% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This decrease was primarily due to a 5% decrease in volume of milliliters sold, which decreased revenues by 4%. Excluding the effects for foreign exchange, revenues decreased 5% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019.

Revenues from the sale of BioGlue decreased 10% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a 9% decrease in the volume of milliliters sold, which decreased revenues by 10%. Excluding the effects for foreign exchange, revenues decreased 9% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019.

On a constant currency basis, revenues from sales of BioGlue decreased in the three and twelve months ended December 31, 2020 compared to the three and twelve months ended December 31, 2019 primarily in North America, Europe, the Middle East, and Africa (collectively, “EMEA”) and to a lesser extent in Asia Pacific, partially offset by an increase in the Latin America market. These markets were impacted by a decrease in volume of milliliters sold in the three and twelve months ended December 31, 2020 as compared to the three and twelve months ended December 31, 2019 primarily due to delays and cancellations of surgical procedures due to the COVID-19 pandemic. The increase in Latin America was primarily due to continued expansion in Brazil and enhanced distributor performance in other Latin American countries.

We are currently seeking regulatory approval for BioGlue in China, and if this effort is successful, management believes this will provide an additional international growth opportunity for BioGlue in future years.

Domestic BioGlue revenues accounted for 49% and 50% of total BioGlue revenues for the three and twelve months ended December 31, 2020, respectively, and 49% and 51% of total BioGlue revenues for the three and twelve months ended December 31, 2019, respectively.

Aortic Stents and Stent Grafts

Aortic stents and stent grafts, including JOTEC, AMDS, and NEXUS products, are used in endovascular and open vascular 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 stent graft system (“NEXUS”) and accessories in certain countries in Europe. NEXUS revenues are included as a component of aortic stents and stent grafts revenues from the date of the agreement.

On September 2, 2020 CryoLife entered into an agreement to acquire all of the equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus has developed the Ascyrus Medical Dissection Stent, an aortic arch remodeling device used for the treatment of acute Type A aortic dissections (“AMDS”). AMDS is currently distributed in EMEA and Canada and is included as a component of aortic stents and stent grafts revenues, from the date of the acquisition.

Aortic stents and stent grafts revenues increased 11% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. Aortic stents and stent grafts revenues decreased 5% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019.

Aortic stents and stent grafts revenues, excluding original equipment manufacturing (“OEM”), increased 8% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. The factors affecting revenue during this period include a change in mix of volume sold which increased revenues by 10%, the effect of foreign exchange rates, which increased revenues by 4%, offset by a change in average sales prices which decreased revenues 6%.

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Aortic stents and stent grafts revenues, excluding OEM, decreased 5% for the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a change in average sales prices, which decreased revenues by 3% and a change in mix of volume sold, which decreased revenues by 2%.

On a constant currency basis, revenues for aortic stents and stent grafts, excluding OEM, increased 3% in the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. Revenues for the three months ended December 31, 2020 increased primarily in Asia Pacific, North America, and EMEA markets, partially offset by a decrease in the Latin American market. The increase in Asia Pacific was primarily due to growth in distributor markets. The increase in North America markets was primarily due to sales of AMDS to Canada as a result of the Ascyrus acquisition in September 2020. The increase in EMEA markets was primary due to sales of AMDS as a result of the Ascyrus acquisition and an increase in NEXUS sales as these products continue to penetrate the EMEA markets, partially offset by a decrease in JOTEC products due to the delay in surgical procedures due to the COVID-19 pandemic. The decrease in Latin America was primarily in direct markets due to the delay in surgical procedures due to the COVID-19 pandemic.

On a constant currency basis, revenues for aortic stents and stent grafts, excluding OEM, decreased 5% in the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. Revenues for the twelve months ended December 31, 2020 decreased in EMEA and Latin America primarily in direct markets due to the delay in surgical procedures due to the COVID-19 pandemic, offset by an increase in Asia Pacific due to growth in distributor markets. Aortic stents and stent grafts OEM sales accounted for less than 1% of product revenues for both the three and twelve months ended December 31, 2020 and 2019.

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 2% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. On-X product revenues decreased 4% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019.

On-X product revenues, excluding OEM, increased 2% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This increase was primarily due to a mix in volume of units sold, which increased revenues by 2%.

On-X product revenues, excluding OEM, decreased 4% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a 16% decrease in volume of units sold, which decreased revenues by 4%.

On a constant currency basis, On-X revenues, excluding OEM, increased 1% in the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This increase in the three months ended December 31, 2020 as compared to the three months ended December 31, 2019 was primarily in North America, partially offset by decreases in EMEA, Asia Pacific, and Latin America. The increase in revenues in North America was due to an increase in market share. The decrease in revenues in all other regions was due to delays and cancellations of surgical procedures due to the COVID-19 pandemic.

On a constant currency basis, On-X revenues, excluding OEM, decreased 4% in the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. The decrease in the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019 was primarily in EMEA and, to a lesser extent, in Asia Pacific due to delays and cancellations of surgical procedures due to the COVID-19 pandemic, partially offset by an increase in North America due to an increase in market share. On-X OEM sales accounted for less than 1% of product revenues for both the three and twelve months ended December 31, 2020 and 2019.

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PhotoFix

PhotoFix revenues increased 11% for both the three and twelve months ended December 31, 2020, as compared to the three and twelve months ended December 31, 2019. The increase for the three months ended December 31, 2020 was primarily due to an increase in average sales prices, which increased revenues by 5%, a mix of units sold which increased revenues 5%, and the effect of foreign exchange rates which increased revenues by 1%. The increase for the twelve months ended December 31, 2020 was primarily due to a 3% increase in units sold, which increased revenues by 6%, and an increase in average sales prices, which increased revenues 5%.

The increase in units sold for the twelve months ended December 31, 2020 was primarily due to an increase in the number of physicians who implant PhotoFix compared to the twelve months ended December 31, 2019 as PhotoFix continues to increase penetration in domestic and European markets.

PerClot

Revenues from the sale of PerClot decreased 18% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This decrease was primarily due to a 24% decrease in the volume of grams sold, which decreased revenues by 20%, and a change in the mix of average sales prices, which decreased revenues 1%, partially offset by the effect of foreign exchange rates, which increased revenues by 3%.

Revenues from the sale of PerClot decreased 24% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a 25% decrease in volume of grams sold, which decreased revenues by 20%, and a change in the mix of average sales prices, which decreased revenues by 5%, partially offset by the effect of foreign exchange rates, which increased revenues by 1%.

The decrease in volume for both the three and twelve months ended December 31, 2020 was primarily due to a decrease in sales of PerClot in Asia Pacific and EMEA due to delays and cancellations of surgical procedures due to the COVID-19 pandemic and competitive pressures in certain regions.

We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. Enrollment was completed in January 2019, and we anticipate being in a position to submit the PMA to the FDA in the third quarter of 2021.

CardioGenesis Cardiac Laser Therapy

Revenues from our CardioGenesis cardiac laser therapy product line historically consisted primarily of sales of handpieces and, in certain periods, the sale of laser consoles. During the three and twelve months ended December 31, 2020, we did not have a supply of handpieces as our contract manufacturer of handpieces was unable to supply them until the FDA approved our supplier’s change in manufacturing location, pending our supplier’s resolution of several observations the FDA raised during a manufacturing site change inspection. We do not believe these observations relate to quality or safety. In January 2021 we received PMA-S approval for a change in manufacturing site for our contract manufacturer and we anticipate resuming limited sales of TMR handpieces in the first half of 2021.

Revenues from cardiac laser therapy decreased 90% and 92% for the three and twelve months ended December 31, 2020, respectively, as compared to the three and twelve months ended December 31, 2019 as a result of this handpiece supply issue.

Preservation Services

Preservation services primarily include services revenues from the preservation of cardiac and vascular tissues. Revenues from preservation services decreased 11% and 6% for the three and twelve months ended December 31, 2020, respectively, as compared to the three and twelve months ended December 31, 2019. Revenues decreased for the three and twelve months ended December 31, 2020 from a decrease in cardiac and vascular preservation service revenues as compared to the three and twelve months ended December 31, 2019. The detailed discussion of the changes in cardiac and vascular preservation services revenues is presented below.

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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 lot of saline solution that we use in our tissue processing that contained some contamination in a small number of bottles of the solution lot. The contamination was identified by our in-process quality controls. The contaminated solution is currently estimated to have impacted a small percentage of tissue processed with this solution lot, causing us to write-off approximately $826,000 of tissue in the fourth quarter of 2020. We are conducting further review to determine if the remaining $5.0 million in quarantined tissue processed with this lot of saline can be released for distribution. We believe the amount of tissue written-off and held in quarantine that was not available for distribution had an impact on tissue revenues in the fourth quarter of 2020, and we anticipate an additional impact on revenues in 2021 primarily in the first quarter. Although we believe it is probable that the tissues held in quarantine will be released, if they are not released, there could be an additional write-off of up to $5.0 million.

See further discussion below of specific items affecting cardiac and vascular preservation services revenues for the three and twelve months ended December 31, 2020.

Cardiac Preservation Services

Our cardiac valves are primarily used in cardiac replacement and reconstruction surgeries, including the Ross procedure, for patients with endocarditis or congenital heart defects. Our cardiac tissues are primarily distributed in domestic markets.

Revenues from cardiac preservation services, consisting of revenues from the distribution of human heart valves and cardiac patch tissues, decreased 10% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This decrease was primarily due to a 10% decrease in unit shipments of cardiac tissues, which decreased revenues by 8%, and a change in average service fees, which decreased revenues by 2%.

Revenues from cardiac preservation services decreased 7% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a 7% decrease in unit shipments of cardiac tissues, which decreased revenues by 7%.

The decrease in unit shipments for the three months ended December 31, 2020, was primarily due to a decrease in aortic and pulmonary valve shipments as well as cardiac patch shipments due to delays and cancellations of surgical procedures and a slowdown of procurement due to the COVID-19 pandemic. The decrease in unit shipments for the twelve months ended December 31, 2020, was primarily due to a decrease in pulmonary and aortic valve shipments due to delays and cancellations of surgical procedures and a slowdown of procurement due to the COVID-19 pandemic as well as the tissues being held in quarantine as a result of the saline solution lot that contained some contamination as described above, partially offset by an increase in cardiac patch shipments.

Vascular Preservation Services

The majority of our vascular preservation services revenues are related to shipments of saphenous veins, which are mainly used in peripheral vascular reconstruction surgeries to avoid limb amputations. Competition with synthetic product alternatives and the availability of tissues for processing are key factors affecting revenue volume that can fluctuate from quarter to quarter. Our vascular tissues are primarily distributed in domestic markets.

Revenues from vascular preservation services decreased 12% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. This decrease was primarily due to a 5% decrease in vascular unit shipments, which decreased revenues by 10%, and a decrease in average service fees, which decreased revenues by 2%.

Revenues from vascular preservation services decreased 6% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. This decrease was primarily due to a 4% decrease in vascular tissue shipments, which decreased revenues by 4%, and a decrease in average service fees, which decreased revenues by 2%.

The decrease in shipments of vascular tissues for the three months ended December 31, 2020 was primarily due to a decrease in saphenous vein shipments, partially offset by an increase in femoral artery shipments. The decrease in shipments of vascular tissue for the twelve months ended December 31, 2020, was primarily due to a decrease in femoral vein and

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artery shipments, as well as saphenous vein shipments. The decrease in shipments for the three and twelve months ended December 31, 2020 are due to delays and cancellations of surgical procedures and a slowdown in procurement due to the COVID-19 pandemic as well as the tissues being held in quarantine as a result of the saline solution lot that contained some contamination as described above.

Cost of Products and Preservation Services

Cost of Products

Three Months Ended Twelve Months Ended

December 31, December 31,

Cost of products remained flat for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. Cost of products decreased 9% for the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. Cost of products for the three and twelve months ended December 31, 2020 and 2019 included costs related to aortic stents and stent grafts, On-X, BioGlue, PhotoFix, PerClot, and CardioGenesis cardiac laser therapy products.

The decrease in cost of products for the twelve months ended December 31, 2020 was primarily due to a decrease in unit shipments.

Cost of Preservation Services

Three Months Ended Twelve Months Ended

December 31, December 31,

Cost of preservation services increased 1% for the three months ended December 31, 2020, as compared to the three months ended December 31, 2019. Cost of preservation services decreased 8% for December 31, 2020, as compared to the twelve months ended December 31, 2019. Cost of preservation services includes costs for cardiac and vascular tissue preservation services.

Cost of preservation services increased in the three months ended December 31, 2020 primarily due to a $1.1 million write-off of tissues not expected to be shipped, partially offset by a decrease in tissues shipped and a decrease in tissue unit costs. Cost of preservation services decreased in the twelve months ended December 31, 2020 primarily due to a decrease of tissue unit costs, and a decrease in tissues shipped, partially offset by a $1.7 million write-off of tissues not expected to be shipped.

Gross Margin

Three Months Ended Twelve Months Ended

December 31, December 31,

Gross margin as a percentage of total revenues 66% 67% 66% 66%

Gross margin decreased 4% and 8% for the three and twelve months ended December 31, 2020, respectively as compared to the three and twelve months ended December 31, 2019. The gross margin decrease for the three months ended December 31, 2020 was due to an overall decrease in total revenues. Gross margin as a percentage of total revenues decreased in the three months ended December 31, 2020 as compared to the three months ended December 30, 2019, primarily due to tissue and product write-offs, partially offset by a change in the mix of products sold during the three months ended December 31, 2020.

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The gross margin decrease for the twelve months ended December 31, 2020 as compared to twelve months ended December 31, 2019 was due to an overall decrease in revenues from products and preservation services and a corresponding overall decrease in costs of products and preservation services. Gross margin as a percentage of total revenues remained flat in the twelve months ended December 31, 2020 as compared to December 31, 2019.

Operating Expenses

General, Administrative, and Marketing Expenses

Three Months Ended Twelve Months Ended

December 31, December 31,

General, administrative, and marketing expenses

as a percentage of total revenues 53% 54% 56% 52%

General, administrative, and marketing expenses decreased 4% and 1% for the three and twelve months ended December 31, 2020, respectively, as compared to the three and twelve months ended December 31, 2019. The decreases in general, administrative, and marketing expenses for the three and twelve months ended December 31, 2020 were primarily due to a reduction of stock compensation expense resulting from stock award performances that were not achieved and a reduction in the vacation accrual that in aggregate was $4.2 million combined with decreases in travel and marketing expenses from reduced and cancelled travel and events as well as reduced commissions due to the COVID-19 pandemic, partially offset by a $4.5 million fair value adjustment related to the Ascyrus Agreement. General, administrative, and marketing expenses included $4.8 million and $6.2 million of business development expenses for the three and twelve months ended December 31, 2020 as compared to approximately $500,000 and $3.1 million as of the three and twelve months ended December 31, 2019. Business development expenses for three and twelve months ended December 31, 2020 were primarily comprised of expenses related to the Ascyrus Acquisition. Business development expenses during the twelve months ended December 31, 2019 primarily consisted of expenses related to the Endospan agreements.

Research and Development Expenses

Three Months Ended Twelve Months Ended

December 31, December 31,

Research and development expenses

as a percentage of total revenues 10% 8% 10% 8%

Research and development expenses increased 24% and 5% for the three and twelve months ended December 31, 2020, respectively as compared to the three and twelve months ended December 31, 2019. Research and development spending in the three and twelve months ended December 31, 2020 was primarily focused on clinical work to gain regulatory approvals for On-X and JOTEC products. Research and development spending in the three and twelve months ended December 31, 2019 was primarily focused on clinical work for JOTEC products and to gain regulatory approval for On-X products as well as approval to commercialize PerClot for surgical indications in the U.S.

Interest Expense

Interest expense was $4.7 million and $16.7 million for the three and twelve months ended December 31, 2020, respectively, and interest expense was $3.6 million and $14.9 million for the three and twelve months ended December 31, 2019, respectively. Interest expense for the three and twelve months ended December 31, 2020 and 2019 relates to interest on debt and uncertain tax positions. Interest on debt includes $1.4 million and $3.7 million of non-cash interest related to the convertible and term loan debt for the three and twelve months ended December 31, 2020, respectively. Interest on debt includes $406,000 and $1.6 million of non-cash interest related to the term loan debt for the three and twelve months ended December 31, 2019, respectively.

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Other Expense (Income), Net

Other income, net was $2.7 million and $1.4 million for the three months ended December 31, 2020, as compared to three months ended December 31, 2019, respectively. Other expense was $3.1 million and $1.3 million for the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019, respectively. Other income, net includes $2.7 million and $1.6 million in realized and unrealized gains due of foreign currency fluctuations for the three months ended December 31, 2020, and 2019, respectively. Other expense, net includes $4.9 million in fair value adjustments of financial instruments for the twelve months ended December 31, 2020. Additionally, other expense, net included $1.8 million in realized and unrealized gains and $1.2 million in realized and unrealized losses due to foreign currency fluctuations during the twelve months ended December 31, 2020, and 2019, respectively.

Earnings

Three Months Ended Twelve Months Ended

December 31, December 31,

Diluted (loss) income per common share $ (0.09) $ (0.02) $ (0.44) $ 0.05

We experienced a loss before income taxes for the three months ended December 31, 2020 as compared to income before income taxes for the three months ended December 31, 2019. We experienced a loss before income taxes for the twelve months ended December 31, 2020 as compared to income before income taxes for the twelve months ended December 31, 2019. The loss before income taxes for the three and twelve months ended December 31, 2020 was primarily due to decreases in revenues impacted by delays and cancellations of some surgical procedures as a result of reduced hospital capacity and hospital restrictions due to the COVID-19 pandemic as well as the fixed nature of certain operating expenses.

Our effective income tax rate was an expense of 3,654% and a benefit of 3% for the three and twelve months ended December 31, 2020, respectively, as compared to an expense of 144% and a benefit of 5% for the three and twelve months ended December 31, 2019, respectively. The change in the tax rate for the three and twelve months ended December 31, 2020 is primarily due to a change in pre-tax book loss, a reduction in the excess tax benefit related to stock compensation, the recording of a valuation allowance against deferred tax assets, as well as adjustments for prior year items for the three and twelve months ended December 31, 2020, as compared to the three and twelve months ended December 31, 2019.

The income tax rate for the three and twelve months ended December 31, 2020 and 2019 was favorably impacted by excess tax benefit deductions related to stock compensation, the research and development tax credit, adjustments for prior year tax items, and releases of uncertain tax position liabilities. These factors were partially offset by the unfavorable impacts of nondeductible executive compensation, intercompany interest expense disallowance, changes in valuation allowances on future tax assets, and nondeductible operating expenses.

In response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) on March 27, 2020. The CARES Act provides various forms of relief and assistance to U.S. businesses. We were able to utilize $2.9 million and $3.3 million of our previously disallowed interest expense in 2020 and 2019, respectively, as a result of the CARES Act changes to the interest expense deductibility guidance. See Note 8 for further discussion of our interest expense deduction limitation and carryforward.

We experienced a net loss and diluted loss per common share for the three months ended December 31, 2020 and 2019. We experienced net loss and diluted loss per common share for the twelve months ended December 31, 2020 as compared to a net income and diluted income per common share for twelve months ended December 31, 2019. Net loss and diluted loss per common share for the three and twelve months ended December 31, 2020 was primarily due to an increase in loss before income taxes, as discussed above.

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Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenues

Revenues as a Percentage of

Revenues for the Total Revenues for the

Three Months Ended Three Months Ended

December 31, December 31,

Products:

Preservation services:

Revenues as a Percentage of

Revenues for the Total Revenues for the

Twelve Months Ended Twelve Months Ended

December 31, December 31,

Products:

CardioGenesis cardiac laser therapy 6,016 6,217 -3% 2% 2%

Preservation services:

Revenues increased 3% and 5% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. The increase in revenues for the three months ended December 31, 2019 was primarily due to increases in On-X product revenues and cardiac preservation services revenues. The increase in revenues for the twelve months ended December 31, 2019 was primarily due to increases in On-X product revenues and cardiac preservation services revenues, as well as BioGlue and aortic stents and stent grafts. Excluding the effects for foreign exchange, revenues increased 4% and 7% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. A detailed discussion of the changes in product revenues and preservation services revenues for the three and twelve months ended December 31, 2019 is presented below.

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Products

Revenues from products increased 2% and 5% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. The increase in revenues for the three months ended December 31, 2019 was primarily due to increases in On-X product revenues. The increase in revenues in the twelve months ended December 31, 2019 was primarily due to increases in On-X, BioGlue, and aortic stents and stent grafts. A detailed discussion of the changes in product revenues for BioGlue, JOTEC, On-X, CardioGenesis cardiac laser therapy, PerClot, and PhotoFix 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, with a concentration denominated in Euros in addition to British Pounds, Polish Zlotys, Swiss Francs, Brazilian Reals, and Canadian Dollars which are subject to exchange rate fluctuations. For the three and twelve months ended December 31, 2019 compared to the three and twelve months ended December 31, 2018 the U.S. Dollar strengthened in comparison to major currencies, resulting in revenue decreases when these foreign currency denominated transactions were translated into U.S. Dollars. Future changes in these exchange rates could have a material, adverse effect on our revenues denominated in these currencies. Additionally, our sales to many distributors around the world are denominated in U.S. Dollars, and although these sales are not directly impacted by currency exchange rates, we believe that some of our distributors may delay or reduce purchases of products in U.S. Dollars depending on the relative price of these goods in their local currencies.

BioGlue

Revenues from the sale of BioGlue decreased 1% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This decrease was primarily due to an impact of foreign exchange rates and a change in average sales prices, each of which decreased revenues by 1%, partially offset by a change in the mix of milliliters sold, which increased revenues by 1%. Excluding the effects for foreign exchange, revenues were flat for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018.

Revenues from the sale of BioGlue increased 3% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This increase was primarily due to a 5% increase in the volume of milliliters sold, which increased revenues by 5%, partially offset by the effect of foreign exchange rates, which decreased revenues by 1%, and a decrease in average sales prices, which decreased revenues by 1%. Excluding the effects for foreign exchange, revenues increased 5% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018.

Excluding the effects for foreign exchange, revenues for BioGlue increased in the three and twelve months ended December 31, 2019 as compared to the three and twelve months ended December 31, 2018 in all international markets, with the largest growth in Asia Pacific for the three months ended December 31, 2019 and EEA, the Middle East, and Africa (“EMEA”) and Asia Pacific for the twelve months ended December 31, 2019. The increase in revenue in Asia Pacific is due to distributor buying patterns for the three and twelve months ended December 31, 2019. The increase in revenue in EMEA is due to an increase in direct sales during the twelve months ended December 31, 2019. The increases in all international markets were partially offset by decreases in domestic markets during the three and twelve months ended December 31, 2019 as compared to the three and twelve months ended December 31, 2018.

Domestic BioGlue revenues accounted for 49% and 51% of total BioGlue revenues for the three and twelve months ended December 31, 2019, respectively, and 50% and 53% of total BioGlue revenues for the three and twelve months ended December 31, 2018, respectively.

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Aortic Stents and Stent Grafts

On December 1, 2017 CryoLife acquired JOTEC AG and its subsidiaries (the “JOTEC Acquisition”), a Germany-based, developer of technologically differentiated endovascular stent grafts, and cardiac and vascular surgical grafts, focused on aortic repair. The JOTEC product line is used in endovascular and open vascular surgery, as well as for the treatment of complex aortic arch and thoracic aortic diseases.

Aortic stents and stent grafts revenues decreased 4% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. JOTEC revenues increased 3% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018.

Aortic stents and stent grafts revenues, excluding original equipment manufacturing (“OEM”), were flat for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. The factors affecting revenue during this period include a change in mix of volume sold which increased revenues by 5%, offset by the effect of foreign exchange rates, which decreased revenues by 4%, and a change in average sales prices which decreased revenues 1%.

Aortic stents and stent grafts revenues, excluding OEM, increased 3% for the twelve months ended December 31, 2019 as compared to the twelve months ended December 31, 2018. This increase in revenues was primarily due to an 8% increase in volume of units sold, which increased revenues by 11%, partially offset by the effect of foreign exchange rates, which decreased revenues by 6%, and a decrease in average sales price, which decreased revenues by 2%.

Excluding the effects for foreign exchange, aortic stents and stent grafts revenues, excluding OEM, increased 4% and 10% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018.

Revenues for aortic stents and stent grafts, excluding OEM, increased in the three months ended December 31, 2019, as compared to the three months ended December 31, 2018 in EMEA and Latin America, on a constant currency basis, due to growth in distributor markets.

Revenues for aortic stents and stent grafts, excluding OEM, increased in the twelve months ended December 31, 2019 as compared to the twelve months ended December 31, 2018 in EMEA, Latin America, and Asia Pacific with the largest growth in EMEA, on a constant currency basis, due to growth in distributor markets.

On-X

The On-X product line 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.

On-X product revenues increased 18% and 12% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018.

On-X product revenues, excluding OEM, increased 19% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This increase was primarily due to a 28% increase in volume of units sold, which increased revenues by 20%, and a change in average sales prices, which increased revenues by 1%, partially offset by the effect of foreign exchange rates, which decreased revenues by 2%.

On-X product revenues, excluding OEM, increased 12% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This increase was primarily due to an 11% increase in volume of units sold, which increased revenues by 14%, partially offset by a change in average sales prices, which decreased revenues by 1%, and by the effect of foreign exchange rates, which decreased revenues by 1%.

Excluding the effects for foreign exchange, On-X revenues, excluding OEM, increased 20% and 12% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018.

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On-X revenues, excluding OEM, increased worldwide in the three and twelve months ended December 31, 2019 compared to the three and twelve months ended December 31, 2018 with the largest growth in EMEA in the fourth quarter of 2019 and in North America for the twelve months ended December 31, 2019 as a result of increases in market share. On-X OEM sales accounted for less than 1% of product revenues for both the three and twelve months ended December 31, 2019 and 2018.

CardioGenesis Cardiac Laser Therapy

Revenues from our CardioGenesis cardiac laser therapy product line historically consist primarily of sales of handpieces and, in certain periods, the sale of laser consoles. However, during the three months ended December 31, 2019, we did not have a supply of handpieces as our contract manufacturer of handpieces was unable to supply them until the FDA approved our supplier’s change in manufacturing location, pending resolution of several observations the FDA raised during a manufacturing site change reinspection. In January 2021 we received PMA-S approval for the change in manufacturing site for our contract manufacturer and we currently anticipate resumption of limited supply during the first half of 2021.

Revenues from cardiac laser therapy decreased 38% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This decrease was primarily due to a 93% decrease in unit shipments of handpieces, which decreased revenues by 93%, partially offset by the effect of higher average laser console selling prices for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018.

Revenues from cardiac laser therapy decreased 3% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This decrease was primarily due to an 18% decrease in unit shipments of handpieces, which decreased revenues by 18%, partially offset by the effect of higher average laser console selling prices and an increase in service fees for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018.

Cardiac laser therapy is generally used adjunctively with cardiac bypass surgery by a limited number of physicians who perform these procedures, which usage patterns can cause period over period revenue fluctuations.

PerClot

Revenues from the sale of PerClot increased 4% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This increase was primarily due to a 2% increase in the volume of grams sold, which increased revenues by 19%, partially offset by a decrease in average sales price, which decreased revenues by 12% and the effect of foreign exchange rates, which decreased revenues by 3%.

Revenues from the sale of PerClot increased 1% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This increase was primarily due to a 3% increase in volume of grams sold, which increased revenues by 15%, partially offset by a decrease in average sales price which decreased revenues by 11%, and the effect of foreign exchange rates, which decreased revenues by 3%.

The decrease in average selling prices for the three and twelve months ended December 31, 2019 was in both indirect and direct markets due to price reductions to certain customers in Europe as a result of pricing pressures from competitive products. The increase in volume for the three and twelve months ended December 31, 2019 was primarily due to an increase in sales of PerClot in EMEA in the direct markets.

We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. Enrollment was completed in January 2019. We anticipate PMA submission to the FDA during the third quarter of 2021.

PhotoFix

PhotoFix revenues increased 43% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This increase was primarily due to a 44% increase in units sold, which increased revenues by 44%, partially offset by a decrease in average sales prices per unit, which decreased revenues by 1%.

PhotoFix revenues increased 46% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This increase was primarily due to a 74% increase in units sold, which increased revenues by 46%.

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The increase in units sold for the three and twelve months ended December 31, 2019 was primarily due to an increase in the number of implanting physicians when compared to the prior year period, as this product continues to penetrate domestic markets. Additional increases in unit shipments for the three and twelve months ended December 31, 2019 were from sales in EMEA, which is a new market in 2019, as well as from the introduction of smaller sized PhotoFix patches in 2018 and a larger sized PhotoFix patch in the second quarter of 2019.

Preservation Services

Preservation services include services revenues from the preservation of cardiac and vascular tissues. Revenues from preservation services increased 6% and 5% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. A detailed discussion of the changes in cardiac and vascular preservation services revenues is presented below.

We continue to evaluate modifications to our tissue processing procedures in an effort to improve tissue processing throughput, reduce costs, and maintain quality across our tissue processing business. Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, timing of the release of tissues for implant, demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing products or services. See further discussion below of specific items affecting cardiac and vascular preservation services revenues for the three and twelve months ended December 31, 2019.

Cardiac Preservation Services

Revenues from cardiac preservation services, consisting of revenues from the distribution of human heart valves and cardiac patch tissues, increased 12% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This increase was primarily due to a 10% increase in unit shipments of cardiac tissues, which increased revenues by 12%.

Revenues from cardiac preservation services increased 15% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This increase was primarily due to a 14% increase in unit shipments of cardiac tissues, which increased revenues by 15%.

The increase in cardiac volume for the three and twelve months ended December 31, 2019 was primarily due to an increase in the volume of cardiac valve shipments and, to a lesser extent, cardiac patch shipments.

Vascular Preservation Services

Revenues from vascular preservation services decreased 1% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. This decrease was primarily due to a 2% decrease in vascular unit shipments, which decreased revenues by 2%, partially offset by an increase in average service fees, which increased revenues by 1%.

Revenues from vascular preservation services decreased 4% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. This decrease was primarily due to a 3% decrease in vascular tissue shipments, which decreased revenues by 3%, and a decrease in average service fees, which decreased revenues by 1%.

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The decrease in shipments of vascular tissues for the three months ended December 31, 2019 was primarily due to decreases in femoral artery and aortoiliac shipments, partially offset by increases in saphenous vein shipments. The decrease in shipments of vascular tissue for the twelve months ended December 31, 2019, was primarily due to decreases in saphenous shipments.

The change in average service fees for the three and twelve months ended December 31, 2019 was primarily driven by fee differences due to physical characteristics of vascular tissues, the routine negotiation of pricing contracts with certain customers, as well as competitive pricing pressures.

Cost of Products and Preservation Services

Cost of Products

Three Months Ended Twelve Months Ended

December 31, December 31,

Cost of products increased 3% and 2% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. Cost of products for the three and twelve months ended December 31, 2019 and 2018 included costs related to aortic stents and stent grafts, On-X, BioGlue, PhotoFix, PerClot, and CardioGenesis cardiac laser therapy.

Cost of products for the twelve months ended December 31, 2018 includes $2.8 million in inventory basis step-up expense, primarily related to the aortic stents and stent grafts inventory fair value adjustment recorded in purchase accounting, all included prior to the three months ended December 31, 2018.

The increase in cost of products for the three and twelve months ended December 31, 2019 was primarily due to increases in unit shipments.

Cost of Preservation Services

Three Months Ended Twelve Months Ended

December 31, December 31,

Cost of preservation services increased 2% and 6% for three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. Cost of preservation services includes costs for cardiac and vascular tissue preservation services.

Cost of preservation services increased in the three and twelve months ended December 31, 2019 primarily due to an increase in the unit shipment of tissues.

Gross Margin

Three Months Ended Twelve Months Ended

December 31, December 31,

Gross margin as a percentage of total revenues 67% 67% 66% 66%

Gross margin increased 3% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018, primarily due to increases in On-X, PhotoFix, and tissue revenues. Gross margin as a percentage of total revenues remained flat in the three months ended December 31, 2019, as compared to the three months ended December 31, 2018, primarily due to a decrease in aortic stents and stent grafts margins driven by a decrease in revenue, offset by an increase in On-X and BioGlue margins driven by an increase in revenue.

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Gross margin increased 6% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018, primarily due to increases in On-X, BioGlue, aortic stents and stent grafts, and tissue revenues. Gross margin as a percentage of total revenues remained flat in the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018, primarily due to additional costs in 2018 for the inventory fair value adjustment recorded in purchase accounting for the JOTEC Acquisition, offset by an increase in revenues in certain international regions that have lower margins during the twelve months ended December 31, 2019.

Operating Expenses

General, Administrative, and Marketing Expenses

Three Months Ended Twelve Months Ended

December 31, December 31,

General, administrative, and marketing expenses

as a percentage of total revenues 54% 53% 52% 53%

General, administrative, and marketing expenses increased 6% and 2% for the three and twelve months ended December 31, 2019, respectively, as compared to the three and twelve months ended December 31, 2018. The increases in general, administrative, and marketing expenses for the three and twelve months ended December 31, 2019 were primarily due to higher expenses to support our increased revenue base and employee headcount, offset by decreased business development and integration expenses primarily related to the JOTEC Acquisition.General, administrative, and marketing expenses for the three and twelve months ended December 31, 2019 included approximately $500,000 and $3.1 million, respectively, in business development and integration expenses, as compared to $1.4 million and $8.4 million for the three and twelve months ended December 31, 2018, respectively, primarily related to the JOTEC Acquisition and the transaction with Endospan.

Research and Development Expenses

Three Months Ended Twelve Months Ended

December 31, December 31,

Research and development expenses

as a percentage of total revenues 8% 10% 8% 9%

Research and development expenses decreased 22% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018, and remained flat for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. Research and development spending in the three and twelve months ended December 31, 2019 was primarily focused on clinical work for JOTEC products and to gain regulatory approval for On-X products as well as approval to commercialize PerClot for surgical indications in the U.S. Research and development spending in the twelve months ended December 31, 2018 was primarily on clinical trials for PerClot in the U.S., JOTEC products, On-X products, and BioGlue in China.

Interest Expense

Interest expense was $3.6 million and $14.9 million for the three and twelve months ended December 31, 2019, respectively, and interest expense was $3.9 million and $15.8 million for the three and twelve months ended December 31, 2018, respectively. Interest expense in the 2019 and 2018 periods included interest on debt and uncertain tax positions.

Other Expense (Income), Net

Other income was $1.4 million for the three months ended December 31, 2019 as compared to other expense of $398,000 for the three months ended December 31, 2018. Other expense was $1.3 million and $141,000 for the twelve months ended December 31, 2019, and 2018, respectively. Other income and other expense primarily include the realized and unrealized effects of foreign currency gains and losses.

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Earnings

Three Months Ended Twelve Months Ended

December 31, December 31,

Diluted (loss) income per common share $ (0.02) $ (0.02) $ 0.05 $ (0.08)

We experienced income before income taxes for the three and twelve months ended December 31, 2019 and a loss before income taxes for the three and twelve months ended December 31, 2018. Income before income taxes for the three months ended December 31, 2019, as compared to a loss for the three months ended December 31, 2018, was primarily due to the effect of foreign currency gains and losses. Income before income taxes for the twelve months ended December 31, 2019, as compared to a loss for the twelve months ended December 31, 2018, was primarily due to a decrease in integration and business development expenses and inventory basis step-up expense related to the JOTEC Acquisition.

Our effective income tax rate was an expense of 144% and a benefit of 5% for the three and twelve months ended December 31, 2019, respectively, as compared to a benefit of 47% and 56% for the three and twelve months ended December 31, 2018, respectively. Our income tax rate for the three months ended December 31, 2019 was primarily affected by the recording of uncertain tax positions and prior year provision to return true-ups. Our income tax rate for the three months ended December 31, 2018 was primarily affected by excess tax benefits related to stock compensation.

Our income tax rate for the year ended December 31, 2019 was primarily affected by excess tax benefits on stock compensation, the research and development tax credit, releases of uncertain tax position liabilities, offset by nondeductible executive compensation, intercompany interest expense disallowance, and nondeductible meals and entertainment expenses. Our income tax rate for the year ended December 31, 2018 was primarily affected by excess tax benefits on stock compensation, the research and development tax credit and non-includable income related to the On-X settlement which increased our benefit.

On December 22, 2017 the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Tax Act”), resulting in significant modifications to existing law. As of December 31, 2017 we remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally from 35% to 21%), which resulted in a nominal provisional amount for 2017. Upon further analysis of certain aspects of the Tax Act and refinement of our calculations during the year ended December 31, 2018, we made immaterial adjustments to our provisional estimate in accordance with SEC Staff Accounting Bullet 118, which are included as a component of income tax expense from continuing operations.

We elected to account for the global intangible low-taxed income (“GILTI”) tax in the period in which it is incurred, and therefore, have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the years ended December 31, 2019 and 2018. For the years ending December 31, 2019 and 2018 our GILTI inclusion was nominal.

The Tax Act also created a new provision, foreign derived intangible income (“FDII”), whereby certain sales made from the U.S. to overseas markets are taxed at a lower U.S. rate. We are favorably impacted by the new FDII provision and as of December 31, 2019 and 2018 our FDII deduction was $737,000 and $525,000, respectively.

We are also affected by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income. For the year ending December 31, 2019 and 2018 our interest deduction was limited to $10.5 million and $6.6 million, respectively. The excess interest not deducted in 2019 and 2018 of $2.4 million and $17.7 million, respectively, can be carried forward indefinitely for use in future years.

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Net loss decreased and diluted income per common share was flat for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018. The decrease for the three months ended December 31, 2019 was primarily due to an increase in income before income taxes, offset by higher income tax expense as discussed above. Net income and diluted income per common share increased for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018, primarily due to the increase in income before income taxes, partially offset by a lower income tax benefit in the twelve months ended December 31, 2019 as compared to the twelve months ended December 31, 2018.

Diluted income per common share could be affected in future periods by changes in our common stock outstanding.

Seasonality

We believe the demand for BioGlue and On-X products is seasonal, with a decline in demand generally occurring in the third quarter followed by stronger demand in the fourth quarter. We believe that this trend may be due to the summer holiday season in Europe and the U.S.

We believe the 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 be obscured due to integration activities in 2018 and 2019 subsequent to the JOTEC Acquisition including the implementation of our distributor-to-direct strategy and our European sales force realignment as well as the recent market introduction of AMDS and NEXUS products.

We do not believe the demand for CardioGenesis cardiac laser therapy or PerClot is seasonal.

We are uncertain whether the demand for PhotoFix, Endospan, and Ascyrus products is seasonal, as these products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may not yet be obvious.

Demand for our cardiac preservation services has traditionally been seasonal, with peak demand generally occurring in the third quarter. We believe this trend for cardiac preservation services is primarily due to the high number of surgeries scheduled during the summer months for school-aged patients. Based on experience in recent years, we believe that this trend is lessening as we are distributing a higher percentage of our tissues for use in adult populations.

Demand for our vascular preservation services is seasonal, with lowest demand generally occurring in the fourth quarter. We believe this trend for vascular preservation services is primarily due to fewer vascular surgeries being scheduled during the winter holiday months.

As a result of the uncertain impact of the COVID-19 pandemic and the resulting shifts of timing in some revenue, our historically observable seasonality of revenues has been obscured in 2020 and may be obscured for the first half of 2021 and potentially beyond.

Liquidity and Capital Resources

Net Working Capital

At December 31, 2020 net working capital (current assets of $234.6 million less current liabilities of $60.5 million) was $174.1 million, with a current ratio (current assets divided by current liabilities) of 4 to 1, compared to net working capital of $142.2 million and a current ratio of 4 to 1 at December 31, 2019.

Overall Liquidity and Capital Resources

Our primary cash requirements for the twelve months ended December 31, 2020 were for the acquisition of Ascyrus as further described below, general working capital needs, capital expenditures for facilities and equipment, interest and principal payments under our Credit Agreement, defined below, debt issuance costs under our Convertible Senior Notes (described in “Significant Sources and Uses of Liquidity” section below), funding of the second tranche payment related to the Endospan Loan, and repurchases of stock to cover tax withholdings. We funded our cash requirements through the issuance of our Convertible Senior Notes, our existing cash reserves, and proceeds from stock option exercises.

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AORT US Equity

AORT · 10-K · period ended 2020-12-31

Item 1A. Risk Factors.

Item 1B. Unresolved Staff Comments.

Item 2. Properties.

Item 3. Legal Proceedings.

Item 4. Mine Safety Disclosures.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Item 6. Selected Financial Data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

AORT US Equity☆

AORT · 10-K · period ended 2020-12-31

Item 1A. Risk Factors.

Item 1B. Unresolved Staff Comments.

Item 2. Properties.

Item 3. Legal Proceedings.

Item 4. Mine Safety Disclosures.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Item 6. Selected Financial Data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

AORT US Equity