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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We believe our cash from operations and existing cash and cash equivalents will enable us to meet our current operational liquidity needs for at least the next twelve months. Our future cash requirements are expected to include interest and principal payments under our Credit Agreement and Convertible Senior Notes, expenditures for clinical trials, research and development expenditures, general working capital needs, capital expenditures, and other corporate purposes and may include cash to fund business development activities including obligations in the Endospan and Ascyrus agreements. These items may have a significant effect on our future cash flows during the next twelve months. Subject to the terms of our Credit Agreement, we may seek additional borrowing capacity or financing, pursuant to our current or any future shelf registration statement, for general corporate purposes or to fund other future cash requirements. If we undertake any further significant business development activity, we may need to finance such activities by obtaining additional debt and equity financing. There can be no assurance that we will be able to obtain any additional debt or equity financing at the time needed or that such financing will be available on terms that are favorable or acceptable to us.

Significant Sources and Uses of Liquidity

On December 1, 2017 we entered into a credit and guaranty agreement for a $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility (the “Term Loan Facility”) and a $30.0 million secured revolving credit facility (“the Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Agreement”). We and each of our existing domestic subsidiaries (subject to certain exceptions and exclusions) guarantee the obligations under the Credit Agreement (the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all existing and after-acquired real and personal property (subject to certain exceptions and exclusions) of us and the Guarantors.

On December 1, 2017 we borrowed the entire $225.0 million Term Loan Facility. The proceeds of the Term Loan Facility were used along with cash on hand and shares of CryoLife common stock to (i) fund the acquisition of JOTEC and its subsidiaries (the “JOTEC Acquisition”), (ii) pay certain fees and expenses related to the JOTEC Acquisition and the Credit Agreement, and (iii) pay the outstanding balance of our prior credit facility. The Revolving Credit Facility may be used for working capital, capital expenditures, acquisitions permitted under the Credit Agreement, and other general corporate purposes pursuant to the terms of the Credit Agreement.

The loan under the Term Loan Facility is repayable on a quarterly basis according to the amortization provisions set forth in the Credit Agreement. We have the right to repay the loan under the Credit Agreement in whole or in part at any time. Amounts repaid in respect of the loan under the Term Loan Facility may not be reborrowed. Amounts repaid in respect of the loan under the Revolving Credit Facility may be reborrowed. All outstanding principal and interest in respect of (i) the Term Loan Facility must be repaid on or before December 1, 2024 and (ii) the Revolving Credit Facility must be repaid on or before December 1, 2022.

In October 2018 we finalized an amendment to the Credit Agreement to reprice interest rates, resulting in a reduction in the interest rate margins over base rates on the Term Loan Facility. The loan under the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.25%, or LIBOR, plus a margin of 3.25%. Prior to the repricing, the optional floating annual rate was equal to either the base rate plus a margin of 3.00%, or LIBOR, plus a margin of 4.00%. The loan under the Revolving Credit Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of between 3.00% and 3.25%, depending on our consolidated leverage ratio, or LIBOR, plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. While a payment event of default or bankruptcy event of default exists, we are obligated to pay a per annum default rate of interest of 2.00% in excess of the interest rate otherwise payable with respect to the overdue principal amount of any loans outstanding and overdue interest payments and other overdue fees and amounts. As of December 31, 2020 the aggregate interest rate was 4.25% per annum. We are obligated to pay an unused commitment fee equal to 0.50% of the unutilized portion of the revolving loans. In addition, we are also obligated to pay other customary fees for a credit facility of this size and type.

The Credit Agreement contains certain customary affirmative and negative covenants, including covenants that limit our ability and the ability of our subsidiaries to, among other things, grant liens, incur debt, dispose of assets, make loans and investments, make acquisitions, make certain restricted payments (including cash dividends), merge or consolidate, change business or accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. In addition, with respect to the Revolving Credit Facility, when the principal amount of loans outstanding thereunder is in excess of 25% of the Revolving Credit Facility, the Credit Agreement requires us to comply with a specified maximum first lien net leverage ratio.

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The Credit Agreement includes certain customary events of default that include, among other things, non-payment of principal, interest, or fees; inaccuracy of representations and warranties; breach of covenants; cross-default to certain material indebtedness; bankruptcy and insolvency; and change of control. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued but unpaid interest under the Credit Agreement immediately due and payable and may exercise the other rights and remedies provided under the Credit Agreement and related loan documents.

In March 2020 partly as a precautionary measure to increase cash and maintain maximum financial flexibility during the current uncertainty in global markets resulting from the COVID-19 pandemic, we borrowed the entire amount available under our $30.0 million Revolving Credit Facility at an aggregate interest rate of 5.20%. On June 29, 2020 we used the net proceeds from the issuance of Convertible Senior Notes, as discussed below, to repay the $30.0 million outstanding under our Revolving Credit Facility.

On April 29, 2020 we entered into an amendment to our Credit Agreement. As part of the amendment we obtained a waiver of our maximum first lien net leverage ratio covenant through the end of 2020. In addition, the amendment to our Credit Agreement provides that EBITDA, for covenant testing purposes, in each quarter of 2020 will be deemed equal to a fixed value equal to our bank covenant EBITDA in the fourth quarter of 2019, when our first lien net leverage was 3.4x. As a result of these changes, we are subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. We are required to maintain a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period. Beginning in 2021, if we repay borrowings under our Revolving Credit Facility to 25% or less, no financial maintenance covenants, including the minimum liquidity covenant and the maximum first lien net leverage ratio covenant, are applicable.

On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25% convertible senior notes with a maturity date of July 1, 2025 (“Convertible Senior Notes”). The net proceeds from this offering, after deducting initial purchasers’ discounts and costs directly related to this offering, were approximately $96.5 million. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. Our current intent is to settle in cash the principal amount outstanding and any note conversion value over the principal amount with shares of our Common Stock. The initial conversion rate of the Convertible Senior Notes is 42.6203 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $23.46 per share, subject to adjustments. We use the treasury stock method for assumed conversion of the Convertible Senior Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.

The conversion feature of the Convertible Senior Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $16.4 million in additional paid-in-capital, net of tax of $4.7 million, during the twelve months ended December 31, 2020. The interest expense recognized on the Convertible Senior Notes includes approximately $4.2 million for the aggregate of the contractual coupon interest, the accretion of the debt discount, and the amortization of the debt issuance costs for the twelve months ended December 31, 2020. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually.

Holders of the Convertible Senior Notes may convert their notes at their option at any time prior to January 1, 2025 but only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (iii) we give a notice of redemption with respect to any or all of the notes, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. On or after January 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.

We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem them on or after July 5, 2023, in whole or in part, at our option, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day

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period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. We may redeem for cash all or part of the Convertible Senior Notes at a redemption price equal to 100% of the principal amount of the redeemable Convertible Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the Convertible Senior Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the Convertible Senior Notes do not contain any financial covenants and do not restrict us from conducting significant restructuring transactions or issuing or repurchasing any of its other securities. As of December 31, 2020, we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes. We have used a portion of the proceeds to pay off the $30.0 million outstanding under our Revolving Credit Facility and finance the Ascyrus transaction and anticipate using the remaining funds for general corporate purposes.

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

Under the terms of the Ascyrus Agreement, we 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 FDA approves an 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 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 milestone payments are added to the potential additional consideration cash payment cap) calculated as two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a Premarket Approval application submitted for the AMDS. Upon closing of the acquisition on September 2, 2020, we paid $83.7 million consisting of $63.7 million in cash consideration, and $20.0 million in shares of CryoLife common stock. The number of shares issued was based on a 10-day moving volume weighted average closing price of a share of CryoLife common stock as of the date immediately prior to closing, resulting in an issuance of 991,800 shares of CryoLife common stock.

We have benefited from various aspects of the CARES Act including a decrease in the amount of interest expense limitation in 2019 and 2020 and the deferment of a portion of the 2020 employer’s portion of social security tax into 2021 and 2022.

As of December 31, 2020 approximately 34% of our cash and cash equivalents were held in foreign jurisdictions.

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $12.4 million for the twelve months ended December 31, 2020, as compared to $15.8 million for the twelve months ended December 31, 2019.

We use the indirect method to prepare our cash flow statement, and accordingly, the operating cash flows are based on our net (loss) income, which is then adjusted to remove non-cash items, items classified as investing and financing cash flows, and for changes in operating assets and liabilities from the prior year end. For the twelve months ended December 31, 2020 these non-cash items included $20.7 million in depreciation and amortization expenses, $7.1 million in non-cash lease expense, and $6.9 million in non-cash compensation.

Our working capital needs, or changes in operating assets and liabilities, also affected cash from operations. For the twelve months ended December 31, 2020 these changes included unfavorable adjustments of $24.8 million due to an increase in inventory balances and deferred preservation costs, unfavorable effect of $9.2 million due to timing differences between the recording of accounts payable and other current liabilities, and $2.7 million due to an increase in prepaid expenses and other assets, partially offset by $9.9 million due to the timing differences between recording receivables and the receipt of cash.

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Net Cash Flows from Investing Activities

Net cash used in investing activities was $73.1 million for the twelve months ended December 31, 2020, as compared to $23.9 million for the twelve months ended December 31, 2019. During the twelve months ended December 31, 2020 cash flows used in investing activities included $59.1 million of payments related to the Ascyrus Acquisition, net of cash acquired, $7.3 million in capital expenditures further described below, and $5.0 million in cash payments related to the Endospan agreements.

Net Cash Flows from Financing Activities

Net cash provided by financing activities was $93.6 million for the twelve months ended December 31, 2020, as compared to net cash used in financing activities of $1.5 million for the twelve months ended December 31, 2019. The current year cash provided by financing activities was primarily due to the $100.0 million cash proceeds from the issuance of the Convertible Senior Notes partially offset by $3.6 million of debt issuance costs associated with these Convertible Senior Notes as described in the “Significant Sources and Uses of Liquidity” section above. During the twelve months ended December 31, 2020, we borrowed and subsequently repaid $30.0 million from the Revolving Credit Facility, as described in the “Significant Sources and Uses of Liquidity” section above.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Scheduled Contractual Obligations and Future Payments

Our long-term debt obligations and interest payments include $320.6 million of scheduled principal payments and anticipated interest payments related to our Credit Agreement, Convertible Senior Notes, and JOTEC governmental loans.

We have contingent payment obligations that include up to $120.0 million to be paid to the former shareholders of Ascyrus, of which $10.0 million is expected to be paid in CryoLife common stock, upon the achievement of certain milestones described in the “Significant Sources of and Uses of Liquidity” section above. We anticipate making a $5.0 million third tranche payment under the Endospan Loan upon receipt of certification that certain approvals and clinical trial milestones have been achieved. We have other contingent payment obligations if certain U.S. regulatory approvals and certain commercial milestones are achieved related to our transaction with Starch Medical, Inc. (“SMI”) for PerClot and other licensed technologies.

Our operating and finance lease obligations result from the lease of land and buildings that comprise our corporate headquarters and our various manufacturing facilities, leases related to additional manufacturing, office, and warehouse space, leases on Company vehicles, and leases on a variety of office equipment and other equipment.

We have purchase commitments that include obligations from agreements with suppliers, one of which is the minimum purchase requirements for PerClot under a distribution agreement with SMI. Pursuant to the terms of the distribution agreement, we may terminate that agreement, including the minimum purchase requirements set forth in the agreement for various reasons, one of which is if we obtain FDA approval for PerClot.

Capital Expenditures

Capital expenditures for the twelve months ended December 31, 2020 and 2019 were $7.3 million and $8.1 million, respectively. Capital expenditures in the twelve months ended December 31, 2020 were primarily related to leasehold improvements needed to support our business, computer software, and routine purchases of manufacturing and tissues processing equipment.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our interest income and interest expense are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash and cash equivalents of $61.4 million as of

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December 31, 2020, and interest paid on the outstanding balances, if any, of our variable rate Revolving Credit Facility, Term Loan Facility, and Convertible Senior Notes. A 10% adverse change in interest rates as compared to the rates experienced by us in the twelve months ended December 31, 2020, affecting our cash and cash equivalents, restricted cash and securities, Term Loan Facility, Revolving Credit Facility, and Convertible Senior Notes would not have had a material impact on our financial position, profitability, or cash flows.

Foreign Currency Exchange Rate Risk

We have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency denominated balances are sensitive to changes in exchange rates. In this regard, changes in exchange rates could cause a change in the U.S. Dollar equivalent of cash or funds that we will receive in payment for assets or that we would have to pay to settle liabilities. As a result, we could be required to record these changes as gains or losses on foreign currency translation. Realized and unrealized gains and losses were a gain of $1.9 million, a loss of $1.2 million, and a loss of $2.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Gains incurred during 2020 were primarily related to cross currency intercompany receivables and payables resulting from large inventory transfers during 2020, impacted by fluctuations in the U.S. dollar relative to other currencies.

We have revenues and expenses that are denominated in foreign currencies. Specifically, a portion of our international BioGlue, On-X, PerClot, and aortic stents and stent grafts revenues are denominated in Euros, British Pounds, Swiss Francs, Polish Zlotys, Canadian Dollars, and Brazilian Reals and a portion of our general, administrative, and marketing expenses are denominated in Euros, British Pounds, Swiss Francs, Polish Zlotys, Canadian Dollars, Brazilian Reals, and Singapore Dollars. These foreign currency transactions are sensitive to changes in exchange rates. In this regard, changes in exchange rates could cause a change in the U.S. Dollar equivalent of net income from transactions conducted in other currencies. As a result, we could recognize a reduction in revenues or an increase in expenses related to a change in exchange rates.

An additional 10% adverse change in exchange rates from the exchange rates in effect on December 31, 2020 affecting our balances denominated in foreign currencies could impact on our financial position or cash flows by approximately $12 million. An additional 10% adverse change in exchange rates from the weighted-average exchange rates experienced by us for the twelve months ended December 31, 2020 affecting our revenue and expense transactions denominated in foreign currencies, would not have had a material impact on our financial position, profitability, or cash flows.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 70

CONSOLIDATED BALANCE SHEETS 74

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 76

CONSOLIDATED STATEMENTS OF CASH FLOWS 77

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 79

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Management’s Report on Internal Control over Financial Reporting

The management of CryoLife, Inc. and subsidiaries (“CryoLife” or “we”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. CryoLife’s internal control system was designed to provide reasonable assurance to CryoLife’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

On September 2, 2020 we completed the acquisition of 100% of the outstanding equity of Ascyrus Medical LLC, (“Ascyrus”), a privately held company. As permitted by SEC guidance, we excluded Ascyrus from management’s assessment of internal control over financial reporting as of December 31, 2020. Ascyrus, which is included in the 2020 consolidated financial statements of CryoLife, constituted $138.7 million and $136.1 million of total assets and net assets, respectively, as of December 31, 2020 and $1.2 million and $1.0 million of revenues and gross margin, respectively, for the year then ended. Ascyrus will be included in management’s assessment of the internal control over financial reporting as of December 31, 2021.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

CryoLife management assessed the effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2020. In making this assessment, we used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, we have determined that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria.

CryoLife’s independent registered public accounting firm, Ernst & Young, LLP, has issued an audit report on the effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2020.

CryoLife, Inc.

February 22, 2021

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of CryoLife, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CryoLife, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Deferred Preservation Costs

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/s/ Ernst & Young LLP

We have served as the Company‘s auditor since 2013.

Atlanta, Georgia

February 22, 2021

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of CryoLife, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited CryoLife, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CryoLife, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Ascyrus Medical LLC (“Ascyrus”), which is included in the 2020 consolidated financial statements of the Company and constituted $138.7 million and $136.1 million of total and net assets, respectively, as of December 31, 2020 and $1.2 million and $1.0 million of revenues and gross margin, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Ascyrus.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Atlanta, Georgia

February 22, 2021

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CryoLife, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)

December 31,

ASSETS

Current assets:

Receivables:

Property and equipment:

Less accumulated depreciation and amortization 77,506 70,944

Other assets:

Operating lease right-of-use assets, net 18,571 21,994

Acquired technology, less accumulated amortization of $36,091 as of

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CryoLife, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)

December 31,

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Current portion of finance lease obligation 614 597

Current maturities of operating leases 5,763 5,487

Current portion of long-term debt 1,195 1,164

Current portion of contingent consideration 16,430 --

Non-current maturities of operating leases 14,034 17,918

Non-current finance lease obligations 5,300 5,415

Contingent consideration 43,500 --

Deferred compensation liability 5,518 4,434

Commitments and contingencies

Shareholders' equity:

Common stock $0.01 par value per share, 75,000 shares authorized,

Accumulated other comprehensive income (loss) 6,743 (8,589)

Total liabilities and shareholders' equity $ 789,404 $ 605,654

See accompanying Notes to Consolidated Financial Statements.

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CryoLife, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

Year Ended December 31,

Revenues:

Cost of products and preservation services:

Operating expenses:

(Loss) income per common share:

Weighted-average common shares outstanding:

See accompanying Notes to Consolidated Financial Statements.

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CryoLife, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Net cash flows from operating activities:

Change in fair value of long-term loan receivable 4,949 -- --

Change in fair value of contingent consideration 4,523 -- --

Write-down of inventories and deferred preservation costs 3,443 1,488 649

Changes in operating assets and liabilities:

Accounts payable, accrued expenses, and other liabilities (9,157) 251 (8,870)

Inventories and deferred preservation costs (24,757) (8,125) 2,384

Net cash flows used in investing activities:

Ascyrus Acquisition, net of cash acquired (59,119) -- --

Payments for Endospan Agreements (5,000) (15,000) --

Net cash flows from financing activities:

Proceeds from issuance of convertible debt 100,000 -- --

Proceeds from revolving line of credit 30,000 -- --

Proceeds from financing insurance premiums 2,815 -- --

Repayment of revolving line of credit (30,000) -- --

Payment of debt issuance costs (3,647) -- (624)

Net cash flows provided by (used in) financing activities 93,608 (1,493) (2,562)

Effect of exchange rate changes on cash (5,185) 1,667 879

See accompanying Notes to Consolidated Financial Statements.

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CryoLife, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

Accumulated

Additional Other Total

Common Paid In Retained Comprehensive Treasury Shareholders'

Stock Capital Earnings Income (Loss) Stock Equity

Shares Amount Shares Amount

Cumulative effect of ASU 606 Adjustment -- -- -- 215 -- -- -- 215

Net loss -- -- -- (2,840) -- -- -- (2,840)

Other comprehensive loss:

Foreign currency translation loss, net of tax -- -- -- -- (7,929) -- -- (7,929)

Comprehensive loss (10,769)

Employee stock purchase plan 83 1 1,338 -- -- -- -- 1,339

Other comprehensive loss:

Foreign currency translation loss, net of tax -- -- -- -- (2,517) -- -- (2,517)

Comprehensive loss (797)

Employee stock purchase plan 61 1 1,462 -- -- -- -- 1,463

Other comprehensive income:

Foreign currency translation gain, net of tax -- -- -- -- 15,332 -- -- 15,332

Comprehensive loss (1,350)

Employee stock purchase plan 83 1 1,560 -- -- -- -- 1,561

See accompanying Notes to Consolidated Financial Statements.

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CRYOLIFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Business

Basis of Presentation and Principles of Consolidation

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current year presentation.

Translation of Foreign Currencies

Our revenues and expenses transacted in foreign currencies are translated as they occur at exchange rates in effect at the time of each transaction. Realized and unrealized gains and losses on foreign currency transactions are recorded as a component of other expense (income), net on our Consolidated Statements of Operations and Comprehensive Loss. Realized and unrealized gains and losses were a gain of $1.8 million, a loss of $1.2 million, and a loss of $2.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Our assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect as of the balance sheet date and are recorded as a separate component of accumulated other comprehensive loss in the shareholders' equity section of our Consolidated Balance Sheets.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates and assumptions are used when accounting for allowance for doubtful accounts, inventory, deferred preservation costs, acquired assets or businesses, intangible assets, deferred income taxes, commitments and contingencies (including product and tissue processing liability claims, claims incurred but not reported, and amounts recoverable from insurance companies), stock based compensation, certain accrued liabilities (including accrued procurement fees, income taxes, and financial instruments), and other items as appropriate.

Revenue Recognition

Contracts with Customers

We adopted Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers effective January 1, 2018 using the modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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We routinely enter into contracts with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms and, in most cases, prices for the products and services that we offer. These agreements, however, do not obligate us to provide goods or services to the customer, and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established by geography and by currency for all products and services, and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. Our performance obligations are established when a customer submits a purchase order notification (in writing, electronically or verbally) for goods and services, and we accept the order. We identify performance obligations as the delivery of the requested product or service in appropriate quantities and to the location specified in the customer’s contract and/or purchase order. We generally recognize revenue upon the satisfaction of these criteria when control of the product or service has been transferred to the customer at which time we have an unconditional right to receive payment. Our prices are fixed and are not affected by contingent events that could impact the transaction price. We do not offer price concessions and do not accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do not have any material performance obligations where we are acting as an agent for another entity.

Revenues for products, including: BioGlue, On-X products, aortic stents and stent grafts, PerClot, PhotoFix and other medical devices, are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations. Revenues from consignment are recognized when the medical device is implanted. We recognize revenues for preservation services when tissue is shipped to the customer.

Our E-xtra DESIGN ENGINEERING products are specifically designed to meet specifications of a particular patient, and therefore, do not create an asset with an alternative use. We evaluate open orders for these products each reporting period, and when material, we recognize the revenue and related contract asset based on the amount of payment we believe we are entitled to at that time.

In certain limited circumstances, CardioGenesis cardiac laser consoles are provided to a customer for their use without transfer of title for evaluation purposes. We have determined that a portion of the revenue for the handpieces purchased during these evaluations constitutes revenues associated with the use of the laser console, however, these are immaterial to reported revenues.

Warranty

Our general product warranties do not extend beyond an assurance that the products or services delivered will be consistent with stated specifications and do not include separate performance obligations. Warranties included with our CardioGenesis cardiac laser products provide for annual maintenance services, which are priced separately and are recognized as revenues at the stand-alone price over the service period, whether invoiced separately or recognized based on our allocation of the transaction price.

Significant Judgments in the Application of the Guidance in ASC 606

There are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon shipment of the product or service to the customer. This is consistent with the time in which the customer obtains control of the product or service. Performance obligations are also generally settled quickly after the purchase order acceptance, other than as identified for the E-xtra DESIGN ENGINEERING product, therefore, the value of unsatisfied performance obligations at the end of any reporting period is immaterial.

For performance obligations provided through our E-xtra DESIGN ENGINEERING product line, we determine the value of our enforceable right to payment based on the time required and costs incurred for design services and manufacture of the in-process device in relation to the total inputs required to complete the device.

We consider variable consideration in establishing the transaction price. Forms of variable consideration potentially applicable to our arrangements include sales returns, rebates, volume-based bonuses, and prompt pay discounts. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products and services in the periods in which the related revenue is recognized and adjusted in future periods as necessary.

Commissions and Contract Costs

Sales commissions are earned upon completion of each performance obligation, and therefore, are expensed when incurred. These costs are included in general, administrative, and marketing expenses in the Consolidated Statements of Operations and Comprehensive Loss. We generally do not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.

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Practical Expedients

Our payment terms for sales direct to customers are substantially less than the one-year collection period that falls within the practical expedient in the determination of whether a significant financing component exists.

Shipping and Handling Charges

Fees charged to customers for shipping and handling of products and tissues are included in product and preservation service revenues. The costs for shipping and handling of products and tissues are included as a component of cost of products and cost of preservation services.

Taxes Collected from Customers

Taxes collected on the value of transaction revenue are excluded from product and service revenues and cost of sales and are accrued in current liabilities until remitted to governmental authorities.

Advertising Costs

The costs to develop, produce, and communicate our advertising are expensed as incurred and are classified as general, administrative, and marketing expenses. We record the cost to print or copy certain sales materials as a prepaid expense and amortize these costs as an advertising expense over the period they are expected to be used, typically six months to one year. The total amount of advertising expense included in our Consolidated Statements of Operations and Comprehensive Loss was $1.1 million, $1.7 million, and $732,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

AORT US Equity

AORT · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

AORT US Equity☆

AORT · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

AORT US Equity