ARTIVION, INC. (AORT) FY 2021 MD&A

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth under Part I, Item 1A."Risk Factors" of this Form 10-K. The following discussion and analysis does not include certain items related to the year ended December 31, 2019, including year-to-year comparisons between the year ended December 31, 2020 and the year ended December 31, 2019. For a comparison of our results of operations for the fiscal years ended December 31, 2020 and December 31, 2019, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 23, 2021.

Overview

Artivion, Inc. (“Artivion,” the “Company,” “we,” or “us”), is a leader in the manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac and vascular surgical procedures for patients with aortic disease. We have four major product families: aortic stents and stent grafts, surgical sealants, On-X® mechanical heart valves and related surgical products, and implantable cardiac and vascular human tissues. Aortic stents and stent grafts include JOTEC® stent grafts and surgical products (collectively, “JOTEC Products”), the Ascyrus Medical Dissection Stent (“AMDS”) hybrid prosthesis, and the NEXUS® endovascular stent graft system (“NEXUS”). Surgical sealants include BioGlue® Surgical Adhesive (“BioGlue”) products. In addition to these four major product families, we sell or distribute PhotoFix® bovine surgical patches, CardioGenesis® cardiac laser therapy, Therion® chorioamniotic allografts (previously marketed as NeoPatch®), and PerClot® hemostatic powder (prior to the sale to a subsidiary of Baxter International, Inc (“Baxter”)).

For the year ended December 31, 2021 we reported annual revenues of $298.8 million, increasing 18% over the prior year, largely due to increases in revenues from all products and preservation services. For the year ended December 31, 2021 we reported a net loss of $14.8 million. See the “Results of Operations” section below for additional analysis of the fourth quarter and full year 2021 results. See Part I, Item 1, “Business,” for further discussion of our business and activities during 2021.

Sale of PerClot

On July 28, 2021 we entered into an asset purchase agreement and other ancillary agreements related to the sale of PerClot, a polysaccharide hemostatic agent used in surgery (“PerClot”) to Baxter, and an agreement to terminate all of our material agreements with Starch Medical, Inc. (“SMI”) related to PerClot (collectively the “Baxter Transaction”). Under the terms of the Baxter Transaction, Baxter will pay an aggregate of up to $60.8 million in consideration (we will receive up to $45.8 million and SMI will receive up to $15.0 million), consisting of (i) $25.0 million at closing, of which $6.0 million was paid to SMI; (ii) up to $25.0 million upon our receipt of Premarket Approval (“PMA”) approval from the US Food and Drug Administration (the “FDA”) for PerClot and our transfer of the PMA to Baxter, of which up to $6.0 million is payable to SMI, subject to certain reductions for delay in PMA approval; and (iii) up to $10.0 million upon Baxter’s achievement of certain cumulative worldwide net sales of PerClot prior to December 31, 2026 and December 31, 2027, of which up to $3.0 million is payable to SMI. In addition, at the conclusion of our manufacturing and supply services for Baxter, Baxter will pay us $780,000 upon transfer of our PerClot manufacturing equipment. Under the terms of the Baxter Transaction, we will continue to provide to Baxter certain transition and manufacturing and supply services relating to the sale of SMI PerClot outside of the US and manufacture and supply of PerClot to Baxter post PMA approval.

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Effects of COVID-19

In December 2019 an outbreak of a respiratory illness caused by a new coronavirus named “2019-nCoV” (“COVID-19”) was detected, and by March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a “pandemic.”

Beginning in March 2020 we took steps to address the potential impact of COVID-19 on our employees and operations, and to preserve cash, including reducing expenditures and delaying investments. These steps included, but were not limited to, implementing specific protocols to minimize workplace exposures to COVID-19 by our employees; implementing remote work arrangements for most employees we deemed able to do so; restricting business travel; 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 Artivion stock instead of cash compensation for a six month period through October 2020; and suspending management merit increases for seven months in 2020.

Our efforts to protect our supply chain and reduce the spread of COVID-19 among our employees, including our work-from-home arrangements, were successful in 2020 and 2021 as we continued to operate all manufacturing sites at full production. These efforts have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, or disclosure controls and procedures; however, there is no guarantee that these efforts and arrangements, if they are continued, will continue to be successful in the future. Further, our reductions or delays in expenditures slowed our progress on certain key R&D initiatives and could in the future continue to adversely impact our business operations or further delay our recovery from the pandemic.

Although we have scaled back many of our COVID-19 mitigation efforts, we continue to monitor the impact of the COVID-19 pandemic and the emergence of new variants on our business and recognize that COVID-19 and its effects could continue to negatively impact our business and results of operations beyond 2021. As an example, the COVID-19 pandemic reportedly has impacted the global supply chain. Although we have yet to experience any material effects of this impact on our supply chain or operations, we face an increasing risk that upstream disruptions may occur or worsen. As global economies continue to recover from the COVID-19 downturn, the expiration of COVID-19 related hiring freezes, increased opportunities for remote work, and increasing compensation pressure have resulted in a war for talent and an unprecedent number of retirements or career changes. The resulting worker shortages at all levels have impacted supply chains and distribution channels and employers’ and our own ability to adequately staff operations. Impact from these shortages during 2021, including a shortage of trained staff capable of meeting the increased demand associated with releasing quarantined tissue, have impacted, and may impact our operations going forward. Hospitals and other healthcare providers have also experienced staffing shortages impacting our business including increased restrictions on elective and non-emergent procedures, restrictions on access to healthcare facilities, cancellation of elective procedures, and the re-allocation of scarce resources to some critically ill patients. Portions of our operations are being impacted by public and private vaccine mandates, which can impact hospital staffing, impact our specialized workforce, and impact the global supply chain, all of which can directly or indirectly impact our product sales, business operations, manufacturing operations, workforce, and research and development projects.

The extent to which our operations and financial performance will be impacted by the pandemic in and beyond 2022 will depend largely on future developments, including changes in hospital utilization rates and staffing, prevalence and severity of new variants, the impact of vaccine mandates or vaccine encouragement programs on the spread of COVID-19 and its variants, global availability and acceptance of vaccines and their effectiveness against variants, the prevalence of vaccine mandates generally, disruptions to workforce availability, and any continuing impact on the global supply chain. If COVID-19 or its variants become more contagious, if efforts to further contain the effects of COVID-19 or its variants, including vaccine mandates or adoption, are unsuccessful, if COVID-19, its variants, or disruptions to the global supply chain impact our supply chain or employee availability or productivity, or if we continue to experience periods of uncertainty due to COVID-19 or its variants, it could materially, adversely affect our revenues, financial condition, profitability, and cash flows.

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

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 US, which require us to make estimates and

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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.

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 provide 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 $575,000, $1.7 million, and $787,000 for the years ended December 31, 2021, 2020, and 2019, respectively, due primarily to tissues not expected to ship prior to the expiration 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.

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 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.

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

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an indefinite-lived intangible asset until the related research and development project gains regulatory approval or is discontinued.

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

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

(In thousands)

Revenues

Revenues increased 18% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in revenues for the twelve months ended December 31, 2021 was due to increases in revenues from all products and preservation services. On a constant currency basis, revenues increased 16% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Revenues for the twelve months ended December 31, 2021 and 2020 were negatively impacted in certain regions by delays or cancellations of some surgical procedures as a result of reduced hospital capacity and staffing and hospital restrictions due to the COVID-19 pandemic. Additionally, reduced hospital staffing and restricted access resulting from COVID-19 have impacted the adoption rates for newly acquired or newly released products. The revenue impact from COVID-19 was smaller and varied regionally during the three and twelve months ended December 31, 2021 as compared to the three and twelve months ended December 31, 2020 with the largest negative impact during the three months ended June 30, 2020.

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A detailed discussion of the changes in product revenues and preservation services revenues for the twelve months ended December 31, 2021 is presented below.

Products

Revenues from products increased 24% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in revenues for the twelve months ended December 31, 2021 was due to increases in revenues from all products. A discussion of the changes in product revenues for aortic stents and stent grafts, surgical sealants, On-X, and other product revenues is presented below.

Sales of certain products through our direct sales force and distributors across Europe and various other countries are denominated in a variety of currencies including Euros, British Pounds, Polish Zlotys, Swiss Francs, Brazilian Reals, and Canadian Dollars, with a concentration denominated in Euros. Each currency is subject to exchange rate fluctuations. For the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020, the US Dollar weakened in comparison to major currencies, resulting in revenue increases when these foreign currency denominated transactions were translated into US 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 US 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 US Dollars depending on the relative price of these goods in their local currencies.

Aortic Stents and Stent Grafts

Aortic stents and stent grafts, including JOTEC, AMDS, and NEXUS products, are used in endovascular and open vascular surgery as well as for the treatment of complex aortic arch and thoracic aortic diseases. Our aortic stents and stent grafts are primarily distributed in international markets.

On September 11, 2019 Artivion 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 products and accessories in certain countries in Europe.

On September 2, 2020 Artivion entered into an agreement to acquire all of the equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus developed the AMDS, an aortic arch remodeling device used for the treatment of acute Type A aortic dissections. The AMDS is currently distributed in Europe, the Middle East, and Africa (collectively, “EMEA”), Canada, Asia Pacific (“APAC”), and Latin America (“LATAM”), 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 38% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020.

Aortic stents and stent grafts revenues, excluding OEM, increased 38% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. This increase was primarily due to an increase in volume of units sold, which increased revenues by 37%, and the effect of foreign exchange rates, which increased revenues by 4%, partially offset by a decrease in average sales prices of certain products in certain regions, which decreased revenues by 3%.

On a constant currency basis, revenues for aortic stents and stent grafts, excluding OEM, increased 33% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in revenues was partially due to improved conditions from the COVID-19 pandemic for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Revenues for the twelve months ended December 31, 2021 increased primarily in EMEA. The revenue increase in EMEA during the twelve months ended December 31, 2021 is primarily due to an increase in sales of newly launched JOTEC Products. Revenues for the twelve months ended December 31, 2021 were also positively impacted by increased revenues from the AMDS as a result of the Ascyrus acquisition in the third quarter of 2020. Aortic stents and stent grafts OEM sales accounted for less than 1% of product revenues for the three and twelve months ended December 31, 2021 and 2020.

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Surgical Sealants

Surgical sealants include BioGlue products used as an adjunct to standard methods of achieving hemostasis (such as sutures and staples) in adult patients in open surgical repair of large vessels (such as aorta, femoral, and carotid arteries).

Revenues from the sales of surgical sealants increased 14% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. This increase was primarily due to an increase in the volume of milliliters sold, which increased revenues by 13%, and the effect of foreign exchange rates, which increased revenues by 1%.

On a constant currency basis, revenues from the sales of surgical sealants increased 13% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in revenues for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020 was primarily due to increases in North America, EMEA, and LATAM, partially offset by decreases in APAC. The revenue increase in these markets was primarily due to an increase of surgical procedures due to improved conditions related to the COVID-19 pandemic during the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Revenue decreases for the twelve months ended December 31, 2021 in APAC was primarily due to changes in distributor buying patterns in this market.

See Part I Item 1A, “Risk Factors—Operational Risks— We may not be successful in obtaining necessary clinical results or regulatory clearances/approvals for new and existing products and services, and our approved products and services may not achieve market acceptance.”

Domestic BioGlue revenues accounted for 51% of total surgical sealant revenues for the twelve months ended December 31, 2021 and 50% of total BioGlue revenues for the twelve months ended December 31, 2020.

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 19% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020.

On-X product revenues, excluding OEM, increased 20% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. This increase was primarily due to an increase in volume of units sold, which increased revenues by 23%, and the effect of foreign exchange rates which increased revenues by 1%, partially offset by a decrease in average sales prices, which decreased revenues by 4%.

On a constant currency basis, On-X revenues, excluding OEM, increased 19% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in revenues for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020 was primarily due to revenue increases in North America, APAC, and EMEA. The revenue increases in these markets were partially due to improved conditions from the COVID-19 pandemic for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Revenues were also positively impacted in the North American market due to increases in market share, in EMEA due to an increase of shipments in direct and indirect markets, and in APAC due to growth in distributor markets. On-X OEM sales accounted for less than 1% of product revenues for the twelve months ended December 31, 2021 and 2020.

Domestic revenues from On-X accounted for 62% of total On-X revenues for the twelve months ended December 31, 2021, and 65% of On-X revenues for the twelve months ended December 31, 2020.

Other

Other revenues are comprised of PhotoFix, PerClot (prior to the Baxter Transaction), and CardioGenesis cardiac laser therapy product revenues. Other revenues increased 8% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020.

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The increase in other revenues for the twelve months ended December 31, 2021 was primarily due to an increase in PhotoFix and, to a lesser extent CardioGenesis cardiac laser therapy product revenues, partially offset by a decrease in PerClot product revenues. The increase in PhotoFix revenues was primarily due to an increase in volume of units sold for the twelve months ended December 31, 2021. The increase in CardioGenesis cardiac therapy product revenues for the twelve months ended December 31, 2021 was primarily due to our ability to restart selling handpieces during the fourth quarter of 2021, as further described below. The decrease in PerClot product revenues for the twelve months ended December 31, 2021 was due to the Baxter Transaction, described above.

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 nine months ended September 30, 2021 and twelve months ended December 31, 2020 we had minimal revenues from the CardioGenesis cardiac laser therapy product line as we did not have a supply of handpieces due to the FDA’s review of our supplier’s change in manufacturing location. After obtaining approval, our supplier resumed manufacturing a limited supply of handpieces allowing us to resume limited sales during the fourth quarter of 2021.

Preservation Services

Preservation services include service revenues from processing cardiac and vascular tissues. Our cardiac valves are primarily used in cardiac replacement and reconstruction surgeries, including the Ross procedure, for patients with endocarditis or congenital heart defects. Our cardiac tissues are primarily distributed in domestic markets. The majority of our vascular preservation services revenues are related to shipments of saphenous veins, which are mainly used in peripheral vascular reconstruction surgeries to avoid limb amputations. Competition with synthetic product alternatives and the availability of tissues for processing are key factors affecting revenue volume that can fluctuate from quarter to quarter. Our vascular tissues are primarily distributed in domestic markets.

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

In the fourth quarter of 2020 we became aware that a supplier shipped to us a saline solution lot that we use in our tissue processing that contained some contamination in a small number of bottles of the solution lot. The contamination was identified by our in-process quality controls. The contaminated solution was estimated to have impacted a small percentage of tissue processed with this solution lot, causing us to write-off approximately $826,000 of tissue in the fourth quarter of 2020. An additional $5.0 million of tissue was quarantined in process pending further testing. Upon completion, and FDA acceptance of the testing, we began releasing tissue meeting our release criteria late in the second quarter of 2021.We believe that the written-off and quarantined tissue impacted the availability of tissue for distribution, which had a negative impact on revenue in the first quarter of 2021 and, to a lesser extent, the second quarter of 2021. Our ability to continue to release this quarantined and other tissue in the third quarter was negatively impacted by trained staffing availability.

Revenues from tissue processing increased 4% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020.

The increase in revenues for the twelve months ended December 31, 2021 was primarily due to a 5% and 3% increase in cardiac and vascular tissue revenues, respectively. The increase in cardiac tissue revenues was primarily due to an increase in cardiac tissue shipments, which increased revenues by 6%, partially offset by a decrease in average service fees, which decreased revenues by 1%. The increase in vascular tissue revenues was primarily due to an increase in vascular tissue shipments, which increased revenues by 4%, partially offset by a decrease in average service fees, which decreased revenues by 1%.

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Cost of Products and Preservation Services

Cost of Products

Cost of products increased 30% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Cost of products for the twelve months ended December 31, 2021 and 2020 included costs related to aortic stents and stent grafts, surgical sealants, On-X, and other products.

The increase in cost of products for the twelve months ended December 31, 2021 was primarily due to an increase in shipments due to improved conditions from the COVID-19 pandemic, JOTEC product launches in late 2020, AMDS which was acquired in the third quarter of 2020, and write-downs of certain products, as compared to the twelve months ended December 31, 2020.

Cost of Preservation Services

Cost of preservation services increased 2% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Cost of preservation services includes costs for cardiac and vascular tissue preservation services.

The increase in cost of preservation services for the twelve months ended December 31, 2021 was primarily due to an increase in shipments due to improved conditions from the COVID-19 pandemic as compared to the twelve months ended December 31, 2020.

Gross Margin

Gross margin increased 18% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020 was primarily due to favorable pricing of certain products and an increase in the volume of products sold. Gross margin as a percentage of total revenues remained flat for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020 primarily due to favorable gross margins of newly launched JOTEC Products and AMDS, mix of products sold, offset by write-downs of certain products.

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Operating Expenses

General, Administrative, and Marketing Expenses

General, administrative, and marketing expenses increased 20% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. The increase in General, administrative, and marketing expenses for the twelve months ended December 31, 2021 was primarily due to an increase in personnel, commission, amortization, and business development expenses.

General, administrative, and marketing expenses included $16.1 million of business development expenses for the twelve months ended December 31, 2021 as compared to $6.2 million for the twelve months ended December 31, 2020.

Business development expenses during the twelve months ended December 31, 2021 included $4.9 million related to the impairment of the Endospan Option and $9.7 million of fair value adjustments for the Ascyrus contingent consideration. Business development expenses during the twelve months ended December 31, 2020 primarily consisted of fair value adjustments for the Ascyrus contingent consideration.

Research and Development Expenses

Research and development expenses increased 47% for the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020. Research and development spending for the twelve months ended December 31, 2021 was primarily focused on clinical work to gain regulatory approvals for On-X, JOTEC, and PerClot products. Research and development spending for the twelve months ended December 31, 2020 was primarily focused on clinical work to gain regulatory approval for On-X and JOTEC Products.

Gain from Sale of Non-Financial Assets

Gain from sale of non-financial assets for the twelve months ended December 31, 2021 consisted of the net $15.9 million gain from the sale of PerClot assets as part of the Baxter Transaction on July 28, 2021.

Interest Expense

Interest expense was $16.9 million and $16.7 million for the twelve months ended December 31, 2021 and 2020, respectively. Interest expense for the twelve months ended December 31, 2021 and 2020 relates to interest on debt and uncertain tax positions.

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Other Expense (Income), Net

Other expense, net was $6.1 million and $3.1 million for the twelve months ended December 31, 2021 and 2020, respectively. Other expense, net for the twelve months ended December 31, 2021 primarily includes the realized and unrealized effects of foreign currency gains and losses. Other expense, net for the twelve months ended December 31, 2020 primarily includes realized and unrealized effects of foreign currency gains and losses and fair value adjustments of financial instruments.

Earnings

We incurred a loss before income taxes for the twelve months ended December 31, 2021 and 2020. The loss before income taxes for the twelve months ended December 31, 2021 was primarily due to business development, expenses primarily related to our financial instruments, investments in the research and development pipeline, and delays and cancellations of some surgical procedures as a result of reduced hospital capacity and hospital restrictions due to the COVID-19 pandemic.

Our effective income tax rate was break-even for the twelve months ended December 31, 2021 as compared to a benefit of 3% for the twelve months ended December 31, 2020. The change in the tax rate for the twelve months ended December 31, 2021 is primarily due to changes in pre-tax book loss, an increase in the excess tax benefit related to stock compensation, the estimated current year valuation allowance, and a reduction in the benefit related to uncertain tax position statute expirations for the twelve months ended December 31, 2021 as compared to twelve months ended December 31, 2020.

Our income tax rate for the twelve months ended December 31, 2021 was primarily impacted by excess tax benefits on stock compensation, the research and development tax credit, non-deductible executive compensation, changes in our valuation allowance against our net deferred tax assets, and changes in our uncertain tax position liabilities.

Our income tax rate for the twelve months ended December 31, 2020 was primarily impacted by changes in our valuation allowance against our net deferred tax assets and changes in our uncertain tax position liabilities.

In response to the COVID-19 pandemic, the US government enacted the Coronavirus Aid, Relief, and Economic Security Act, (“CARES Act”) on March 27, 2020. The CARES Act provided various forms of relief and assistance to U.S. businesses. We recorded a reduction to income taxes payable and deferred tax assets of approximately $1.3 million for the change to the 2019 Section 163(j) interest expense deduction limitation for the three months ended March 31, 2020. See Part II, Item 8, Note 9 of the “Notes to Consolidated Financial Statements” of this Form 10-K for further discussion of our interest expense deduction limitation and carryforward.

We experienced a net loss and diluted loss per common share for the twelve months ended December 31, 2021 and 2020. Net loss and diluted loss per common share for the twelve months ended December 31, 2021 was primarily due to an increase in loss before income taxes, as discussed above.

Seasonality

As a result of the uncertainty and other impacts of the COVID-19 pandemic and the resulting shifts of timing in some revenue, our historically observable seasonality of revenues has been impacted or obscured in 2020 and 2021 and potentially beyond.

Historically, we believe the demand for JOTEC Products is seasonal, with a decline in demand generally occurring in the third quarter due to the summer holiday season in Europe. We are uncertain whether the demand for AMDS and NEXUS products

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is seasonal, as these products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may not yet be obvious.

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

We do not believe the demand for our other products is seasonal.

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

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

Liquidity and Capital Resources

Net Working Capital

At December 31, 2021 net working capital (current assets of $247.7 million less current liabilities of $45.0 million) was $202.7 million, with a current ratio (current assets divided by current liabilities) of 6 to 1, compared to net working capital of $174.1 million and a current ratio of 4 to 1 at December 31, 2020.

Overall Liquidity and Capital Resources

Our primary cash requirements for the twelve months ended December 31, 2021 were for general working capital needs, capital expenditures for facilities and equipment, interest and principal payments under our Credit Agreement (defined below), interest payments under our Convertible Senior Notes (defined below), a milestone payment related to the Ascyrus acquisition, and repurchases of stock to cover tax withholdings. We funded our cash requirements through our existing cash reserves, proceeds from stock option exercises, and the Baxter Transaction described above.

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

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.

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In March 2020 partly as a precautionary measure to increase cash and maintain maximum financial flexibility during the 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 a portion of 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 June 2, 2021 we entered into an amendment to our Credit Agreement to extend the maturity dates of both the Company’s Term Loan and its Revolving Credit Facility. As part of the amendment, the maturity dates of both the Company’s Term Loan and its Revolving Credit Facility were each extended by two and one-half years, until June 1, 2027 and June 1, 2025, respectively, subject to earlier springing maturities if our 4.25% Convertible Senior Notes, described below, remain outstanding on April 1, 2025 and December 31, 2024, respectively. With respect to the Term Loan, if the Convertible Senior Notes remain outstanding on April 1, 2025, the Term Loan’s maturity date will be April 1, 2025, or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of (i) 91 days prior to the Convertible Senior Notes’ new maturity date and (ii) June 1, 2027. In the case of the Revolving Credit Facility, if the Convertible Senior Notes are still outstanding on December 31, 2024, the Revolving Credit Facility’s maturity date will be either December 31, 2024 or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of (i) 182 days prior to the Convertible Senior Notes’ new maturity date and (ii) June 1, 2025. Under the amendment, the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.50%, or LIBOR, plus a margin of 3.50%. Prior to the amendment, the optional floating annual rate was equal to either the base rate plus a margin of 2.25%, or LIBOR, plus a margin of 3.25%.

On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25% Convertible Senior Notes with a maturity date of July 1, 2025 (the “Convertible Senior Notes”). The net proceeds from this offering, after deducting initial purchasers’ discounts and costs directly related to this offering, were approximately $96.5 million. On January 1, 2021 we adopted ASU 2020-06 and adjusted the carrying balance of the Convertible Senior Notes to notional. The Convertible Senior Notes balance was $100.0 million recorded in Long-term debt on the Consolidated Balance Sheets as of December 31, 2021. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. The initial conversion rate of the Convertible Senior Notes is 42.6203 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $23.46 per share, subject to adjustments. We use the if-converted method for assumed conversion of the Convertible Senior Notes for the diluted earnings per share calculation. The fair value and the effective interest rate of the Convertible Senior Notes as of December 31, 2021 was approximately $116.0 million and 5.05%, respectively. The fair value was based on market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.

The interest expense recognized on the Convertible Senior Notes includes approximately $4.9 million for the aggregate of the contractual coupon interest, and the amortization of the debt issuance during the twelve months ended December 31, 2021. 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.

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We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem them on or after July 5, 2023, in whole or in part, at our option, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. We may redeem for cash all or part of the Convertible Senior Notes at a redemption price equal to 100% of the principal amount of the redeemable Convertible Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the Convertible Senior Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the Convertible Senior Notes do not contain any financial covenants and do not restrict us from conducting significant restructuring transactions or issuing or repurchasing any of its other securities.

We have benefited from various aspects of the CARES Act including a decrease in the amount of interest expense limitation in 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, 2021 approximately 36% of our cash and cash equivalents were held in foreign jurisdictions.

The following table summarizes cash flows from operating activities, investing activities and financing activities for the periods indicated (in thousands):

Net Cash Flows from Operating Activities

Net cash used in operating activities was $2.6 million for the twelve months ended December 31, 2021 as compared to net cash provided by operating activities of $12.4 million for the twelve months ended December 31, 2020.

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, 2021 these non-cash items included $24.0 million in depreciation and amortization expenses, $15.9 million of gain from the sale of non-financial assets, $10.7 million in non-cash compensation, $8.9 million in fair value adjustments of financial instruments, and $7.5 million in non-cash lease expense.

Our working capital needs, or changes in operating assets and liabilities, also affected cash from operations. For the twelve months ended December 31, 2021 these changes included unfavorable adjustments of $18.4 million due to an increase in inventory balances and deferred preservation costs, $11.6 million due to the timing differences between recording receivables and the receipt of cash, unfavorable effect of $1.9 million due to timing differences between the recording of accounts payable and other current liabilities, and $1.4 million due to an increase in prepaid expenses and other assets.

Net Cash Flows from Investing Activities

Net cash provided by investing activities was $5.7 million for the twelve months ended December 31, 2021 as compared to cash used in investing activities of $73.1 million for the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021 cash flows provided by investing activities included $19.0 million of net proceeds from the sale of non-financial assets, partially offset by $13.1 million of cash used for capital expenditures. 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, and $5.0 million in cash payments related to the Endospan agreements.

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Net Cash Flows from Financing Activities

Net cash used in financing activities was $12.2 million for the twelve months ended December 31, 2021 as compared to net cash provided by financing activities of $93.6 million for the twelve months ended December 31, 2020. The current year cash used in financing activities was primarily due to $8.2 million related to the Ascyrus milestone payment, $3.1 million repayment of debt, $2.2 million payment of debt issuance costs, and $1.9 million for repurchases of common stock to cover tax withholdings, partially offset by $3.8 million of proceeds from exercise of stock options and issuances of common stock.

Net cash provided by financing activities was $93.6 million for the twelve months ended December 31, 2020. 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. During the twelve months ended December 31, 2020, we borrowed and subsequently repaid $30.0 million from the Revolving Credit Facility.

Scheduled Contractual Obligations and Future Payments

Our long-term debt obligations and interest payments include $317.6 million of scheduled principal payments and $66.1 million in anticipated interest payments related to our Credit Agreement, Convertible Senior Notes, and JOTEC governmental loans.

We have contingent payment obligations that include up to $100.0 million to be paid to the former shareholders of Ascyrus, upon the achievement of certain milestones. We are obliged to make a $5.0 million third tranche payment under our loan agreement with Endospan upon receipt of certification that certain clinical trial milestones have been achieved. See “Overview” identified in Part II, Item 8, Note 3 of the “Notes to Consolidated Financial Statements” of this Form 10-K.

As part of the Baxter Transaction, we may be required to pay up to $9.0 million to SMI if certain milestones are met. See “Overview” identified in Part II, Item 8, Note 2 of the “Notes to Consolidated Financial Statements” of this Form 10-K.

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.

Capital Expenditures

Capital expenditures for the twelve months ended December 31, 2021 and 2020 were $13.1 million and $7.3 million, respectively. Capital expenditures in the twelve months ended December 31, 2021 were primarily related to leasehold improvements needed to support our business, routine purchases of manufacturing and tissue processing equipment, and computer software and equipment.